The Gamestop mess; You reap what you sow

What happened

Shares of GameStop (NYSE:GME) extended their recent torrid gains on Wednesday as a horde of traders rushed to buy the video game company's stock in an attempt to crush short-sellers and drive its price to astronomical levels.

So what

GameStop's shares are now up nearly 1,700% so far in 2021 ? and it's still January. An epic short squeeze is believed to be fueling the rally ? one led by an army of individual traders using social media sites like Reddit and Twitter to coordinate their strikes against short-sellers.

By buying heavily shorted stocks en masse, these bear slayers are driving up their price. Short-sellers, in turn, are suffering staggering losses.

Many short-sellers ? including multibillion-dollar hedge fund Melvin Capital ? have been forced to exit their positions to stem the bleeding. This requires that they buy back the stock they sold short, which has likely helped drive GameStop's price even higher.

The short squeeze has even caught the attention of Tesla CEO Elon Musk and venture capitalist Chamath Palihapitiya. On Tuesday, Musk sent his 43 million Twitter followers a link to a popular Reddit message board that many traders have used to hype GameStop's stock. Meanwhile, Palihapitiya went so far as to say on Twitter that he bought GameStop call options, which is essentially a leveraged bet that its stock price would continue to rise.

Now what

While no doubt amusing to Musk, Palihapitiya, and the legion of GameStop bulls who have enjoyed the stock's incredible ascent, the steep rally in its share price might not last much longer.

On Wednesday, Bank of America analyst Curtis Nagle reiterated his underperform rating on GameStop's shares. He expects GameStop's upcoming earnings report to remind investors of its formidable challenges, including the shift to digital game downloads and the enormous pressure this will place on its preowned and collectibles businesses. Thus, Nagle argues that the game retailer's share price could plunge as much as 97% to $10.

With so much potential downside, those who have profited from GameStop's ascent may want to consider taking profits. And investors who haven't yet purchased shares will likely be best served by staying well clear of GameStop's stock.

“David defeated Goliath,” the press wrote several times during the week. A post on Reddit, the micro-investor meeting site, begs the rhetorical question, “Excuse me, did the wrong people manipulate the market?” Alexandria Ocasio Cortez, a Democratic member of the House of Representatives, has publicly backed this wave of investment activism from anonymous citizens.

gamestop stock shares soar high short squeeze

The big dogs of shorting are fleeing

The massive support of vulnerable companies by a wave of small investors was so unexpected and colossal that their shares led to a large percentage increase in a short period. So the managers of Wall Street's aggressive capital, i.e., the hedge funds, were forced to leave positions that they were betting on in their collapse. Goldman Sachs said last week saw the most significant exit from hedge funds in short places, betting on falling stocks, since August 2019. Melvin Capital suffered the most significant losses, needing a $ 2.75 billion liquidity injection. after losing as many or even more than “amateur” small investors.

Small investors but not unsuspecting

Last Wednesday's session was typical when the stock indices moved in deep red due to the worrying development of the SARS-CoV-2 virus pandemic and its economic consequences. There was, however, an underlying variability that was difficult for a third observer to determine. Against the wave of stock market losses, the shares of Gamestop, AMC, which is the largest US movie chain, and the retail group Express showed gains from 150% to 255%. The rally was the result of massive placements by r/WallStreetBets micro-investors on Reddit. Through the exchange of views, the unruly micro-investors proceeded to purchase orders through the Robinhood stock exchange platform and other affiliates that enable access to financial markets with minimal capital. The architect of this form of “investment activism” claims that with initial money of 50,000 dollars, he managed to secure 40 million dollars.

“These Reddit traders are not as reputable as professional stockbrokers, but there is a lot of in-depth analysis on the forum,” said James Kardaske, co-founder of analyst firm Quiver Quantitative. their shares in shorts. “People there are well aware of the market mechanisms that can cause major changes in a stock,” he told the Financial Times.

The variability skyrockets

The fact is that this large influx of funds from small investors has detuned Wall Street. The Cboe Vix volatility index, which measures investment risk, closed yesterday at 32.4 points, much higher than the average, slightly lower than 20 points. Following their steady rise since November, the Dow Jones, S&P 500, and Nasdaq indices began to stumble on the phenomenon of this investment activism, closing yesterday with losses of 2%. Last week was the worst on Wall Street since October last year.

Market analysts are wondering if there is a question of stock market destabilization at a critical time when economies are being hit by the sweeping effects of the Covid-19 pandemic. According to the research company Sundial Capital Research data, the investments in call options ? rights to buy shares at a specific price ? reached 34.2 billion dollars in January.

Robinhood: is such a big success desirable?

Robinhood, the Internet's largest stock exchange platform for small investors and now known in the international press, had 13 million users last May. Just a week ago, the Robinhood app had the most downloads from the Apple App Store. In the middle of the week, it was forced to secure additional liquidity of one billion dollars from banks and investors after the central liquidation system -Depository Trust & Clearing Corporation- asked for more coverage for the processing of stock transactions from 26 billion to 33.5 billion dollars.

Following last Wednesday's solo rally starring Gamestop, AMC, and Express shares, Robinhood set a day after market restrictions but not on the sale of some stocks as it had not yet secured the $ 1 billion. In addition to the strong protest of its activist users, reactions were also provoked by Congress members. “It is unacceptable. “We need to be better informed about Robinhood's decision to block small investors than to buy shares when hedge funds are trading freely,” US politician Alexandria Ocasio Cortez wrote on Twitter.

After easing the restrictions, Robinhood returned yesterday with young people in the middle of the session and other internet trading platforms since Gamestop and AMC's shares showed gains of over 60% and 50%, respectively. This time, these interventions attracted the interest of the US Securities and Exchange Commission. The Wall Street regulator said it would look into the matter “to see if it works to the detriment of investors or hinders their ability to trade certain stocks.”

From a purely financial perspective, it is not rational to invest in stocks against economic developments. But several companies were trapped in the vortex of this unprecedented pandemic crisis. This investment activism exposes the size of the short to an unfavorable situation. If the derivatives market is so free to bet on companies' collapse, why can't small investors do the opposite with buying their stocks? Throughout this story, American Airlines, one of the big losers in the pandemic, managed to raise $1.1 billion from selling new shares and covering losses. At present, this form of investment activism seems to be gaining ground. What happens next will be interesting.


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