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You’d think that most City stock tippers would not recommend putting their money in a chain of traditional video game stores.
Lockdowns have devastated the High Street, non-essential stores are closed in many countries, and electronic retailers like Amazon dominate the online space with very competitive prices.
And yet, if, a few weeks ago, you had bet on GameStop and bought stocks when they were worth $ 17, you would have made a lot of money. Yesterday, they settled at $ 240 and rose as high as $ 469 this week.
One lucky investor even claims to have turned a $ 50,000 stake in the company into a life-changing $ 23 million.
Some ‘Master of the Universe’ in a Wall Street skyscraper? Quite the opposite.
Most of those who tip the stocks would not have suggested to potential investors that they put their money in traditional video game stores, like Game Stop.
For once, the financiers aren’t popping the champagne corks, they’re howling with fury.
The winners of the most extraordinary financial history over the years are not the big investment houses and banks, which, in many cases, have done extremely well during the pandemic. (The hedge fund industry reaped $ 127 billion last year, while banking giant JP Morgan posted a record profit of more than $ 12 billion in the latest quarter alone.)
Instead, they are ordinary investors, including many in the UK.
Locked up at home, many have started trading stocks and shares, and decided, on anarchic online stock information forums, that it would be fun to shake the markets and bite the noses of the bloodiest ‘vampire squid’ of all: funds. coverage.
Joining together at WallStreetBets, a bustling trading community on the popular social networking site Reddit, an army of amateur traders decided to work against financial professionals, who had bet GameStop was about to collapse.
In scenes reminiscent of The Big Short, the 2015 hit movie that recounted how spirited investors beat big banks at their own game after the 2008 financial crisis, these ‘little guys’ have mercilessly punished the Masters of the Universe. for his apparent error of judgment.
Using low-cost or even free stock trading sites like Robinhood, Redditors have been piling up to buy, or bet, GameStop stock, pushing the share price to ridiculous levels for this 37-year-old company that had been layoffs of personnel and closure of branches on both sides of the Atlantic.
Youtuber known as ‘Roaring Kitty’ AKA Boston’s father Keith Gill who was behind the Wall Street collapse
Wall Street thought the share price would collapse. But in fact, it skyrocketed, up 1,000 percent in the last month, and enjoyed an added boost when Tesla billionaire founder Elon Musk raved about ‘Gamestonk!’ On social media Tuesday.
The company is now valued at about $ 10 billion, more than American Airlines, the largest in the country.
Hedge funds often make money by betting on failure. They are the ones who are failing now.
So how exactly did it work?
Well, as the closings hit traditional retail businesses last year, many major investors bet against the stock prices of these companies – “shorting” in financial jargon.
This involves borrowing shares from a broker and then selling them. If the price falls, investors can buy them back at the lowest price, return them to the broker, and make a considerable profit. But, if the price rises, the bet fails and hedge funds and other institutions suffer.
In theory, if the stock price keeps going up, there is no limit to the amount of money they can lose.
This has happened with GameStop, which seriously affected two large US hedge funds.
WallStreetBets clearly shows that millions of armchair investors wanted not only to make money, but also to poke fun at hedge funds whose business is to profit from the misfortunes of others.
But the hedge funds and their highly paid analysts who bet on GameStop’s demise didn’t just stop anticipating social media fans.
Other developments were also lost.
Back in August last year, Ryan Cohen, a billionaire founder of an online pet food vendor, began buying millions of GameStop shares. Later, he and two executives joined GameStop’s board, with plans to help the company move online.
Youtuber Roaring Kitty refers to Mr Wizard online and was behind the stock buying frenzy
Added to that, late last year the two major game console makers, Sony and Microsoft, released new versions of PlayStation and Xbox – good news for a company that sells video games. GameStop even signed a deal with Microsoft that awarded it a share of Xbox earnings online.
All of this meant that the company didn’t seem so desperate after all. As their stock prices rose, hedge funds and other institutions that had predicted the company’s collapse fought back by shortening the company further, hoping (in vain, as it turned out) to defend their original ‘positions’ by suppressing the price of the shares.
In total, some 71 million shares were shorted. However, GameStop has less than 70 million shares in total, of which about a fifth are held by company executives who are prevented (under insider trading laws) from easily selling them.
Appropriately for a group of daily traders who do much of their buying and selling on a site called Robinhood, there is an anti-establishment aspect to the Reddit rebellion.
Another 20 percent is in the hands of large financial institutions that do not usually do business with them. This meant that only 20 million shares were available to hedge funds and other ‘sharks’.
This very tricky situation was spotted by, among others, Wallstreetbets cheaters who spread the word among the forum’s two million subscribers (a figure that has since skyrocketed to 4.5 million) that now was a perfect time to earn some money. money and put two fingers towards the plutocrats.
Many of these small-scale investors also cleverly limited their potential losses by using financial instruments known as “options,” rather than buying the shares. But it is important to see this drama in a larger context.
In London and New York, this stock-buying frenzy has now spread to other retail stocks that have been very short, pushing up the price of companies like electronics makers Blackberry and Nokia (phone makers that some were once in vogue), British educational giant Pearson and Odeon. owner of theaters AMC Entertainment.
US President Joe Biden’s economic team is monitoring stock market activity around GameStop
Meanwhile, appropriately for a group of daily traders who do much of their buying and selling on a site called Robinhood, there is an anti-establishment, even class warfare aspect to the Reddit rebellion.
Let’s bankrupt these billionaires and hedge funds! They will not outlive the masses! wrote a WallStreetBets user. Everyone buy now! We are not done yet!
Sayem Ahmed, a UK marketing expert who joined the GameStop stampede, said: ‘Part of me got in on the hype, but another part did it for another reason. I hate billionaires. I don’t think they should exist. ‘
Last night, online brokerages Robinhood and Interactive Brokers restricted trading in GameStop and AMC shares for hobbyists, controversially allowing hedge funds and their kind to continue to trade them.
Ardent left-wing senator Alexandria Ocasio-Cortez criticized the measure and called for a committee hearing in Washington. Lawsuits against the brokerages were rumored to be under consideration.
Critics reply that WallStreetBets’ activities amount to illegal market manipulation. And yet, others insist, isn’t that what hedge funds do every day by shorting stocks – sometimes of perfectly good, viable companies – and then spreading the word that the companies in question are dead ducks?
The White House said yesterday that Treasury Secretary Janet Yellen and President Joe Biden’s economic team are monitoring stock market activity around GameStop and other very short companies.
However, in these difficult times, politicians are not necessarily saying what the financial world wants to hear.
“We’re done letting hedge fund billionaires treat the stock market as their personal playground and then take the ball home as soon as they lose,” said Ro Khanna, a Democratic congressman.
Still, amid signs of a dangerous stock bubble, commentators warn that it could all end in tears.
The last few months have seen extraordinary movements in the markets, from the aforementioned Tesla shares rising eightfold to the controversial cryptocurrency Bitcoin that soared from around £ 5,000 per ‘coin’ to over £ 30,000.
All of this, of course, is taking place against a backdrop of rising unemployment, multiple lockdowns, increased public spending, and (in Britain at least) the near-certainty of tax increases to come.
American investor Michael Burry, made famous by the feature film The Big Short, described the latest events as “unnatural, insane and dangerous.”
The ‘short squeeze’ can still turn into a lethal crush.
