Why Did Reddit Trigger a GameStop Stock Surge?

[kyphysics]

So...

I popped into my local GameStop. There were two customers. Both were grown ups in their 30's...40's. Men.

One was asking for some item for his kid...the other was a grown adult gaming fan.

Gamestop has LOTS of toys/collectibles. That part is probably unique.

Otherwise the games, consoles, and accessories can probably be bought elsewhere (brick/mortar - like Best Buy) or online. Nothing special about them that I could see.

I reiterate. They are like Foot Locker in that sense.

 

[kyphysics]

This describes all businesses.

This is just untrue, in large part because:

You can replace "Amazon" with "large competitor"; anti-monopoly laws are sitting unused and forgotten about. As such, one of the most common avenues of expansion is monopolistic accumulation of anything even suggesting it might become a competitor.

This applies to all businesses.

It's late and I'm bored/procrastinating...so I'll entertain these thoughts more.

I don't think retail has a very high barrier to entry. Mostly, you're just selling stuff you buy from wholesale as a localized convenience to people. I'd say a high barrier to entry business is something like becoming a medical doctor. On top of needing to have many years of advanced education and training, the AMA strategically limits the amount of people who are admitted to medical school every year to protect the medical market. They DON'T want an oversupply of doctors, as that would endanger the livelihood of current doctors. Of course, it's partially to uphold academic/professional standards as well. This contrasts with the ABA, which has let way more people become lawyers than are needed and with pretty crappy credentials/pedigrees. Some law schools let you in with C-average undergrad grades and/or a crappy LSAT. For a long time, many low-tier law schools have been degree mills for profit. Law, then, is sort of a relatively law barrier to entry field. I think retail is mostly the same on a relative basis.

As for Amazon and monopolies in retail, I don't know. . .Brick and mortar stores not named Walmart (or a hugely successful big box store) don't seem to have that much monopolistic power. They can achieve economies of scale that lower their costs of operation and thwart competition, but this is not at all guaranteed, as you also have diseconomies of scale and "Cournot's dilemma."

Overall, I think selling a products in a brick and mortar retail environment is just much more unstable than, say, being an accountant, teacher, medical doctor, funeral home operator, etc. GameStop is possibly in one of the worst retail niches for reasons mentioned in earlier posts.

Feel free to disagree.

 

[Astronuc]

Five Imploding $40 Billion Companies Are Shadows Of What They Were​

https://www.investors.com/etfs-and-...lion-companies-implode-to-a-fraction-of-that/

The largest loss in market value from the all-time high is Amazon (AMZN). Shares of the online retailer shed a remarkable $766 billion in market value from its all-time high on July 13, 2021. That's a 43% drop in market value.

A colleague invested in AMZN recently, right before it dropped again.

Shares of Peloton topped out with a massive $45.4 billion market valuation on Nov. 18, 2021. The stock hit 176.65 on that day as it looked like people would ditch their gyms and workout at home. But now it's the Peloton investors who are sweating and perhaps hoping for a buyout. The company's market value shriveled nearly 90% from the highs to be worth just $4.6 billion now, or 13.83 a share.

GME closed on Friday at $98.39, which is up from previous close of $89.57. Earnings per share is -$5.25
AMC closed on Friday at $11.81, up from its previous close $11.20. On June 2, 2021, it hit a high of $62.55. The one year range is $9.70 - $72.62.

BitCoin was down from its high.

BTC-USD

$29,406.35

-$641.23

-$2.13%

But it's above its low of $26,284 on May 12. It's high on Nov 8, 2021 was $67,582.80.

 

[Vanadium 50]

But...but...stonks only go up!

 

[Astronuc]

Coinbase founder Brian Armstrong had a personal fortune of $13.7 billion as recently as November. That’s now just $2.2 billion.

Ouch!

 

[Vanadium 50]

You know, my lifestyle would be identical if I had a net worth of $2.2B or $13.7B.

 

[Office_Shredder]

You know, my lifestyle would be identical if I had a net worth of $2.2B or $13.7B.

It's easy to say that until you actually have that much money. Only one of them let's you drop a billion dollars on five giant mansions across the country without worrying about the cost.

 

[artis]

It's easy to say that until you actually have that much money. Only one of them let's you drop a billion dollars on five giant mansions across the country without worrying about the cost.

I'd argue that both of them should be used to drop a billion on 5 mansions if not for anything else then for the simple fact that it is wise to invest in stuff that doesn't swing back and forth in value like a leaf in the wind.

 

[Office_Shredder]

I'd argue that both of them should be used to drop a billion on 5 mansions if not for anything else then for the simple fact that it is wise to invest in stuff that doesn't swing back and forth in value like a leaf in the wind.

The market for 200 million dollar homes is not large, it seems pretty easy to lose half your investment if demand drops a bit.

 

[phinds]

The market for 200 million dollar homes is not large, it seems pretty easy to lose half your investment if demand drops a bit.

I recall reading a story fairly recently about a super mansion that was sold originally for $250+ million and put on the market for $250 million and ended up selling for "only" $150 million, so yeah.

 

[artis]

true, well then simply invest in something that doesn't drop in value or isn't volatile if one wishes to safe guard their assets without further risking with them

 

[Stephen Tashi]

it is wise to invest in stuff that doesn't swing back and forth in value like a leaf in the wind.

Have you seen the online game "Crack shack or Mansion" ?

 

[Vanadium 50]

Only one of them let's you drop a billion dollars on five giant mansions across the country without worrying about the cost.

I get your point, but doubt either can do that in practice. Most bezillionaires have tehir wealth in the stock of a company - where it is illiquid (but can serve as collateral for a loan). With the average dividend yield of 3.1% and the rule of thumb that your mortgage can be 2.5x your income, you get $78M in house per billion in assets.

There are people who can do that - about 15 of them.

And there are some very, very nice houses available for a mere $10-20M.

 

[Office_Shredder]

I get your point, but doubt either can do that in practice. Most bezillionaires have tehir wealth in the stock of a company - where it is illiquid (but can serve as collateral for a loan). With the average dividend yield of 3.1% and the rule of thumb that your mortgage can be 2.5x your income, you get $78M in house per billion in assets.

There are people who can do that - about 15 of them.

Billionaires borrow money against their stock to fund whatever they want. If you have 15 billion in assets, you can borrow a billion dollars, pay 30 million a year in interest, and buy everything you want right now.

You only need a divided friend of 0.2% on your assets to support the interest.

This is pretty standard stuff - wealthy people don't sell stock when they need money, they borrow money to avoid paying capital gains tax.

You can also get a pretty good interest rate - borrowing a billion dollars secured by 15 billion dollars of assets is a pretty safe bet. I don't know the specific details of how these loans work but I would guess for people who own growth assets, they let the loan grow in lieu of interest for the first couple years.

 

[Vanadium 50]

That is my point exactly - being a billionaire does not mean you can write a check for a billion dollars. It's not like Scrooge McDuck, who has a basement full of gold.

 

[russ_watters]

But...but...stonks only go up!

I pointed this out on Reddit a couple of days ago and was told it's really just code (they don't necessarily really believe it). Code for what, wasn't explained. In two separate threads people implied they recognized a bubble/game of musical chairs...though they implied they though all stocks were like that.

 

[BWV]

Billionaires borrow money against their stock to fund whatever they want. If you have 15 billion in assets, you can borrow a billion dollars, pay 30 million a year in interest, and buy everything you want right now.

You only need a divided friend of 0.2% on your assets to support the interest.

This is pretty standard stuff - wealthy people don't sell stock when they need money, they borrow money to avoid paying capital gains tax.

You can also get a pretty good interest rate - borrowing a billion dollars secured by 15 billion dollars of assets is a pretty safe bet. I don't know the specific details of how these loans work but I would guess for people who own growth assets, they let the loan grow in lieu of interest for the first couple years.

but at 3% interest vs a 23.8% max LTCG tax, its cheaper to realize gains rather than let the interest compound. At a zero cost basis the 3% interest becomes more expensive after 8 years.

 

[artis]

Have you seen the online game "Crack shack or Mansion" ?

No I have not, should I ?

That is my point exactly - being a billionaire does not mean you can write a check for a billion dollars. It's not like Scrooge McDuck, who has a basement full of gold.

Exactly. I actually think the Cali cartel and other top 5 drug empires or other criminal enterprises might have at some point had more realistic assets than many of today's billionaires because unlike them the drug lords had all their money pretty much either cash or in other real valued items like diamonds, gold, property etc.

Pretty much how business was done in the old days I think, you produce something of real value and you get your money's worth.

 

[bhobba]

Billionaires borrow money against their stock to fund whatever they want.

Many of the well off (not necessarily Billionaires - just wealthy) do the wheel or modified wheel. The wheel is you select, using fundamentals detailed in classics like the Intelligent Investor (i.e. basically what Warren Buffet uses) strong stocks. You buy them at discounts using puts. That means you get paid while waiting for the share to reach your price. Once it reaches your price, it is assigned, and you sell calls at ten delta, meaning 90% of the time, you collect the premium. In the rare case that the stock reaches your strike price, you have collected the premium and hopefully a nice profit in the share rising. If you don't make a profit, you sell your call, keep the stock, and continue selling calls. If it is sold, you buy another using a put and keep repeating. The modified version used by Warren Buffett is to sell puts on shares he wants. Or you could trust Warren and buy Berkshire Class B shares. But instead of then selling calls, he keeps the stock. If he doesn't have the cash to buy the share if assigned, you can easily borrow the money against your other shares (most option accounts give you a 50% margin these days), but it is also easy to sell the put and take a bit of a loss. The details of the strategy can vary a bit but let us say you have a million-dollar stock portfolio but little or no cash. Of course, you can borrow against it, but you can also sell puts using the stock as 'collateral' or 'margin'. Nothing is sold. It is kept aside should the trade not work out. Here are the details on one way of doing it (forget the sales pitch):


If your goal is to collect premium and it looks like you may be assigned, you close the put at a loss and move on to the next trade.

Thanks
Bill

 

[Office_Shredder]

but at 3% interest vs a 23.8% max LTCG tax, its cheaper to realize gains rather than let the interest compound. At a zero cost basis the 3% interest becomes more expensive after 8 years.

You're ignoring the potential for future growth on the assets that you would have owned if you didn't sell them to buy your stuff. If you have a billion dollars of stuff earning 30 million a year, selling it to buy stuff vs borrowing a billion dollars and using your 30 a year to pay the interest is economically equivalent. (Where here 30 million a year might be mostly contained in the growth of the asset, since we're assuming they're cash poor to begin with)

Bhobba , I'm not talking about an investment strategy, I'm talking about a tax hack to buy actual stuff (cars, houses, yatchs) without paying capital gains tax.

 

[Vanadium 50]

people implied they recognized a bubble/game of musical chairs...though they implied they though all stocks were like that.

They aren't exactly wrong. Companies go up and go down. How many of the original Dow 30 are still in it? How many are still solvent? The Reddit crowd seems not to like shorting on principle, but fact of the matter is that companies can and should shrink. Acme Buggy Whips is not the great deal it once was.

 

[Astronuc]

Acme Buggy Whips is not the great deal it once was.

Neither are tulips and hats.

 

[Astronuc]

Ethereum co-founder says every ‘average smallholder’ impacted by Terra’s stablecoin crash should be made whole, cites FDIC’s $250,000 as ‘precedent’
https://finance.yahoo.com/news/ethereum-co-founder-says-every-215033542.html

 

[Office_Shredder]

Ethereum co-founder says every ‘average smallholder’ impacted by Terra’s stablecoin crash should be made whole, cites FDIC’s $250,000 as ‘precedent’
https://finance.yahoo.com/news/ethereum-co-founder-says-every-215033542.html

He's not that wrong - I don't know what will happen for this situation, but if there was a stable coin where anyone who held it was promised to get at least a thousand dollars back, that would greatly enhance its value and utility (I mean, a stable coin that was fully backed by assets like tether is supposed to be is even better)

 

[BWV]

You're ignoring the potential for future growth on the assets that you would have owned if you didn't sell them to buy your stuff. If you have a billion dollars of stuff earning 30 million a year, selling it to buy stuff vs borrowing a billion dollars and using your 30 a year to pay the interest is economically equivalent. (Where here 30 million a year might be mostly contained in the growth of the asset, since we're assuming they're cash poor to begin with)

Sure, I get that but a growing loan balance and volatility risks triggering the ~50% LTV levels that would trigger a margin call

billionaires tend aggressive risk-seeking personalities and many leverage themselves to the hilt because they believe in the growth of their companies, or own a concentrated interest in their own company stock and want to avoid the optics of selling, but there is a downside, for example:

https://whalewisdomalpha.com/the-mo...-stock-melted-down-to-30-million-in-100-days/

 

[Office_Shredder]

Sure, I get that but a growing loan balance and volatility risks triggering the ~50% LTV levels that would trigger a margin call

Did you see the part where they borrowed a billion dollars against 15 billion in assets? I literally said If you only have 2 billion dollars you wouldn't do that! We're on the same page here - having many billions of dollars is better than only a couple billion dollars. The thing about borrowing money is kind of irrelevant, though I guarantee you people are doing this.

 

[Astronuc]

A lavish Bel Air mansion listed for $87.8 million reportedly received just half the asking price when it went to auction last week.

According to CNBC, the highest bid for the property was just under $45.8 million—around 52% of the mammoth asking price.

Maybe the seller should have used Reddit.

https://finance.yahoo.com/news/bel-air-mega-mansion-listed-161003169.html

 

[Vanadium 50]

Neither are tulips and hats.

Tulips only go up!

 

[Astronuc]

Tulips only go up!

In the Springtime!

We have tulips in our garden. We must be rich!

 

[Vanadium 50]

Ethereum co-founder says every ‘average smallholder’ impacted by Terra’s stablecoin crash should be made whole, cites FDIC’s $250,000 as ‘precedent’

Interesting position. "We don't want government involvement, until we do."

 

[Office_Shredder]

Interesting position. "We don't want government involvement, until we do."

That's not what he said. He said terra, the organization behind the coin, should reimburse people so that most people become whole.

The thing to remember here is the Terra organization raised like, 3 billion dollars selling its coins as funds to use to defend the dollar peg. I think they claimed to have spent it trying to buy the stablecoin. There were only ten billion dollars of terrausd available, if they promised to make as many people whole instead of just buying from whoever sold first they could have pulled this off.

 

[russ_watters]

Interesting position. "We don't want government involvement, until we do."

I didn't read that as a promise of FDIC insurance but rather a promise to reimburse losses directly because they don't have FDIC insurance. Not, "we want government involvement" but rather "we can do it all ourselves".

Assuming we believe they actually can.

[edit] Oops, already answered.

 

[Vanadium 50]

Obviously, if they have billions of dollars, they can do with it what they will. The question then becomes why they didn't do this proactively. "Terra - the satblecoin that's not very stable" is not the best slogan I have every heard.

 

[Office_Shredder]

Obviously, if they have billions of dollars, they can do with it what they will. The question then becomes why they didn't do this proactively. "Terra - the satblecoin that's jot very stable" is not the best slogan I have every heard.

No, they don't have any money anymore, they spent it all.

In theory the stablecoin is no different from the us dollar. It had a gold standard, then came off it for a bit, then got back on it, then dropped it entirely. The value of a us dollar is pretty stable despite it just, being a dollar. This stablecoin had the same goal - it was kind of sort of pegged to the dollar by some assets backing it, but it didn't work out. This isn't that dissimilar to the Swiss franc peg to the euro or the British pound to the various European currencies in the 90s, except that the move was more extreme because this is a more speculative and unestablished currency.

 

[russ_watters]

The question then becomes why they didn't do this proactively. "Terra - the satblecoin that's jot very stable" is not the best slogan I have every heard.

In order to think to put the policy in proactively they first have to believe there is a non-zero possibility that their The Algorithm could fail. But this is crypto we're talking about. It's a totally safe and stable alternative to currency backed by fickle and unstable governments like the US.

 

[Vanadium 50]

they first have to believe there is a non-zero possibility that their The Algorithm could fail.

Hmmmm...

My understanding is that the algorithm is a "cocktail" of various assets (all cryptocurrencies, I think, but that's not an important detail). This is not new to crypto; see Special Drawing Rights (XDR) as an example of an attem,pt to make a currency that is stable. Well, more stable. Well, maybe a little less volatile.

The problem with this is that if the cocktail ingredients are all positive definite, you can't maintain parity in all circumstances. The easiest to see is if all the assets fall with respect to the dollar, there is no rebalancing that will recover parity. That's the easiest to see, but you also have the case where things fall so far and so fast in a subset of assets the others can't buoy the basket up.

There is a great Dilbert on this from 12/13/2008 on this. For obvious reasons, I won't like it here.

 

[Astronuc]

I don't know if Reddit had anything to do with Snap (SnapChat), or just the not so good news from Snap CEO Evan Spiegel, who warned of slowing growth in a note to employees made public on Monday.

SNAP Snap Inc.

12.79

-9.68

-43.08%

The founders own a combined 95% of voting shares (Spiegel with 48% and Murphy with 47%), which are undiluted and transferable to the other when one retires or dies.

https://en.wikipedia.org/wiki/Snap_Inc.

https://www.cnbc.com/2022/05/24/snaps-down-32percent-and-its-dragging-other-stocks-down-with-it.html

 

[Office_Shredder]

There's nothing special about snapshot- lots of internet stocks whose value was based on long term user growth at getting hammered now that there are better things to do than use the internet again.

 

[fluidistic]

The luna/ust fall is not.the first nor the last ''stable coin'' fall. Usdt, the currently most used one, is a titanic waiting to meet its iceberg. It's not an algorithmic one, it's an unbacked one.

The founder of DAI (an overcollateralized algorithmic stablecoin) called out luna's founder earlier this year on twitter. He got a salty reply from luna's founder.

.

I'm glad I didn't sink in that ship. Entered the game when luna hit 100 usd, left one day later at 102 usd.

Not only that but someone had shown that luna would crash for a billion usd or so, and this is exactly what happened.

 

[Astronuc]

The Rise and Fall of Cathie Wood
https://nymag.com/intelligencer/2022/05/the-rise-and-fall-of-cathie-wood.html
Even after her ARK fund dropped in value, she talked up her portfolio and future opportunity.

Around the middle of April, Cathie Wood sat onstage at the storied Fontainebleau hotel in Miami. It was an awkward time to be a keynote speaker at a conference for money managers: Wood’s flagship fund, the ARK Innovation ETF, had lost roughly half of its value over the prior year, as its aggressive bets on hot companies from Coinbase to Robinhood and Tesla had melted down amid a bear market in tech stocks.

Wood, though, had evidently not lost her luster — judging by the crowd’s applause — nor her brazen bullishness. A year earlier, she’d thought her firm, ARK Invest, would deliver annualized returns of 15 percent, she acknowledged, setting up what seemed like a mea culpa for her poor performance. Instead, she doubled down: “Now we think 50 percent.”

So far, she’s been wrong — her main fund is down another 34 percent since her comments — but her firm still has more than $16 billion in assets, according to fund-tracker Morningstar. While that’s a fraction of the $40 billion ARK had in March (a figure the firm still lists on its website), it means Wood’s pool of money is still roughly the same size as major hedge funds like Bill Ackman’s Pershing Square. (Wood declined to comment for this article.) In the realm of Wall Street, Wood is an unusual creature: Not only is she a rare female portfolio manager, but she was also an outlier in her nearly boundless optimism about the riskiest investments on the market, including cryptocurrency and Tesla, which four years ago she (correctly) predicted would go up more than 1,000 percent. Last fall, she put a $500,000 price target on bitcoin, then — as bitcoin’s price cratered — raised it to $1 million a few months later.

Wood’s willingness to make such calls so far ahead of reality — and so out of step with Wall Street’s old guard — has earned her a rockstar reputation among stonks-obsessed retail investors, making her a mascot for buy-the-f***ing-dip Robinhood traders, some of whom have dubbed her “Cathie Bae” on Reddit. In an industry loath to make guarantees about the future, Wood’s brand was like price-prediction porn: To hear her talk was to feel your mind liquefy in a clickbait-like flood of dopamine-inducing buzzwords — her portfolio a cornucopia of self-driving cars, crypto, genomic cancer cures, AI, streaming, and gaming. She told risk-drunk investors exactly what they wanted to hear. In her view, it seemed, tech stocks only went up and to the right.

I read some headline hype about Cathie Wood and ARK, and only recently did I learn about her and how she became the investor she did. I think she got lucky, then it went to her head.

I wonder of Redditors talked up ARK before it collapsed, just like Bitcoin and other cryptocurrencies.

 

[kyphysics]

I don't think she was as bad, nor as good as her peak performance and subsequent demise have shown.

Per SEC rules, I believe she's forced to invest incoming funds and also diversify them. That means even when prices are astronomically high for certain growth stocks, she's forced to buy more based on fund flows and new capital. On top of that, there are often diversification rules, so she's got to have a wide basket of stuff she may not even want to buy.

Everything is well when there is Fed liquidity (low rates and QE) and a huge mania behind meme and growth stocks. People just wanted to get in no matter the cost (ridiculous 50X price/sales multiples) as long as the stocks/funds went up. Cathie's not going to complain, nor tell people not to buy into her overvalued fund/ETF.

She's probably thinking it's their own responsibility to know what is overvalued or not. I don't mind her not telling people not to buy in. But, I do mind her pumping and pumping her fund even at those high valuations. I feel there is a difference.

 

[Vanadium 50]

Um...what?

Mutual funds are not as complicated as you make them out to be. (There may be a kernel of truth in there somewhere, but it's not clear where or what it is.)

At their core, mutual funds are collections of stocks. ABC Corp may trade at $100/share, and XYZ at $200/share, and if a share of particular mutual fund contains 1/10 share of ABC and 1/20 of XYZ, it will trade at $20/share, and have half its value in each company. Of course as a practical matter, real funds hold many more stocks than just two. The fund price cannot deviate too far from $20/share, otherwise people will take advanatge of arbitrage until the situation stabilizes.

If I invest $2000 in this fund, I expect that I will own, through the fund, 10 shares of ABC and 5 shares of XYZ. If the fund doesn't buy them for me, that's a problem. But it's not a problem with the way that the fund is structured or with funds in general, or with liquidity, flow rates, or any other high-falutin' financial terms: it's simply malfeasance. (Note that in real life, funds have some latitude on when they need to purchase the underlying asset, how much they keep in cash, etc. This is in the prospectus)

Further, if the fund does not want to take in new money = for whatever reason - they can simply close the fund.

There's no financial mumbo-jumbo here. It appears to be an old story - Wood picked good stocks in the past, but isn't picking good stocks now.

 

[Bystander]

Series I-bonds? Yes/No?

 

[Vanadium 50]

Do you mean "do they exist?" I'm pretty sure they do.

Do you mean are they good investments? Depends on your goals, including when you will need the money. It also depends on your tax situation and present portfolio balance.

 

[Bystander]

are they good investments

The $10k/a limit vs. the current rate of inflation; 10% isn't bad, but too many hoops...?

 

[Vanadium 50]

Ever deal with Treasury Direct? It could possibly be thos most annoying website in the world. Just one disadvantage of I-series bonds.

Full disclosure: I bought a ton of TIPS during my June rebalance.

 

[Bystander]

Treasury Direct? It could possibly be thos most annoying website in the world. Just one

That's what I wanted to know...gonna spend a little time tossing coins now, thankee.

 

[BWV]

Ever deal with Treasury Direct? It could possibly be thos most annoying website in the world. Just one disadvantage of I-series bonds.

Full disclosure: I bought a ton of TIPS during my June rebalance.

Sure, but the -7.5% yield on 1-year TIPS makes the Treasury Direct site palatable

 

[kyphysics]

 

[BWV]

12/31/19 market cap of US stocks was ~$34T, down 20% after the COVID crash that would be $27T, $100B is not that much money on that scale