Why Did Reddit Trigger a GameStop Stock Surge?

[phinds]

*The game will go on until it stops.

Peaked at 170 on Thursday, closed at 100 on Friday.

Actually, it peaked at 200 with reasonably high volume just after the market closed on Wed.

 

[Klystron]

Actually, it peaked at 200 with reasonably high volume just after the market closed on Wed.

Correct.

This image shows a plot of GME price versus time-of-day over 5 days confirming an ~200 price late 24 Feb 2021.

Using tradingview.com software with optional Bollinger bands. If you want to change views or use other measures of GameStop price fluctuations, build your own chart using the free trial software.

 

[Vanadium 50]

Does that software allow one to plot the prices of two stocks or indices in an x-y plot? (Each point would be at a particular time) I think that could be quite interesting.

 

[Vanadium 50]

A very interesting paper just came out: "Attention-Induced Trading and Returns: Evidence from Robinhood Users" by Barber, Huang, Odean and Schwartz. Barber and Odean wrote a very famous paper "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors" in 2000 which is the source of the following very famous plot:

Anyway, the 2021 paper does a few things. In my mind, the most interesting is that they have a unique handle on what Robinhood users are actually doing by looking at outages and seeing how overall market transactions change. This doesn't tell us anything we didn't already suspect - no surprises here - but I for one prefer evidence to "it seems to me that..."

They also discuss what they call "herding events", days when the number of Robinhood users owning a particular stock increases dramatically. These are generated by external attention (e.g. Reddit). They show that returns following such events are typically negative,

 

[Klystron]

Does that software allow one to plot the prices of two stocks or indices in an x-y plot? (Each point would be at a particular time) I think that could be quite interesting.

I have been using the free Trading View trial package to peek at recent market fluctuations. If the paid service does not provide what you need, I think you can output data streams for further processing.

https://www.tradingview.com/

 

[mfb]

A very interesting paper just came out: "Attention-Induced Trading and Returns: Evidence from Robinhood Users" by Barber, Huang, Odean and Schwartz.

Interesting paper. Something went wrong with the link. Here it is: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715077

Figure 6 shows that events with larger herding effects tend to have larger negative returns.

 

[Vanadium 50]

Thanks for fixing the link.

Another interesting thing is that there are strong positive returns immediately before the herding events.

 

[mfb]

GME closed at 250 and then went to 275 (=now) outside of trading hours.

So much speculation going on.

https://finance.yahoo.com/news/game-stop-gains-another-20-extends-five-day-rally-163401966.html

 

[phinds]

GME closed at 250 and then went to 275 (=now) outside of trading hours.

I continue to be amazed that this stock can maintain such a high stock value w/ no justification.

I DO think it might have moved up slightly from a $20 stock since they are changing executives (well, at least one) and are re-planning the business model. But there's still no way this is a $200+ stock.

 

[Vanadium 50]

I continue to be amazed that this stock can maintain such a high stock value w/ no justification.

I think the justification is not that people intend to collect some of GME's profits. It's that they intend to sell to someone else at a higher price. Like today at nearly $300.

AT $300, the company is worth $20B. At 4-5% ROI that means an expectation of profits around $1B/year. GME's sales are around $5B and dropping, and are losing about $400M/year. To support a proce of $300, one needs to believe that GameStop can increase sales by 28% at no increase in cost, or decrease costs by an equivalent amount with no decrease in sales, or some combination.

That's asking a lot of new management.

 

[mfb]

I think the justification is not that people intend to collect some of GME's profits. It's that they intend to sell to someone else at a higher price. Like today at nearly $300.

Peaked at $350 and then fell to $200 in half an hour.
I have seen lotteries that were more predictable.

 

[Stephen Tashi]

Interesting paper. Something went wrong with the link. Here it is: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715077

We study the influence of financial innovation by fintech brokerages on individual investors’ trading and stock prices.

What are "fintech brokerages"?

 

[Vanadium 50]

What are "fintech brokerages"?

Robinhood and its ilk.

 

[Stephen Tashi]

Robinhood and its ilk.

I'm unfamiliar with "Robinhood" and the properties that characterize it.

On the web, I see the term "fintech" used as a company name. The company is accused of offering "pseudo automated trading" software.

 

[Vanadium 50]

I'm unfamiliar with "Robinhood" and the properties that characterize it.

I think Google will provide you more about what Robinhood is and what it does, and do it faster than me typing it in.

 

[Stephen Tashi]

Google knows what Robinhood is, but I don't see a generic meaning for the term "fintech". I see there is a company or companies that have "Fintech" in their names.

 

[BWV]

Google knows what Robinhood is, but I don't see a generic meaning for the term "fintech". I see there is a company or companies that have "Fintech" in their names.

generic name for financial service companies utilizing IT to disrupt traditional business models

 

[jbunniii]

I continue to be amazed that this stock can maintain such a high stock value w/ no justification.

The same thing happened with hundreds of stocks in the dot-com era (late 1990s). Almost all of them without justification, and almost all of them came crashing back to Earth eventually. As now, much of the hype was driven by message boards, although Reddit didn't exist at the time. The mania went on long enough that institutional investors were lured in. It didn't end well. This is small potatoes by comparison.

 

[phinds]

The same thing happened with hundreds of stocks in the dot-com era (late 1990s). Almost all of them without justification, and almost all of them came crashing back to Earth eventually. As now, much of the hype was driven by message boards, although Reddit didn't exist at the time. The mania went on long enough that institutional investors were lured in. It didn't end well. This is small potatoes by comparison.

All true.

 

[Vanadium 50]

The same thing happened with hundreds of stocks in the dot-com era (late 1990s).

And with tulips in the 1630's.

 

[Office_Shredder]

The same thing happened with hundreds of stocks in the dot-com era (late 1990s). Almost all of them without justification, and almost all of them came crashing back to Earth eventually. As now, much of the hype was driven by message boards, although Reddit didn't exist at the time. The mania went on long enough that institutional investors were lured in. It didn't end well. This is small potatoes by comparison.

Picking QQQ as an easy proxy for tech stocks, the tech bubble burst wasn't that bad. If gamestop only drops 25% from where it's trading now I'm sure its major shareholders would be ecstatic.

Calling bubbles is tough. Alan Greenspan said stocks were in a bubble in like, 1997. If you bought the s&p500 then you didn't lose money marked to any time in the future. Everyone acts like the top of the bubble is obvious in hindsight, but it's not.

 

[phinds]

Calling bubbles is tough. Alan Greenspan said stocks were in a bubble in like, 1997. If you bought the s&p500 then you didn't lose money marked to any time in the future. Everyone acts like the top of the bubble is obvious in hindsight, but it's not.

I've also heard that economists have predicted 9 of the last 4 bubbles.

 

[jbunniii]

Picking QQQ as an easy proxy for tech stocks, the tech bubble burst wasn't that bad. If gamestop only drops 25% from where it's trading now I'm sure its major shareholders would be ecstatic.

QQQ declined roughly 80% from its peak in March 2000 to its nadir in October 2002. It absolutely was that bad! Many high-flying individual stocks went all the way to zero.

Calling bubbles is tough. Alan Greenspan said stocks were in a bubble in like, 1997. If you bought the s&p500 then you didn't lose money marked to any time in the future.

Unless you bought at the 2000 peak and had to sell before the S&P500 briefly reached that level again in 2007. Or between 2007 and 2013 before the recovery from the credit/housing bubble crash.

And even if you bought in 1997, you were briefly underwater in 2009, even without adjusting for inflation.

Everyone acts like the top of the bubble is obvious in hindsight, but it's not.

That we were in a bubble was blatantly obvious at the time. Of course, the timing of the peak was not possible to predict. As Keynes said, "the market can remain irrational longer than you can remain solvent."

But if something can't go on forever, then it won't. As John Marks Templeton said, "the four most expensive words in the English language are it's different this time."

 

[russ_watters]

The same thing happened with hundreds of stocks in the dot-com era (late 1990s). Almost all of them without justification, and almost all of them came crashing back to Earth eventually. As now, much of the hype was driven by message boards, although Reddit didn't exist at the time. The mania went on long enough that institutional investors were lured in. It didn't end well. This is small potatoes by comparison.

Calling bubbles is tough.

Meaning, calling when they will pop, right? Identifying them isn't that tough, at least when they are extreme.

I was going to agree with @jbunniii at first, but changed my mind. While both are bubbles, they aren't the same kind of bubbles. There's a big difference between the GME bubble and the tech bubble of the late '90s. Those companies were new and unknown**, the internet boom was a real thing, and some did hit it big. Like the gold rushes, most companies lost money, sure, but still, a massive amount of gold was actually mined. So those investors were placing bets on the possibility a particular startup would succeed. It was a crapshoot for sure, but one that had a definite, if unknown possibility of a payout. They were just too loose with their bets, which is a problem that persists today, just not as bad.

GME is different because it's an established company, with history. Really, really bad history. The people betting on GME* aren't betting "without justification", they are explicitly betting against a decade of information that says the company is failing. Now, there is a new and unknown component here, and a potential for turn-around in Gamestop's strategy to go digital. But it's not even a defined idea yet, and it doesn't erase the bad history. Even if the digital part succeeds, it still might not save the company. Valuing/buying GME at $10 or $20 is a bet that the company might not fail, but buying/valuing it a $250 or $450 is asinine.

*Assuming they are actually betting on GME -- I believe many if not most are not betting on GME, they are just playing the wallstreetbets video game with real money.

**Ok, there's one massive exception to that. GME doesn't have a model that could send them in that direction though.

 

[Rive]

And with tulips in the 1630's.

I think it's an important difference that both the tulips and the tech bubble was kind of about buying as (irreal) investment: while the actual events could not happen without selling (what's not yours yet).
While the result might seem similar, within the context the underlying psychology and math are both very different.

 

[Vanadium 50]

Well, Russ, I think there are two ways to look at this. Look at my 28% analysis in #280. 28% is a huge number - if you could achieve 1% at MCD or KO you'd be hailed as the next Jack Welch. But there are millions of people that, by purchasing GME, apparently think 28% is what's going to happen. Given that, is 29% all that much crazier than 28%? 30%?

The other way is this - they are not investing in GME the company. They are investing in an unbacked asset (like Bitcoin) that they believe will appreciate. If you knew for certain GME would be at $700 tomorrow, wouldn't you buy it at $250 today? What if it has a 1% chance of going from $250 to $249 and a 99% chance it will hit $700? I can keep going down this path with various probability distributions, and in many cases it's rational to act on these beliefs in buying the stock - not because you think the underlying company is undervalued, but because you believe the stock price will increase.

 

[BWV]

at year-end, GME had assets of $2.8B and liabilities of $2.2B, so the company should be worth $600M, about what it was trading at on 9/30, right?

wrong - equity in a highly levered firm is a call option on the assets with a strike equal to the value of the debt. The rationale is the equity owner gets all the upside, but the downside is limited to the original investment.

So using a Black Scholes calculator for a call option with a current value of $2.8B, a strike of $2.2B, then just guess at 30% volatility in the value of assets and a 3 year expiration, the equity is worth $900M

No way I can torture the BS calculator to get to the current $18B valuation though

Of course the inputs above can be debated. Three years is generous, as it faces over $315B in debt maturities spaced over the next three years. 30% vol is a WAG and the
assets may be worth considerably less than book value.

 

[Vanadium 50]

No way I can torture the BS calculator to get to the current $18B valuation though

Aren't you limited to $2.8B? The best that can happen is all the debt goes away on Day One.

 

[BWV]

Aren't you limited to $2.8B? The best that can happen is all the debt goes away on Day One.

yes, but not for that reason, you just would never pay more for the option than the value of the underlying (and why you only do this for highly levered companies as for, say Microsoft, this option valuation would be so far in the money it would be about the same as the asset value)

 

[Vanadium 50]

yes, but not for that reason, you just would never pay more for the option than the value of the underlying

Isn't that the same thing? The net value is the value of the assets less the value of the liabilities, so you get a max value by zeroing the liabilities.

assets may be worth considerably less than book value.

I would suggest that if there were an analysis more sophisticated than "stonks always go up!" it would go something like this. The assets also include a 3-year revenue stream. The valuation of that is difficult: US Treasuries pay 0.31% for three years now. MetLife and Prudential have dividends of over 5%. You quickly run into the problem of needing either crazy increases in profitability or to argue that GME is much safer than Prudential - maybe on par with Treasuries. Pay no attention to the price swings behind the curtain.

PS At $18B, GME is about half as large as Prudential.