Why Did Reddit Trigger a GameStop Stock Surge?

[Klystron]

Here is a screenshot of GME prices over 5 days. Graph displays candlesticks and Bollinger bands.

Same price display for 1-day at 11:30 PST 29Jan2021. Churn and burn?

 

[bhobba]

He appears to be an advocate of what is called "technical analysis", a school of thought that holds that one can forecast future prices from historical data, primarily price, but also volume and sometimes open options contracts. I think Wikipedia's statement is fair: "Whether technical analysis actually works is a matter of controversy."

He sure does. All short-medium term traders do it and many combine it with fundamental analysis. His strategy is basically look for fundamentally sound stocks whose price is on the rise - a momentum strategy. Wait for a pullback, then for the pullback to show signs of ending, That is the buy point. Then put in a stop underneath it that you sell if it goes below that and a profit taker if it rises above it. I have back tested and live tested it years ago when I was into that sort of thing, and followed the example trades he puts in his newsletter. It does work - but is a pain to implement - nowhere near as easy as nearly set and forget long term investing, where you simply adjust your tactical allocation when you regularly add money to your portfolio. It produces reasonable profits, but is not tax effective. It is fine if you want to trade for a living, are able to spend the time, muck around with charting programs the night before and put your orders in when the market opens (no sleeping in). You have to live day to day off your profits. It's more like a job. If you like it - fine. If not you may as well do a job you like and long term invest. If retired you just want to enjoy your retirement. That's why I no longer even invest - I just can't be bothered - now is the time to relax and enjoy it. To be fair to invest doesn't actually take much work. From my pension I have about $1000 left over each month and could add that to an investment portfolio - but now I just keep it in the bank. I may take it up again one day. But all it will do is increase the money I have enough for my lifestyle anyway.

Thanks
Bill

 

[BWV]

Question: Why aren't (or, are they?) the hedge fund clients exposed to these GME losses not just pulling their money out (or, can they?)?

How are these fund managers exposed able to continue to fight on (yes, I know Melvin was infused with capital from several other funds)? . . .Wouldn't this freak out all their clients?

Hedge funds have limited liquidity - typically only quarterly withdrawals with 60 or 90 day prior notice. Losses like this typically force funds to shut down as investors put in withdrawal notices

 

[kyphysics]

Hedge funds have limited liquidity - typically only quarterly withdrawals with 60 or 90 day prior notice. Losses like this typically force funds to shut down as investors put in withdrawal notices

Thanks! Interesting to know.

Any idea if what I'm reading (unofficial sources...just Reddit, etc.) is true: that the shorts don't have a time-limit for when they have to be covered? Although, one person explained that there is a premium they have to bleed if they don't cover, so it's not possible to hold the shorts forever...

Wondering how this situation plays out with both WSBers and the hedge funds holding out against each other it seems.

 

[gleem]

Here is a take on the GameStop buying and the investment houses by a professional financial advisor and editor of the Bauman letter

 

[BWV]

Thanks! Interesting to know.

Any idea if what I'm reading (unofficial sources...just Reddit, etc.) is true: that the shorts don't have a time-limit for when they have to be covered? Although, one person explained that there is a premium they have to bleed if they don't cover, so it's not possible to hold the shorts forever...

Wondering how this situation plays out with both WSBers and the hedge funds holding out against each other it seems.

No time limit, but there are solvency issues - brokers will force a margin call if the assets in the fund are not sufficient to cover the short. Remember a short sale is a liability, so as the price of GME increases, the liability increases causing the equity value of the HF shorting the stock declines. Brokers set limits, typically 25% equity before they require a margin call. So a fund that took a tiny position in GME would be fine and would in theory never have to cover (as is anyone who was short the whole market). But a 5% initial short position after a 17x increase would be 85% of the fund (assuming no other price changes). For funds that had some leverage to begin with, this would be fatal - an 80% decline in value and (assuming the short proceeds were held in cash) a corresponding increase in leverage from 0 to 80%.

 

[Vanadium 50]

But the counterparty might not want a margin call now, knowing it will likely bankrupt the fund. They might want to wait until the prices have become more reasonable, leaving the fund solvent but owing them a lot of money.

If you owe the bank $5000, you have a problem. If you owe the bank $5,000,000, the bank has a problem.
-and-
I want my sheep shorn, not slaughtered.

 

[bhobba]

Just an interesting comment about investor psychology. Years ago now I read a book called the Little Book That Beats The Market that described a value based strategy of stock investing:
https://www.magicformulainvesting.com/Home/AboutTheBook

Value investing is one of the few strategies that there is evidence it can beat the market over the long term. It uses a formula to find such stocks that you can find in the book, but others that find value stocks also work, such as the p/e ratio. Anyway back testing showed it beat the market. Since the book was written they looked at how it performed - and it still worked. You may think - hang on - once people know it the efficient market hypothesis means it will stop working. But it still worked. Here is the suggested reason as to why. You only needed once a year to sell 20 stocks and buy 20 more - hardly much work. You say great - might give it a go myself. But interestingly what the author found is very very few people could stick to even such a simple strategy. They fretted and worried when the market went up and their stocks went down for example. Also there is administrative work associated with even such a simple strategy. He found only 3% of people could stick to it - most - including the author - wanted someone else to do it for them. And therein lies the big issue with investing - you can come up with a simple easy strategy like the book details - but motivating yourself to keep doing it over the long haul - which is the only way to make the big bucks by compound interest - is far from easy. After all most would rather spend money and have fun. It's like the experiments they did with I think it was jelly beans. Kids were given a bowl of jelly beans and told they would get twice as many if they refrained from eating any. Most could not resist. But those that did resist were found to do better in life. Delayed gratification seems a good predictor of success.

Thanks
Bill

 

[Mondayman]

I'm not knowledgeable about economics or stocks unfortunately. This event has me starting to research so I can understand better what's happening.

I'm curious how this plays out for Gamestop long term. I was an avid gamer, and I have a dozen or so friends who are hard core gamers. I can say without a doubt that in the last four years, not one of us has frequented a game store such as Gamestop or EB Games. The trend has entirely been towards online transactions for everything: games, additional content, Xbox live, etc. Even with people buying stocks or whatever, I don't see the business itself improving a whole lot.

 

[kyphysics]

Is there ANY way for the hedge funds with big GME short exposure to cover their shorts at a small enough price to live to see another day. They don't have much bargaining power, right?

WSB's Reddit posters are all coming out saying they're holding their shares and not selling. If enough people do this, is the end game ultimately the bankrupting of these funds?

 

[bhobba]

I don't see the business itself improving a whole lot.

Nor do I - that's why it was targeted for short selling. But there were enough people on forums such as Reddit that actually like going to the store. So they bought shares hoping to keep its stock price from falling too much and it going out of business. That sent the share price up - basic economics - demand goes up - so does price. Now to sell short what you do is borrow shares from somewhere like an institutional investor, sell it, and later buy it back at a cheaper price thus making a profit. But let's say you just decided to get into the short selling action on this stock. You would see the price rise making a loss so you buy it back. This in turn creates more demand, and combined with the Reddit guys also buying it, up goes the price even more. Then for some other short sellers they are making a loss so they have to buy. It creates a positive feedback loop if you understand a bit of engineering. Positive feedback loops can quickly cause large changes. Soon the share price has risen considerably leading to large losses from those that short sold the shares. It would have been even worse for those that when the price rose they did not sell straight away hoping it was just a temporary blip - its fundamentals were not sound would be their thinking. Or maybe it just happened so fast they could not get out quick enough. For those it could mean the loss of a fortune. And of course the Reddit guys that originally bought them would have seen large gains. Normally institutional investors like Hedge funds 'give the finger' to the ordinary investor. This was a case of the ordinary investor 'giving the finger' to financial institutions. And they did not like it one bit. Some of the comments I heard on the news were laughable. But really it's a case of you live by the sword, you die by the sword. Funny thing is once this settles down the stock price will start to fall because of less demand - and then it will be a good short selling opportunity. But do not get too greedy - or the same could happen to you.

Thanks
Bill

 

[bhobba]

WSB's Reddit posters are all coming out saying they're holding their shares and not selling. If enough people do this, is the end game ultimately the bankrupting of these funds?

I doubt the Reddit guys are the only owners of stock. But if they were then the short sellers will have to go to those that lent them the shares and say we will have to buy them from you instead - and the price they would want would be - how to express it - 'nasty'.

Thanks
Bill

 

[Mondayman]

This was a case of the ordinary investor 'giving the finger' to financial institutions.

This is all I need to hear. Nothing against money, I just generally feel the need to flip the bird to some of these useless fat cats.

 

[mfb]

It would have been even worse for those that when the price rose they did not sell straight away hoping it was just a temporary blip - its fundamentals were not sound would be their thinking. Or maybe it just happened so fast they could not get out quick enough.

You need to find people who sell it. If multiple/large short sellers need to buy it at the same time there might simply be not enough shares for all of them.

If you buy shares for X then X is everything you can ever lose. If you short them then X is everything you can ever gain (buy them back for nothing) - but you can lose a large multiple of X.

Multiple hedge funds say they covered all their shorts, but there are still many of them around. Some people will try to short it now, of course. We'll see if they can keep their positions.

 

[Vanadium 50]

Some people will try to short it now, of course.

Easier said than done.

The way one shorts a stock is that one borrows the stock, sells it, buys it back later (hoping it will cost less so they can pocket the difference) and returns it. What does this look like for the counterparty? They get the same gain that they would have had the stock stayed in their own account, plus a little extra for their trouble. That little extra compensates them for the risk of something called "failure to deliver" - essentially the person you loaned the stock to running off with it. Of course, eventually this gets sorted out, so more realistically, it means that the owner of the stock won't be able to get it back exactly when he or she wants to sell it. And even when things go right, contracts typically give the borrower three days to deliver.

The problem now is that the risk to the lender of GameStop stock is very high - with the market craziness, he may want to sell it Right This Minute, and further it is likely that the person he lends it to is doing his very first short sale, so the odds of something going wrong are even higher than usual. So the "little extra" does not compensate the lender for the additional risk, and that means it is currently very difficult to borrow shares of GME to short them.

 

[kyphysics]

I doubt the Reddit guys are the only owners of stock. But if they were then the short sellers will have to go to those that lent them the shares and say we will have to buy them from you instead - and the price they would want would be - how to express it - 'nasty'.

Thanks
Bill

Thanks, Bill. I think the price is already nasty, no? The wallstreetbets "diamond hands" crowd is not selling and that naturally puts upward pressure on prices (less sellers).

Then, you have the call options forcing brokers to hedge more and more by buying GME themselves (forcing up the price).

This chart circulating online shows ~58M short interest shares yet to be covered:

Seems the price of GME could get nastier, no?

 

[kyphysics]

Michael Burry (of "The Big Short" fame) had this to say yesterday:

 

[Vanadium 50]

but you can lose a large multiple of X

Brokerages set limits so that this multiple doesn't get too large. For me, I believe the multiple is around 4 (I believe I am allowed 50% margin, half in anyone transaction, and if things go awry, my broker will sell my assets to cover), but normally limits kick in at around 2X. This, of course assumes a certain liquidity and price moves are slow enough to react. There was a famous case in 2015 with a guy named Joe Campbell - he shorted a company that took off in overnight trading, and ended up losing about 6.6X.

Had things moved slowly, he would have lost about 2X.

The institutional investors are not bound by this, so they can lose much, much more. The upside is, of course, the same.

 

[nsaspook]

This is not investing, this is social engineering with a wet noodle.

https://apnews.com/article/us-news-...ncial-crisis-834f2dd17cbbc5222e2fc4be3f41ab42

Feeding the frenzy have been young traders like 27-year-old Zach Weir, who this week bought five shares of GameStop.

“I’m a college student, so that’s basically a month’s rent for me,” said Weir, who is pursuing a master’s degree in marketing.

He did it, he said, because he believes in the cause: Protecting a cherished game store, where he would hang out as a teenager on Friday nights, from financial tycoons who want the company to fail.

And if he loses his investment?

“If my account goes to zero, it goes to zero,” Weir said. “At this point, it’s not about the money. I think this is bigger than the money now”

When all of the shorts crash (brokers taking their losses) out of the market these stocks will have no support when they go south.

 

[kyphysics]

Michael Burry's latest:

 

[kyphysics]

impressive...I definitely didn't have $3,000 at 15 y/o.



Hope this kid uses it wisely!

 

[Astronuc]

Nine Investors Instantly Make $16 Billion On GameStop Stock 'Squeeze'
https://www.investors.com/etfs-and-...16-billion-gamestop-stock-squeeze/?src=A00220

BlackRock may have raked in $2.4 billion on GameStop's retail-driven stock frenzy
https://www.reuters.com/article/us-blackrock-investment-gamestop-idUSKBN29W22T

From - https://finance.yahoo.com/news/how-...ory-is-part-of-5-bigger-trends-130701087.html
Over the past several weeks, a group of investors, often communicating on a Reddit community called Wall Street Bets, (WSB)—which has 6 million members . . . —bought shares in GameStop, the beaten down video game retailer.

A few saw promise in the company, but recently, mostly because word had gotten out that hedge fund Melvin Capital, among others, had shorted the stock (betting it would go down.) That the belief that they could make the stock go “to the moon” (how WSBers put it.) As demand for GameStop’s stock rose, (these investors bought options as well), so did its price, creating “a short squeeze,” i.e., the short seller is forced to buy shares at a higher price to prevent greater losses if the price continues to climb.

 

[Vanadium 50]

Nine Investors Instantly Make $16 Billion On GameStop Stock 'Squeeze'

Sure, people who already held GME have did well, at least on paper. The problem is if they want to turn paper into cash. If you've made a billion on paper, you need to find a billion dollars worth of people who want to buy it. That's probably not a bunch of guys on the internet who live in their parents' basement.

However, if they are smart, they will unload a small fraction of their shares. Let's say they bought 3M shares at $20, hoping it will go up. That cost $60M. Now it's at $325, so on paper it's worth $975M - almost a billion. By the argument above, they aren't going to turn this into $975M in case. But they may be able to get rid of 1% of that. That gets them $9.75M or a 16.25% gain. Further, they can try and sell it as it goes down -at $100 there are more buyers and at $50 more still.

They will do just fine on this, but they won't make billions, because there aren't really billions to be had.

 

[mfb]

If you look at post 104, at least 4 million shorts were bought back when the price was over $200 - that's at least something close to a billion that went to people/companies who sold when the price was high. Not 16 billions, of course, but it's still a lot of money that changes owners here.

 

[Astronuc]

However, if they are smart, they will unload a small fraction of their shares. Let's say they bought 3M shares at $20, hoping it will go up. That cost $60M. Now it's at $325, so on paper it's worth $975M - almost a billion. By the argument above, they aren't going to turn this into $975M in case. But they may be able to get rid of 1% of that. That gets them $9.75M or a 16.25% gain. Further, they can try and sell it as it goes down -at $100 there are more buyers and at $50 more still.

According to an article by ArsTechnica, "wealthy investors had shorted more shares of stock than the total number of shares available to trade." For GME, there are apparently 69.75M shares outstanding, 46.89M shares floating. I'm not sure of the accuracy of the numbers of shares, or the claim by ArsTechnica, but it seems dodgy if the number of shorted shares exceeds the number shares available for trade.

https://finance.yahoo.com/quote/GME/key-statistics/ - as of January 15. Apparently one must subscribe for more recent data.

https://www.marketwatch.com/story/g...ff-stake-valued-at-over-1-billion-11611855951

 

[Vanadium 50]

GME has a present market cap of $22B. (So the $16B people represent a 73% ownership in the country) Before this began, it was more like $1B. That plot shows $800M in sales. Astro's numbers show $1.1B. So that's the new cash that's gone into the system, and the only way for the "wealthy investors" to get that $16B is for $16B of new money to enter the system.

There is something called the "greater fool theory". But that only works until it doesn't.

The Ars Technica article I saw said that investors wanted to borrow more shares than were available. They didn't say they did. And of course they do. If they thought the stock was overvalued at $30, they must really think it's overvalued at $300.

(As an aside, does anyone believe GameStop is a Fortune 500 compay? It's #463 at the moment. Bigger than Deutsche Bank. Bigger than Kellogg. Bigger than Western Digital. Bigger than Burger King, Popeye's and Tim Horton's combined!)

 

[phinds]

(As an aside, does anyone believe GameStop is a Fortune 500 compay? It's #463 at the moment. Bigger than Deutsche Bank. Bigger than Kellogg. Bigger than Western Digital. Bigger than Burger King, Popeye's and Tim Horton's combined!)

Exactly. I keep wondering what the devil is letting it continue to defy economic gravity. Every day I expect it to go back to $20 / $30 where it belongs(*) and every day my jaw drops at the continuing high price.

* based on fundamentals

 

[gleem]

....., but it seems dodgy if the number of shorted shares exceeds the number shares available for trade.

Here is how. https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/

 

[Vanadium 50]

I keep wondering what the devil is letting it continue to defy economic gravity.

Ironically, GME is illiquid. If you are short, you want to wait so you will be less short. If you are long, you want to liquidate slowly.

 

[Astronuc]

Here is how. https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/

Dodgy.