It all started harmlessly in 2019, when people on message boards exchanged ideas about a chain of malls that were left over for the dead.
Now it’s much bigger: For experts prone to the dramatic, a parable between David and Goliath for the age of wealth inequality. Perhaps a holdover from Trumpism and the populist backlash against “the elites”.
It is an existential crisis for parts of the hedge fund industry. For old school investors who preach discipline and do their homework before hitting the “Buy” button, it’s a horror story that they expect to end horribly. This is at least part of the reason the entire stock market fueled on Wednesday.
The GameStop Corp. saga has become a national sensation and is on the doorstep of both the new President Joe Biden and the Chairman of the US Federal Reserve, Jerome Powell. Each of them received awkward questions about their attitude towards a company that sells five used video games for $ 10.
“It’s shaking everyone because every lever is working,” said Matt Maley, chief marketing strategist at Miller Tabak + Co.
At first glance, it’s hard to explain how a company whose revenue is expected to have shrunk in four of the last five years – and likely to post losses for a third straight year – had its share price soaring nearly 1,800% so far in January and 8,000% in the past 12 months.
Take a closer look and it makes more sense. “Buy what you know” is Warren Buffett’s mantra. So it’s easy to see why a group of millennial traders trapped at home amid the pandemic, whose savings are swollen from lack of options to spend elsewhere or from government stimulus payments, know a thing or two about games could.
Especially when they approach the market like a video game and their strategies involve something akin to what gamers would call a “cheat code” – in this case, by banding together and piling up individual stocks and related options like a tight one Team attacks a room full of dragons in “World of Warcraft”. All with the aim of forcing short sellers and derivatives traders to buy the stock and raise its price above anything a traditional investor thinks is reasonable.
For the nearly 3 million strong group of self-described “degenerates” on Reddit’s WallStreetBets forum and other social media sites where this new army of day traders gathers and conspires, the game has quickly expanded to include a multitude of stocks that they want to manufacture. “the next GameStop.”
There’s Naked Brand Group Ltd., a clothing manufacturer whose inventory has increased 618% this month. And AMC Entertainment Holdings Inc., the cinema company that generates more than 800% profit. Macerich Co., a real estate investment trust, more than doubled in size this month. This list goes on and on.
Nevertheless, the benchmark indices fell on Wednesday. The S&P 500 fell nearly 3%, its worst drop since October. How can that be? One theory is that hedge funds are being forced to dump the companies they really love in order to raise money to buy the stocks they hate. Why? This allows you to finish short bets before the losses get too big when the rally runs against you.
The gross leverage, or a measure of the risk appetite of hedge funds that takes long and short positions into account, is shrinking. The money withdrawn from the pool of both bullish and bearish bets during the four sessions through Tuesday was the fastest rate since October 2014, data from Goldman Sachs Group Inc.’s Prime Brokerage Unit shows.
While there have been numerous examples of notorious short squeezes in the past, including the volatility implosion in early 2018, there are indications that the current one may have a lasting impact on market dynamics, wrote Michael Purves, founder and CEO of Tallbacken Capital Advisors. When screening for smaller companies with high short interest, he found that there are hundreds of potential retail investor targets and that there are signs that “squeeze contagion” is increasing day by day.
This means that long-short hedge funds could continue to be pushed to unwind their shorts sales and unburden their long books, even if they are not involved in some of the recently targeted names.
“These two deleveraging processes – the long and the short – would have a significant impact on market action in the coming weeks and could create significant market volatility,” wrote Purves.
The story shifts so quickly that trying to collect all the strands is in vain, but for starters, the squeeze affects shorts sellers and their ability to pay. the search for the nearest cop robbery target; the challenge of calculating the actual fair value of GameStop; What it really means for wealth inequality when you consider the gusts of wind reaping the super-rich; the impact on internet brokerage and the role their commission elimination has played in all of this; and even what Biden, Powell, Securities Commissioners and Treasury Secretary Janet Yellen are thinking and doing about it.
Of course, no short press can last forever. The market will eventually revert to “normal” appearances.
“While they are currently the marginal buyer, retailers do not have enough collective assets to keep global markets moving,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors. “Small individual stocks? Absolutely. But will that change the entire investment landscape? Unlikely.”
(Except for the headline, this story was not edited by GossipMantri staff and published from a syndicated feed.)