Tuesday, February 2, 2021

Regarding GameStop

GameStop (stock symbol GME) was founded in 1984 and has lots of retail stores that sell software for video games. The top management very recently announced plans to move to or expand to streaming games. So GameStop has suddenly become a speculative stock. Will its move to streaming be a huge success or a dud? There are many opinions on both sides, and some are willing to put some money where their mouths are.

GameStop's price history is here. The six-month (6M) graph gives a terrific bird's eye view.

The story has received loads of media attention. It’s being portrayed as a Robinhood or David and Goliath story. It’s not, or more accurately there are Davids and Goliaths on both sides. A friend asked, "Who benefits more from GME being up hundreds of percent, 'Wall Street' or 'Main Street'? This is an anomaly but it’s not entirely unique. It’s newsworthy but there’s nothing sinister here." Many of the "Davids" communicate on the Reddit forum WallStreetBets. Their "collusion," and short sellers talking with one one another, are both about as common as lying in politics. Many of these small investors have accounts at the broker Robinhood, which helps to promote the partly true story that the little guys are taking from the rich. Robinhood’s behavior is also part of the story, which I will skip for now. 

Some very large institutional investors, e.g. Fidelity and BlackRock, and their clients or customers, many of whom many live on 'Main Street', are enjoying the ride. Smaller institutional investors – e.g. the hedge fund Melvin Capital, have bet on the price of GME to fall, expecting to make money by so-called short selling – borrowing GME and then (hopefully) repaying the lender/owner after the price falls. For example, borrow GME and immediately sell it at $300 and buy back GME and repaying the lender/owner when GME's price is $200. That’s a gain of $100 per share. It hasn’t worked very well for some. If the borrower is forced or pressured to repay the loan when the price of GME is $350, that’s a $50 per share loss. The higher the price goes, the bigger the short seller's loss.

Much of the commentary about the story portrays it as unprecedented. Perhaps a little, but not much. This sort of phenomena happens regularly. People not that familiar with the world of investing don’t hear all about it, along with the mainstream press not making a lot of noise about it. A knowledgeable investor might yawn.

Fox News guy Tucker Carlson said: "Whatever our current system is, it is definitely not the capitalism we were promised, not even close” (link). Huh? Trading and borrowing and lending aren’t part capitalism (and even socialism and human nature)? Well, that’s for sure fake news! 😉 

Self-anointed do-gooder Senator Elizabeth Warren could not resist commenting. She said: “For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” Warren said. “It’s long past time for the SEC and other financial regulators to wake up and do their jobs -- and with a new administration and Democrats running Congress, I intend to make sure they do” (link). In GameStop's case, isn't that the little guys treating the stock market like their own personal casino?  😄 What does the pretentious Warren believe she can do to stop this “calamity”? I bet she doesn’t have a clue. It obviously struck her moral sense, though.

To show how silly Warren's portrayal is and support my claim that there are Davids and Goliaths on both sides, see here. "The hedge fund manager hit hardest by the GameStop trading frenzy is in the middle of a major redevelopment of a $44 million mega-mansion in Miami — despite his company losing $4.5 billion in the mania, according to a report.
   Short-seller Gabe Plotkin’s Melvin Capital Management lost 53 percent in January — ending the month with $8 billion in assets, down from roughly $12.5 billion."

That sounds more like Goliath committing suicide than David slaying him. Is Warren laughing? Would she cheer if it was 'David' slaying him? Would she laugh if it were Nancy Pelosi's husband rather than Mr. Plotkin?

Here is The Daily Objective's perspective. 

Update today: The speculative fever started around Jan 12, less than a month ago, when the price was about $20. A few minutes ago the price was $86. In the interim the price was over $450 on Jan 28. That's pretty spectacular. Regardless, I'm confident that there are other stock prices that have risen and fallen as much, though maybe not as fast when trading and information flow was much slower.

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