The GameStop Saga: The Retail Investors Strike Back
Hedge fund managers are currently learning a lesson the hard way. As reported by Reuters, hedge fund Melvin Capital Management “suffered heavy losses by betting against video game retailer GameStop.”
Here’s how that happened. Hedge fund Melvin Capital had opened a large short position (i.e., it sold borrowed stock) on GameStop in hopes that the price would fall and it could buy the stock at a lower price in the future to profit on the difference. Instead, GameStop’s stock price increased meteorically. Facing unknown and unlimited risk, the hedge fund had to cut its losses by closing its short positions, i.e., paying a much higher market price for the stock they’d borrowed and sold, thus absorbing heavy losses.
These losses were so heavy that Melvin Capital had to secure billions in “rescue capital” from other prominent hedge funds, according to the New York Times. These hedge funds are collectively such influential players in the stock market that this event had ripples felt throughout the marketplace, manifesting as a declining market even as GameStop’s stock surged. As Naeem Aslam at Forbes observes, covering these short positions requires the “liquidation of long positions in hedge funds,” which causes a “broader sell-off” in the market. This type of thing isn’t new, he writes. “In 1902, we also saw an episode of this when Northern Pacific stock price increased several times while the rest of the market crashed.”
From transcontinental railroads to video game retail stock, there’s not much which has changed about short selling in the marketplace, conceptually. And right or wrong, there’s always been a public assumption of devious intent applied to anyone engaged in the business of selling short. As Daniel Defoe wrote in The Political History of the Devil (1726), “every dissembler, every false friend, every secret cheat, every bearskin-jobber, has a cloven foot.” And today, there are few entities more detested among the contemporary public than hedge funds.
Though I personally believe that short sales are a natural and enduring feature of a free marketplace, it’s easy to see why our natural human inclination is to be suspicious of someone who has an economic interest in the failure of another enterprise. This feeling is only amplified when those seeking the failure of another enterprise for the sake of profit are those who seem to need profit least.
Now, consider this in the context of how the everyday American sees this. And, more to the point, how two million enterprising young professionals might see this.
There’s one set of opportunities and regulations for investors with established money and power, and there’s another for everyone else. How could anyone view hedge funds differently?
Wall Street Bets is a Reddit forum comprising well over two million small-dollar, speculative retail investors who are credited with pushing GameStop’s stock price to such heights. Some users are making it clear that they view this as an expression of their power.
One user writes, “FOR ALL THE BIG F---ING HEDGE FUNDS MONITORING US, THIS IS A MESSAGE… WE F---ING OWN YOU… GO BUY THE F---ING NEWS.” [sic]
And why wouldn’t the hedge funds be monitoring? Why wouldn’t they, with all of their power and money, seek retribution through political lobbyists to shut the forum down when their retail investing escapades hit the pocketbook of America’s richest and most politically connected?
The young retail investors don’t seem afraid, though. Another writes:
To the SEC retards in this sub: go f--- yourself. Why don’t you start investigating why companies can shut down trading so their hedge fund buddies don’t lose money. But when people lose money it’s completely ok. Eat a d---.
Note the separation between “hedge-fund buddies” of the market administrators and ostensibly normal “people.” Again, it’s easy to understand this distinction. When a hedge fund takes a large short position on GameStop, the hedge fund shareholders only win at the expense of the long-term shareholders and employees of GameStop, some of whom lose their entire positions in the enterprise or their livelihoods.
To be clear, I haven’t fully concluded as to where I stand on all of this. GameStop’s price and massive market capitalization, as of this writing, seems clearly unsubstantiated and practically artificial. But then, Tesla’s outrageously soaring stock price isn’t based on anything fundamental either, considering it just turned its first profit last year, and missed analysts estimates in doing so.
A market price is just what people are willing to pay for something, and these young retail investors are putting their money on the table. And they’re doing it in spite of the fact that they know they’re not supposed to be doing it.
That’s something. That’s conviction, at least, if not courage. That’s people putting skin in a game in which they’re hoping to influence the outcome. They’re not destroying others’ property in order to demand tax increases for high income earners while paying no income taxes themselves. And for that alone, I can’t shake this initial feeling of hopefulness. Something along the lines of Mark Cuban’s read on it:
I got to say I LOVE LOVE what is going on at #wallstreetbets. All those years of High Frequency Traders front running retail traders, now speed and density of information and retail trading is giving the little guy an edge. Even my 11 yr old traded with them and made $.
We are in the witnessing the beginning of a David and Goliath kind of battle for an incredible amount of money and power. Naeem Aslam at Forbes seems to understand what’s really going on:
Retail traders have become a significant part of the story and they are effectively telling Wall Street that it is no longer in control of stock prices. Generally speaking, institutional traders such as hedge funds will bet against retail traders. Commission-free trading has started to change the game and since last year, there is no doubt that retail traders have started to gain much more control.
Institutional and accredited investors often seek to profit as retail investors suffer. Retail investors, recognizing the adversarial relationship that exists, are reciprocating by exercising their collective power in influencing market prices.
The legal escalation of these issues with regulatory bodies, like the SEC, will be interesting to see play out. Hedge funds and their political surrogates will cry foul, of course. They’ll claim that millions of middle-class market participants are stacking the deck against institutional market players by unnaturally manipulating prices, or some such.
What will be most interesting to watch, however, is how the New York Times, MSNBC, and Joe Biden will stumble all over themselves as they completely reverse their position from ten years ago. Back then, corporate and hedge-fund billionaires were the plague that is decimating America’s poor and middle class. Today, expect those same voices to defend corporate and hedge-fund billionaires as the bulwarks of a stable market, while supporting the suppression of millions of small-dollar retail investors who seek to exercise their power in the marketplace in the only meaningful way that they can.
Image: Gamestop
Rush Limbaugh Weighs in on the Populist Revolt on Wall Street
Source: AP Photo/Photo courtesy of Rush Limbaugh
Rush Limbaugh weighed in on GameStop's skyrocketing stock price that currently has hedge funds bleeding billions of dollars. The radio host compared the populist revolt on Wall Street, engineered by a group of Reddit users, to today's political battles between ordinary people and the elites.
"Folks, it’s not just political now. The elites are bent out of shape that a bunch of average, ordinary users have figured out how to make themselves billionaires," Limbaugh told listeners on Thursday. "I’ve been studying it all morning and the best thing I can tell you is that whatever you think is going on in politics — the Washington establishment, the deep state, what have you — it’s the same thing in finance. There are those who are allowed to make all of the money and those of you who aren’t."
Limbaugh compared the traders beating hedge fund managers at their own game to Donald Trump's battles with the deep state. The host said the elites control who makes money and who doesn't and the deep state will come after anyone who learns how to beat the system.
"Now they’re actually making it clear to anybody who has the ability to notice that you’re not allowed to use the stock market the way they do," said Limbaugh. "You’re not allowed to profit. You’re not allowed to make the kind of money they do."
According to the radio legend, the ability to guarantee a financial future for yourself and your family is a privilege reserved by the elites and not intended for the benefit of ordinary Americans.
"You know, everything is rigged in favor of the elites, and this has come along and upset that rigging," said Limbaugh.
The host then drew parallels between big tech companies colluding to stop dissenting political speech and trading apps stepping in to stop traders from buying shares of GameStop.
"You know, if everything doesn’t benefit the establishment, then it has to be censored, right? Your speech, your attitude, if it doesn’t benefit the establishment, it’s gotta be censored. It’s gotta be canceled. It’s gotta be silenced," said Limbaugh.
Despite how the mainstream media characterizes it, Limbaugh said ordinary traders have done nothing wrong.
"They played the same game that hedge fund managers play every day to make a lot of rich people even richer. Yet the markets are now shutting down trades," Limbaugh pointed out, calling it a "teachable" moment for people who never realized how deep the deep state goes.
For her part, "progressive" squad member Alexandria Ocasio-Cortez (D-NY) appears to have her eyes open to the current situation.
"We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit," AOC said in a tweet.
In announcing plans to launch a congressional investigation, Rep. Maxine Waters (D-CA), chair of the House Committee on Financial Services, pointed to Wall Street's history of "predatory conduct" when it comes to hedge funds and short selling stocks.
A great way to unite a very-divided country may be for everyone to see just how much the elites and the deep-state have rigged things in their favor. What a great opportunity to reunite Americans by correctly identifying a common enemy: the elites.
But something tells me these Democrats won't stray too far off the reservation. Don't be surprised to see Democrats calling in the National Guard to protect Wall Street.
Populism Is Engulfing Wall Street…And They’re Not Happy About It
Source: AP Photo/Richard Drew
[SEE UPDATE BELOW]
Harrison is a good friend of the Triggered Podcast and his tweet pretty much sums what’s happening on Wall Street: “Populism is contagious.” Yes, a few smart randos on a Reddit thread, ‘wallstreetbets,’ decided to exercise their right to free speech and only boost the stock price of GameStop through the roof. It cost hedge fund firms, who were trying to keep the price low, tons of money—billions of dollars were just roasted. If you need a visual comparison, think the Joker lighting that mountain of money on fire in The Dark Knight. Some hedge funds got wiped out. I have another media reference for what’s happening—sort of—and it centers on the ending of Trading Places with Dan Ackroyd and Eddie Murphy manipulating the market of frozen concentrate orange juice. It’s that scene, but in reverse—and yes, those margin calls can be quite steep. They have been quite steep. As a Mets fan, I know new owner Steve Cohen, who serves as the basis for the character Bobby Axelrod on Showtime’s Billions, will be okay. That doesn’t negate the fact that his hedge fund lost a ton of money in the past few days.
Look, a few small-time guys are beating Wall Street. They’re making some money—and the big wigs aren’t happy. The power of the people is screwing the folks who are rigging the system. And now, that’s a problem. How dare the little guy make some scratch by conducting some trades? How dare they? This is our playground. Well, everyone has a plan until you get punched in the mouth. So far, some of the stocks targeted for this money train ride are AMC Theaters, Nokia, GameStop, and a couple of others. It’s a financial ‘storming of the Bastille,’ which I wholeheartedly endorse. Even Barstool's Dave Portnoy is getting in on the action (via NYT):
A real estate salesman in Valparaiso, Ind. A former line cook from the Bronx. An evangelical pastor and his wife in Huntington Beach, Calif. A high school student in the Milwaukee suburbs.
They are among the millions of amateur traders collectively taking on some of Wall Street’s most sophisticated investors — and, for the moment at least, winning. Propelled by a mix of greed and boredom, gleefully determined to teach Wall Street a lesson, and turbocharged by an endless flow of get-rich-quick hype and ideas delivered via social media, these investors have piled into trades around several companies, pushing their stock prices to stratospheric levels.
[…]
On Wall Street, individual investors are often derided as “dumb money,” destined to lose against the highly compensated analysts and traders who buy and sell stocks for a living. But in recent days, individual investors — many of them followers of a popular, juvenile, foul-mouthed Reddit page called Wall Street Bets — have upended that narrative by banding together to put the squeeze on at least two hedge funds that had bet that GameStop’s shares would fall.
While the hedge funds and other professional money managers had been shorting GameStop’s shares, betting that its stock was doomed to further decline, the retail investors — online traders, mom-and-pop investors, small brokers and others — have been pushing the other way, buying shares and stock options. That caused GameStop’s market value to increase to over $24 billion from $2 billion in a matter of days. Its shares have risen over 1,700 percent since December. Between Tuesday and Wednesday, the market value rose over $10 billion.
[…]
Ben Patte, 16, a high school student in Wisconsin who said he made $750 off GameStop stock, said the campaign felt like vindication for himself and fellow young traders. “It’s a good opportunity to make money and stick it to the hedge funds,” he said. “By buying GameStop, it’s kind of like beating them at their own game.”
No one knows how this ends. Some analysts say the intense activity could eventually prompt a wider sell-off in the market by forcing hedge funds on the losing side of these trades to sell parts of their portfolios to raise cash to cover their losses.
BREAKING: SEC releases statement on "ongoing market volatility," saying it is working with "our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants" https://t.co/yt6IViqKAu pic.twitter.com/qxSrUIq1sc
— CNBC Now (@CNBCnow) January 27, 2021
Sorta incredible what they will say out loud
— Jesse Singal (@jessesingal) January 27, 2021
Nasdaq CEO Suggests Halt to Trading to Allow Big Investors to 'Recalibrate Their Positions' to Combat Reddit Users https://t.co/dKsE1UiyLB via @mediaite
Waking up to WallStreetBets twitter tomorrow pic.twitter.com/P7dSCZvy0u
— Stephen L. Miller (@redsteeze) January 28, 2021
Populism is contagious.
— Harrison Dunn (@hdunn2) January 27, 2021
Praying to the Stonks $AMC pic.twitter.com/atGZJib96V
— Barstool Sports (@barstoolsports) January 28, 2021
Out to dinner and somebody just sent this.... TONIGHT WE DRINK...TOMORROW WE GO TO WAR $nok $amc #wsb pic.twitter.com/6o2A4PSfo5
— Dave Portnoy (@stoolpresidente) January 28, 2021
Pro Tip: Never get mad, except on purpose. @cvpayne coming in hot and meaning every word. https://t.co/6GTMdFXkzl
— Beverly Hallberg (@BeverlyHallberg) January 28, 2021
SEC is like pic.twitter.com/HT7CiF9M8m
— Drew Holden (@DrewHolden360) January 27, 2021
Redditers are going to get reporters working for corporate media outlets to defend the hedge funds and they are going to get Biden and Dems to put a bail out for them in the next stimulus.
— Stephen L. Miller (@redsteeze) January 27, 2021
Yeah, those poor billionaires. How will they ever live now? Also, it’s hilarious to see the NASDAQ CEO make suggestions that trading be halted so the elites can recalibrate their standing in the market. This right here is one of the many reasons why Trump won. Believe it or not, there are significant Trump and Bernie supporters who feel the economic system is rigged and the elites are trash. Well, this is exhibit A in that regard. Also, Sen. Dianne Feinstein’s (D-CA) husband bought $50,000 in stocks that weren’t disclosed. But it’s okay—she’s willing to pay a fine. Two separate rules, except it’s between the wealthy and well-connected and the little guys.
REPORT: Sen Dianne Feinstein Willing To Pay Fine Over Failing To Disclose Up To $50,000 In Stocks Purchased By Her Husband https://t.co/DlM9yvldkx
— Daily Caller (@DailyCaller) January 28, 2021
Best of luck, guys. Keep making them pay.
Protesters Descend on Wall Street: 'We Want a Free Market'
Source: AP Photo/Seth Wenig
Protesters descended on Wall Street on Thursday amid the ongoing populist revolt over the stock price of GameStop. A trading app known as Robinhood banned investors from trading stocks of GameStop and other companies popularized by users of the social media site Reddit.
On Thursday, the group of a few dozen protesters confronted workers on Wall Street, the New York Post reported. Protesters held signs the read "Tax Wall Street Trades" and chanted "We want a free market!"
The protest comes after Reddit users popularized the stocks of GameStop, AMC, and other companies, companies that well-connected hedge fund managers had placed large bets against. The sudden interest in the stocks drove the price of the stocks up, which in turn pressured hedge fund managers to cover their unsecured positions by purchasing stocks at increasingly higher prices. The increasingly higher prices means increasingly higher losses for hedge funds, losses now measured in the billions.
The populist outrage directed at elites on Wall Street is drawing support from individuals across the political spectrum.
On Thursday, "Progressive" squad member Alexandria Ocasio-Cortez (D-NY) called for an investigation into Robinhood's ban on trades.
"We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit," the congresswoman said in a tweet.
Rep. Maxine Waters (D-CA), chair of the House Committee on Financial Services, announced plans to launch an investigation, pointing to Wall Street's history of "predatory conduct" when it comes to hedge funds and short selling. The Senate is similarly planning to hold an investigation.
Tesla founder Elon Musk denounced the practice of short selling by hedge funds, and radio host Rush Limbaugh made comparisons between the populist revolt on Wall Street and President Trump's battles with the deep state.
"You know, everything is rigged in favor of the elites, and this has come along and upset that rigging," Limbaugh told listeners on Thursday.
The radio host said he hopes the moment will be a teachable one for those who didn't know the power of the elites goes far beyond censoring and canceling dissenting political opponents.
The Robinhood app says it will allow limited purchases of the banned stocks during trading hours on Friday.
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