Originally my intent for this month’s Insight was to talk about the changing of the guard in the White House. First to review the last four years and then discuss the initial moves made by the new President. Even the most ardent Trump hater, if balanced in their review, would have to admit he achieved some good things for the country (and even the most strident supporter would have to admit he also did some damage). Likewise, Biden’s rush of initial executive actions have both positives and negatives, at least in my observation. But the GameStop’s stock price went vertical. The story is fascinating from an investing standpoint. And, as of today, the story is also concerning/interesting from a societal standpoint.
For those of you unfamiliar, with the story:
As recently as recently as January 12th the stock price was below $20/share; and had traded in a narrow range for quite some time. With the idea that GameStop would be rendered obsolete by on-line games and game downloads, some hedge funds were piling into short positions to benefit from the assumed impending decline.
Those short positions were disclosed in the required year end filings. The so called Robinhood crowd, maybe not as green as assumed by the Wall Street pros, saw these short positions and, using chat boards on Reddit, compiled a herd of small investors to start buying the stock in an effort to squeeze the short positions. It should be noted that many of these initial buyers were fans of GameStop (the store, not the stock) and took the short positions as a personal affront. Through the buying action of this relatively small group of traders the stock price skyrocketed, closing at $31.44 on the 13th, a cool 57% increase in the stock price in a single day.
But the fun was just starting. $39.92 on the 14th, a breather to $35.49 on the 15th (people selling out of positions heading into the weekend), and after the long weekend continuing a slow (at least by comparison) climb over the following 4 days to the high $40s/share. Then on the 25th the stock shot to $119/share, fell back, consolidated its support and then went truly vertical, reaching $362/share on the 27th. For those of you keeping score at home, that is over a 1700% increase in price in two weeks.
Short positions were blowing up all over the place as margin calls tumbled in. Investors larger than the short funds were suddenly providing billions in liquidity to bail out their own investments in the short funds. There was no fundamental reason for the increase in price, and as one possessing a value investing mindset, I could only stare in bewilderment.
But Wall Street and all its richly paid experts had been, and continued to be, taken out behind the toolshed and given a good spanking. In the most populist of investing events, the elite were no longer in control. The small investor, using inexpensive trading tools and free message boards, was ruling the day.
As the price increased to $396/share in the morning of the 28th Wall Street could take it no more. Trading on retail trading platforms was halted. At least buying activity. Sales could still be made. But if there is no one buying, what good is selling you ask? Large trades were still be consummated, and the Wall Street insiders with direct access to the markets continued to transact. Without buying support but selling availability, the stock price plunged to $132/share, a massive 66% decline in a matter of minutes. Any of the Wall Street shops still holding short positions breathed a massive sigh of relief.
It doesn’t take a lot of shares to make a considerable amount of money when a stock price goes up $370/share in a couple weeks. A thousand share position (remember, the stock price was trading under $20) created gains of $370,000 at the peak, followed by losses of $264,000 at the plunge. This was, and is, an incredible stock market story.
The societal story may be better. This short squeeze activity is likely to spread to other heavily shorted stocks. Small investors have realized that by teaming up they have incredible power, even more than the financial elites. But they also found out that because the elites also have sway of the rules of the game, the elites have the power to wipe out the very vehicle being used by the proletariat.
A friend of mine summed up the situation nicely:
NBC and the Elites yesterday: This will end badly for the retail investors.
Wall Street Insiders last night/this morning: Manipulate the markets and shut down Robinhood so it ends badly for the retail investors.
CNBC and the Elites in a week or so: Told you so.
It didn’t take long for AOC to jump in demanding an inquiry. As a believer in free market economics, I don’t often agree with AOC on matters of investing or economics, but in this case I agree with her, heartily. This is the antithesis of a free market. So did Ted Cruz, who offered bipartisan support for such an inquiry. In an uncommon show of bipartisanship, AOC told him to “shove it up his $%^”.
Two populist politicians from different ends of the spectrum that are more in alignment than either would ever like to admit have taken a wonderful opportunity to get support from main street America in their crusade against the elites…and promptly siderail the news cycle onto their own pettiness.
And, no longer in the harsh glare of the spotlight, Wall Street smiles.
I don’t know if we will see this level of intensity in this sort of man versus the machine action again. But I am confident that there will be more of this kind battle. The rich poor gap was already large and growing before the pandemic. The economic shut down as exacerbated this issue. As has the Fed doubling down on the very loose money policies that caused the acceleration of the issue in the first place. Main Street is feeling the pinch and understanding they don’t have support in Washington or their state capitals. The only hope is taking matters into their own hands. This is not an end; it is the beginning.
Note: In the hours after writing these thoughts this article was posted on CNBC which does a great job of bringing more color to the societal interplay of the GameStop situation.
About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at email@example.com.