The Stock Market Has Lost Its Capitalistic Mind

In case you missed it, the entire world of democracy, capitalism and investing dramatically changed in the past 48 hours. Or, if you’re like me and you’re still a simple buy and hold investor, nothing changed at all and you can go back to waiting to see if General Motors will be able to turn things around in another five years so you can eek out a 6-8% gain because of their exciting new fleet of electric cars. Woo-hoo!

So What Happened?

GameStop happened. The company operates roughly 5500 retail stores throughout the United States where you can go in and buy X-Box’s and Playstations and kiss your kid’s chances of attending a real college goodbye. Up until a few weeks ago, GameStop was your typical old-school retailer struggling through a pandemic where no one wants to go to a shopping mall and risk dying just to play Minecraft. Store sales were down. Morale was down. The company was going nowhere fast.

In August, former Chewy CEO Ryan Cohen started buying shares until he owned 12.9% of the company and started pressuring the board to do something to get the stock moving. He got 3 board seats but as far as anyone can tell no major changes have been implemented.

Then a few weeks ago, a guy named Andrew Left who runs a hedge fund called Citron Capital came out and started shorting GameStop citing the company’s lack of revenues and the fact that it’s still largely a retail play in a digital world. Other hedge funds apparently thought this was a good idea and they shorted the company too. Yesterday, Investopedia, the best source of financial news because it’s fun to say Investopedia, reported that the short interest on the float was 144%, the highest short interest on outstanding shares for any company in the Russell 3000. In other words, a lot of people were betting for this company to fail.

r/wallstreetbets To The Rescue

Turns out there’s a subreddit called r/wallstreetbets that was started in 2012 and has 3.3 million members. Actually, today it added 100,000 new members so make that 3.4 million members. These fine people decided to ban together and save GameStop because a) they have fond childhood memories of hiding in the store while their mom shopped for panty hose at Macy’s and b) they’re tired of rich, wealthy, white hedge fund managers making millions while putting all those nerdy GameStop workers out of work.

On Friday the stock closed at $65.01. Then Elon Musk tweeted his support and, well, when Elon tweets the world kinda notices. On Monday it was up 145% and triggered nine trading halts. Today, shares were up an additional $199.53 (134.84% ). And it’s not just GameStop. Shares of AMC (AMC Entertainment Holdings), the shitty movie theatres with popcorn and soda stuck to the floor and loud people sitting in the row in front of you saw its shares rise 301% today. THREE HUNDRED AND ONE PERCENT! In one day. That’s life-changing returns for someone stupid, I mean smart enough to invest yesterday in the hopes that this madness keeps going.  So where does it end?

There is, of course, a chance that none of this is legal. Matt Levine writes the “Money Stuff” newsletter for Bloomberg News and noted that there are two ways to break the law when it comes to trading stocks.

1. Securities fraud: Lying about a stock
2. Market Manipulation:  To effect, alone or with 1 or more other persons, a series of transactions in any security … creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.

The ironic thing here is that the r/wallstreetbets subreddit lists its own set of rules to post and one of those rules includes market manipulation:

Don’t post for the purpose of instigating or coordinating a group buying effort to move the market for a security. For example, posting to encourage others to buy call options so that market makers will be forced to delta hedge their short positions. Similarly, any post that contains false or misleading information and is made for the purpose of manipulating the market for a security is prohibited. Any activity of this sort is against the securities laws and will not be tolerated on this forum.

Isn’t this entire week an example of ‘a group buying effort to move the market for a security?’ But what would the SEC do, come after all 3.4 million members of the subreddit? It’ll be interesting to see how it all plays out but I know one person that’s ready for the challenge. My favorite Reddit post comes from a someone who fondly refers to him/herself as “neighborhood asshole.”

“Fuck you SEC I did nothing wrong. Go ahead and investigate how I heard these assholes at a hedge fund we’re trying to put our beloved GameStop out of business by shorting it 149%, so I took actions to ensure that didn’t happen. And it’s an amazing coincidence that all of my bro’s wanted to keep GME alive too 😤 so go eat a Dick and investigate the assholes from 2008.”

To be continued…