Reddit, GameStop & The Elites
We have been asked, and so we will try to explain the Reddit/GameStop/Hedge Fund situation as we see it. Neither of us hold any long or short positions in GameStop (GME) individual stock. Nothing we address in this email is intended to constitute a recommendation to buy, sell or hold GME or any other individual stock.
A recent Reddit thread (WallStreetBets) exposed a number of very aggressive short positions made by hedge funds against multiple companies, GameStop becoming the most popular, likely because of its beloved, nostalgic nature, specifically amongst gamers (common Reddit users). An impressively powerful call to action caused the GME stock to skyrocket from its below $10/share lows to well over $400/share creating what is known as a short squeeze, forcing many hedge funds to take massive losses and some to go out of business completely. As I write this, it’s midday on Tuesday, February 2nd and GME has fallen sharply the past two trading days, closing today at $90/share. Is it over? Who knows? What is more shocking and trouble to us is everything that has come to light in the wake of this war.
The first shock to the system was when Robinhood, the trading app that claimed to be for the little guy, halted purchases of GME stock and only allowed for sales. With hedge funds desperate to buy shares and close out their short positions, this move directly benefitted them. It later came to light that Citadel LLC, a large financial partner of Melvin Capital, pays extremely large fees to Robinhood as “market makers” in return for real-time information about stock trading volumes and trade execution. While Robinhood recently took to their blog to hold their position that “this was a risk-management decision, and was not made on the direction of the market makers we route to,” the speculation has already run rampant.
Shock number two really shouldn’t come as much of a shock at all. We now live in a society of “if they can, why can’t we?” Right and wrong have merely become a question of relativity. It may come out in the weeks and months ahead that the short positions Melvin Capital took were at best unethical and at worst illegal. Our biggest question is how the company was even able to acquire such an aggressive short position in the first place. Fortunately for them, it appears they’ve long bought their political protection, with previous paid speaking engagements with now Secretary of the Treasury, Janet Yellen (this is only one example, it is certainly not one sided politically). Elizabeth Warren recently penned a letter to the SEC Chair demanding immediate answers and actions to a complex question that no one fully understands yet, “how the SEC intends to address these concerns and prevent these and future incidents of potential market manipulation.” She isn’t talking about the potential market manipulation hedge funds participate in every day, she’s talking about a group of unsophisticated Reddit users who felt the ever popular “if they can, why can’t we” and won. The Reddit army is holding to their defense that what they’re doing to GME is no worse than what the hedge funds do every day. The battle lines have been drawn, and they are definitely not where we expected, with AOC and Ted Cruz ON THE SAME SIDE and the political and financial elites like Elizabeth Warren and hedge funds on the other side. Hedge funds have roles that are appreciated by some and despised by others. The fine line is between where their actions have served to correct companies that have gone off course and where they have caused the destruction of companies by forcing them to make fast, short-sighted decisions. The ultimate question is are they properly regulated? If and how the SEC chooses to handle the situation and its fallout will be telling to say the least.
The third and final shock is one we haven’t seen yet, the pop. Economist Ed Hyman pointed out last month, when there is more money than there is economic activity it shows up in asset prices. A bubble is brewing and this recent market activity only solidifies our belief that the pop is coming. The euphoric sense of investing that we most recently saw leading up to the financial crisis is back and it’s stronger than ever. With the Fed’s seemingly limitless asset purchasing, mass stimulus check dispersion and enhanced unemployment benefits that increased median wage replacement to 134%, it’s no wonder the market has been hitting all-time high after all-time high. It’s not sustainable and will correct eventually; the when is the mystery.
As of today, it appears the Reddit users, gamers by nature, have moved on to new conquests, specifically silver. Have we seen the end of the GameStop surge? Maybe, but the fallout will likely be with us for months and years to come.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Molly VanBinsbergen and not necessarily those of Raymond James.
