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The GameStop Fiasco Proves We’re in a ‘Meme Stock’ Bubble (marker.medium.com)
51 points by dgudkov 3 months ago | hide | past | favorite | 66 comments

If it's really a short squeeze, then I think it's unfair to say that it's a bubble caused by small retail investors. It's actually a bubble caused by overexposed shorters who are forced to buy at any price due to their own doings. Of course noone likes when the small man makes money at the expense of big wall street firms, but it takes some mental gymnastics to view simply buying and then not selling as a more nefarious financial instrument than shorting.

Surely (almost) everybody likes it when that happens? It's hard to have a less sympathetic antagonist than a filthy-rich hedge fund like Melvin that's trying to mint even more money by crushing a company like GameStop that many people have fond memories of.

This could literally save GameStop.

They could (should?) perform a share issue, which would give them much needed capital to reduce their 485.50M debts and or allow a partial pivot (see Toys R Us's re-launch attempt pre-COVID).

Regardless of short-squeeze Vs. "meme stock" this is good for GameStop if they capitalize on it.

They did do a share issue.

When? They still have 69.75M outstanding shares, which you can see here isn't an increase:


They certainly haven't issued anything near the current price ($200+).

apparently they have pre-approval to release $200m in shares, but perhaps are waiting for after the short squeeze to issue them

(take this with a grain of salt, read from a /r/wsb post)

The issue is Melvin is a symbol of everything that is wrong with Wall Street.

How can you short a stock to the tune of 140% of all outstanding shares, enjoy a lend ratio of 23% and then bitch and moan when people buy in and cause the lend ratio to blow up to 83%?

You would think, but empirically that doesn't seem to be the case. People don't like it when some guy in suspenders makes a lot of money on his computer in a downtown office, but they really hate it when some schmuck down the street makes some money in a pretty much identical fashion. It's a class thing. It also goes against some kind of superficial common knowledge about the markets. If your cab driver (or local reddit goon) starts getting into the markets, you're supposed to get out and let the bubble boil over. But things are so bizarroworld right now that that wisdom doesn't really apply.

Shorting 140% of the float no less. This falls entirely on these big funds.

>Shorting 140% of the float no less. This falls entirely on these big funds.

This is the real issue. Everyone crying "Market manipulation! Call the SEC!" is right, except it's entirely Wall Street's doing. If anything good comes of this, we will see tighter regulation around short limits after this.

Does anyone have a link to a good explanation of how 140% of the float can be shorted, given the restrictions that the SEC imposed on naked shorting in 2008? Is there a specific loophole that is being consistently exploited?

From Matt Levine:

>There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.

Is ownership recorded like this in reality or does A transfers her shares to C and gets an IOU (secured by the margin) in return?

Then ownership records would not exceed the number of outstanding shares

No loophole, simply that the SEC does not exist or matter if you're a hedge fund.

Is that number actually correct? I don’t know the details on how margin lending of us stocks is reported. However I know from European markets that that number would be complex to measure correctly.

Yes it is correct. There’s no loophole. I borrow a share and sell it to someone. Someone else borrows that share and sells it to someone. Same share, borrowed twice and sold twice. As long as each short seller maintains the equity requirement, there’s no issue.

What I am unclear on is who takes the counter party risk in the event the short seller cannot make margin calls and goes bust. The exchange I assume? Who insures the exchange if something like this happens where $10 billion is created overnight at the expense of short sellers?

In Europe there is a settlement window of 3 days (and longer as failing to deliver only draws a fee) which makes it possible to sell stocks without holding them.

so much price. it's not just gme, it's all the thigs shorted by melvin capital: Bed bath and beyond for example. This was particularly helped by literally all the other hedge fund once they realised the short squeeze was going to happen anyway.

After a few seconds of googling past the headlines blaming some kids on reddit.

"Cohen’s former hedge fund, SAC Capital, came to dominate share trading on Wall Street before it pleaded guilty to insider trading charges in 2013 and paid $1.8bn in penalties. Cohen escaped criminal indictment himself despite being the living, breathing heart of SAC Capital (its name came from his initials) and now runs a private fund with $11bn in assets." (Point72 is the fund under Cohen who contributed nearly a billion dollars to Melvin for funding of these shorts)

These are people who have and are doing shady things and are getting collectively punished by people who's financial expertise stems from pepe the frog predictions moreso than the government did.

This is not great coverage imo. It focuses on retail investors when arguably the big wall street guys had more of a role to play. By overshorting the stock (140% of outstanding stocks were shorted) they made themselves vulnerable to what happened afterwards. The GameStop shares had a couple of things going for it: - Ryan Cohen who previously sold Chewy.com invested heavily and joined the board - Higher than expected sales of (legacy) games on discs - Strong cash position

So WallstreetBets picking up the stock does not come completely out of the blue. I would say the 'Fiasco' has as much to do with Melvin and other short sellers making mistakes as it has to do with retail investors.

I've seen it claimed that "big Wall Street" was on both sides of this. HFT firms that pay for access to RobinHood's data joined the run on GameStop based on movement on RobinHood adding significant initial dollars to those invested by the Reddit crowd. I don't know enough about this space to know if this is true/possible and my sources so far are "randos on the internet" so I'm not investing (har har har) in the idea, but I'm curious.

Amazing to watch the media as a whole last night attempt to blame people on reddit and 4chan for this "fiasco" and ignoring the underlying culprits who spent BILLIONs in over shorting an equity and were caught with their pants down. How This isn't a criminal act on the part of these institutions who knowingly over leveraged themselves in hopes no one would have noticed and would have been able to make billions more off of retail investors and legitimate investors is beyond me.

"That's right, it was I who committed the sleazy transactions and short armed robbery. And I would have gotten away with it too, if it weren't for these meddling kids!"

Louis Rossman (Apple repair guy) had a similar great take on it: https://www.youtube.com/watch?v=4EUbJcGoYQ4 (and followup: https://www.youtube.com/watch?v=DdpVzzXWOTA )

What a time to be alive where an apple repair youtuber is more trustworthy than cable networks.

I've never really understand what the price of a stock actually means. My simplified understanding of the stock market is that: 1) you have a company with a good idea, but the company does not have enough money to fund the idea, so they sell shares of the company to shareholders in exchange for capital 2) using this capital, the company grows and succeeds, and in return it pays portions of its profits back to its shareholders/investors in the form of dividends.

However, this all falls apart when the company never issues dividends, as many public companies have yet to ever do so. At this point, what does it matter how well the company does or what their profits are? If no dividends will ever be paid, then the stock price is irrelevant to the company as long as it issues no new shares (or if all remaining shares are held by the founder to retain majority voting rights). Whether the stock goes from $10 to $1,000 has no effect on the company, right? So what does the price mean at this point?

The company doesn't have to pay dividends in any particular time period for a share in the ownership of the company to have value. If the company grows in value then you should be able to sell shares for more than you bought them for.

It's worth reading Benjamin Graham to get a really good understanding of fundamental valuation, however the short answer is that a company is a stream of (potential) future earnings. That stream is funded by debt and equity. If you price that future earnings stream and discount it back to today, you get a sense for the net present value of the company. If you subtract the debt and the cash on hand what is left is the equity component. Theoretically this should be identical to the market cap of the company but of course there are all sorts of reasons these will diverge (investors will have different risk tolerances and will therefore assign different values to the discount factors etc).

From a management perspective, the share price is important for several reasons. Firstly for equity raises etc. Secondly some of the executives personal compensation will be tied to metrics that are in some sense linked to share price. Eg they might have a bonus that is related to return on equity. High ROE will tend to cause the price to rise. Finally if the price multiple trails peers, investors will get antsy and you could have shareholder activism etc.

Investors buy shares of a company generally to make money, and there are two ways to make money from holding shares. The first is to receive dividends. The second is to sell the shares at a higher price. Note that companies can (and do!) buy back their own shares to reward their shareholders.

In theory, the meaning of a stock price, or rather, the total market value of a company is how much one should rationally be willing to pay to acquire the company: this is the value of its total net assets plus some accounting for future profits. However, stock prices are also seen as a metric in and of themselves. Upper echelons of most companies are rewarded mostly in stock rather than cash, and so keeping the stock price artificially high can be the easiest way to keep their jobs, which isn't helped by a political emphasis on keeping the stock market from collapsing (it isn't entirely rational that the S&P 500 rose 16% in a year when the economy crashed by several percent).

When you own shares, you own a fraction of the company. The assets of the company partly belong to you, and if you have the voting power, you can decide to pay out some of it.

Of course, there's a philosophical argument to be made if the ownership structure is such that a dividend decision like that can never be made.

I suppose everyone is confident that if the leadership of such a company actually tried to assert that "no, your class ZZ share is actually just monopoly money, and your ownership share does not entitle you to any rights", such a claim would be struck down in court. Or cause the stock price to crash to such a degree that the class A shareholders would amend the agreement.

>So what does the price mean at this point?

What does the price of anything mean? You can look at things like fundamentals; EPS, P/E, etc. but ultimately it just comes down to what everyone else agrees on it being worth.

> What does the price of anything mean?

That's a bit more philosophical than what I was getting at. What I mean is: why do people say it is good for the stock price when a company is doing well if the price of the stock is completely decoupled (in the case of no dividends) from the company's performance? Or am I mistaken and the price is not actually decoupled?

Immediately decoupled from dividends or traditional metrics like P/E doesn't mean decoupled from the likelihood to achieve good performance on such metrics in the future.

Consider e.g. Tesla in 2013. It had a market cap (directly proportional to the stock price, assuming no secondary offerings) in the area of $2 billion. No one would expect it to pay dividends for at the very least the next decade.

Most people assumed it would go bankrupt, like all other car startups. Some few believed it would be successful. When the Model S launch proved to be successful during the following year, the market cap (stock price) increased considerably.

This was consistent with an increased expectation that the company would survive to the point where it would be able to return money to investors, through dividends, stock buybacks or other measures. But nothing about the Model S launch had any direct effect on dividends or earnings. Looking at the situation today, the company has much better revenues and margins. They could easily choose to have good P/E metrics if their market cap was still $2 billion, meaning that investors who bought in at that price were successful in their bet.

Controversy around stock prices are always caused by disagreements about the expected value of the company's future earnings. Unless it's an exceptional case like Gamestop, where the stock price increases for reasons that are mostly technical. (In this case, the potential future requirement for short sellers to buy shares at any cost).

>why do people say it is good for the stock price when a company is doing well

In a normal market, based on fundamentals, you can say a stock is a good price based on a few key factors like EPS and P/E [0]

But in our current la la land of free money and infinite liquidity, things are basically worth whatever the hedge funds say they are.

[0] https://www.investopedia.com/terms/p/price-earningsratio.asp

There's a difference between a stock that doesn't get you dividends and an item with a sensible expected worth. Sure, it's hard to put a concrete price on a 2x4, but you at least understand what value people see in it - the way supply and demand affect the price are reflections of the worth of lumber as a building material (or whatever else).

But the price of a stock is nonsense - if you don't own enough to influence the company, and the stocks don't pay out, then the price is just money that moves in and out of your account. You can't even really say that the price of a stock is an agreement of its arbitrary value; you sell the stock because you expect it to go down, and you sell the stock to someone else who expects it to go up. If you buy a stock at the peak, you are paying the highest ever price for its lowest ever value.

For voting stocks I can see it making sense that the big players who want some threshold of influence would determine the value. And, if a company could be bought out then your shares can get paid out that way.

But Google has nonvoting no-dividend shares, and I don't think they are feasibly going to get bought out without crashing first, so the price isn't from that either though. I think it really only makes sense if you think Google is going to issue dividends some day.

> So what does the price mean at this point?

What does the price of anything mean?

Why is a Audi "worth" $60K but a VW "worth" $30K? A Porsche "worth" over $100K? Why is a Patek Philippe or A. Lange & Söhne Tourbillon watch worth $100K? Why should I pay $300 for one All-Clad pan when for the same price I can get a 10-piece set at Costco?

Surely you have things that you think are worth paying more for while for others you wouldn't spend more than some 'basic' amount.

People perceive things as being of different quality.

It's not that everyone (!) thinks that GameStop (GME) is "worth" over $300 a share, it's just that the folks at the hedge funds are willing to pay over $300 for each share because they have contractual obligations to fulfill, and if they do not they (a) may be sued for a lot of money and/or (b) go to jail.

So each share of GameStop is "worth" this much to the hedge funds because it gets them out of paying the consequences of (a) and (b). Paying $300/share may be "cheap" compared to paying those consequences.

And to go back to my first paragraph: a Porsche is not "worth" $100K to me—because I'm not willing to pay for it, or even for an Audi. But it may be "worth" it to someone else because they are willing to pay for it.

> I've never really understand what the price of a stock actually means.

This plays into the theory of the bigger fool. If a stock isn't issuing dividends, it's either profiting and storing large amounts of cash or losing money. If there's profiting and storing cash (the Apple model), you purchase the stock on the thoughts that the board can be replaced with a board that will take that cash and dividend it out. If the company is just losing money, you purchase stocks on the thought that they can turn it around become profitable for either dividends or for stashing cash.

So, if hypothetically you could guarantee and prove somehow that a company would never pay dividends even with a new board, then there would no longer be a reason for the stock price to move, right? People are basically betting on the fact that a company that doesn't pay dividends will change their mind at some point?

The company could also be bought out, which has the same effect. In a simplified case, imagine that the company had simply stuffed all of its profits in a mattress. A buyer will have to offer stockholders at least as much money as is in that mattress.

The price of that stock is never going to be as simple to calculate as the price of the mattress, because of uncertainties in future revenue. In theory a company consisting just of a mattress would have a true fixed price that never changes, but there isn't any such company.

The closest you get is a "blue chip" stock, very large and very consistent in its revenue, often in manufacturing (because there's less innovation and high barrier to entry). Their prices indeed don't change much.

Stock holders are in control of the board.

Either dividends are paid constantly or eventually stock holders can force a new more dividend-friendly board.

You still possess a right to a portion of the company which has an underlying value. The company is then essentially a store of value, just like my gold ETF. I have no right to access the gold directly but it has value because of the underlying.

> If a stock isn't issuing dividends, it's either profiting and storing large amounts of cash or losing money.

Or it's funnelling the money back into itself to grow. Amazon made "zero profits" for many years because it wanted to growth as fast as it could.

If a company finds that it cannot find any productive ways of using cash then it may return the money to investors in dividends or share buybacks. Management may determine that the ROI for owners is better by keeping the money internal.

If owners disagree they can presumably get new management at the shareholders' meeting by replacing the board, or ordering a change in cash-use policy:

* https://www.investopedia.com/terms/v/votingright.asp

I always find this style of reporting rather unedifying -

>No one is in charge of this effort, though, of course, some voices are louder than others.

There has been a history of moderators on WSB using their position to push certain agendas. I think it's more accurate to say "We don't know of any group co-ordinating this effort" - because I don't think its far fetched that there is one.

All this article is really saying is "I've taken this sub-reddit at complete face value."

>They’ve shown, in a sense, that if you pick the right stocks, a self-organized community of small investors can make them rise,

Some users are posting investments of over $750k that are now up to $22m in value. How many people on WSB are actually investing and driving up the price? 10? 100? 1000? We have no idea. I personally find it hard to believe that 1000 redditors are investing enough to actually matter compared to the top investors who are investing hundreds of thousands.

You better believe it. The board has 2.5 million users, many of them piling into the same stock. They get huge leverage and are ready to gamble hard, often blowing up in the process, but as they say: YOLO.

A professional trader on the other hand may have more money to trade with, but will not risk their career by making dumb overleveraged bets on a single stock.

Except the professional traders decided to short a stock over 100% and got caught doing so by the private "retards".

One hedge fund making such a bet does not reflect the entirety of the profession.

My point is that the money these retail investors control due to leverage, recklessness and sheer numbers makes up for the higher AUM of professionals.

The story isn't over yet anyway, unlike with TSLA, literally nothing about GME justifies its current price. It remains to be seen how many of those "retards" are willing to YOLO away their money "for the lulz" and who is going to take their profits.

There are many posts there with sizable investments, up to $1M. A few of those + thousands of smaller trades can definitely move the price. Think 50k people investing 1000 each.

I'm not saying there's definitely only a handful of people actually driving the price. What I'm saying is that I don't think we have any real evidence about the number of people really involved, the level of their investment. The only evidence this article is presenting is literally just taking reddit comments at face value. This situation could likely have been created by a single ballsy hedge fund if they wanted to, with the comments on reddit being entirely fictional.

That would be really easy to spot from the volume and order book.

WSBs has 2 million users. What on earth makes you think 1000 redditors is hard to believe? It was likely hundreds of thousands before it went viral.

By "some users" you really mean one user, dfv, and his investment is actually much lower, but due to trading into new positions his cost basis appears to be ~750k.

/u/DeepFuckingValue bought in when the stock was $4.

Diamond hands.

Here's a thing I don't understand: will we ever leave the meme stock bubble?

Most stockmarket gains have been happening with companies with no dividends and no executive control for at least a decade. Other than very few exceptions like Apple that one time large companies aren't buying back stock either.

Why should the price of individual stock still have some correlation to the company's profit?

This has been the conclusion with real estate - fundamentals to outside economy has been permanently severed in many markets. Why not other assets?

This is an interesting question to ask, regardless of GME. The Robinhood app may have caused an 'eternal September' for the market.

The difference is that people don't have an infinite appetite for losing money, and people are on aggregate losing money as one does when trading with a short term mindset. So I would say that we will eventually leave the meme stock bubble, but it's anyone's guess as to when.

I think by this logic, casinos wouldn't exist.

Casinos are highly regulated business with games having constant and verified return rate. E.g if you make 1,000,000 of $1 bets on slots in registered and regulated online casino then you'll actually retain 95-98% of the money. People who are addicted to gambling and risk aren't there to bet $1 so they lose everything much faster.

It's can be different for offline gambling where people go to play once in a month, but online companies related to gambling work hard to avoid burning people out too fast. After all they want sustainable income which come from audience that trust them.

Stock market on ther side doesn't have anything like this and it's can make people go broke much faster than casinos do.

The only solution is a crop of AI- guided systems that trade with high frequency to get in front of this information. That will likely smooth out some of this rockiness, and give way to entirely information driven markets (no fundamentals). This would be more akin to a kind of celebrity based market.

They are already front running these trades. Robinhood is free for a reason.

No it doesn't. There were more shares shorted than were available.

Nothing to do with meme stocks.

And it could have worked if it went unnoticed by the public. It makes a perfect underdog story of the common man sticking it to a hedge fund.

On Monday I bought AMC at 4.63 on the news they avoided bankruptcy. Monday closed at a minor loss for me. Yesterday closed at 4.96 a minor profit. In premarket trading it has reached up to 17.5 and has since tumbled back to 15.

Did you buy AMC on the advice of a meme?

Nope. I wasn't aware of the memes. I saw when GME hit $38 from $19 and thought I had already missed the bus.

Matt Levine has been covering these news for a couple days on his column, pretty interesting stuff: https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthe...

Can’t read. Paywall.

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