The GameStop Fiasco Proves We’re in a ‘Meme Stock’ Bubble
by James Surowiecki / 1/26/21

“GameStop is a struggling, kind of boring, mid-size retailer stuck in a legacy business — selling physical video games. But it’s also pretty much the only company anyone on Wall Street is talking about right now after its stock rose 160% in a matter of hours on Monday morning to an all-time high of $159. (By day’s end, GameStop’s price had been cut by more than half, but that still left it up more than 300% this year and almost 3,000% from its 52-week low. And it was up another 15% at Tuesday’s open.) It isn’t GameStop’s precipitous rise, impressive as that’s been, that has everyone fascinated.

Instead, it’s what is fueling that rise: concentrated buying by thousands upon thousands of small individual investors who are using sites like Reddit and Robinhood to drive up what are now being called “meme stocks.” GameStop is the best-known of these meme stocks, simply because its gains have become so outrageous. But it was preceded last year by Hertz and Kodak, which, despite having struggling businesses, saw their stock prices soar when they became Reddit darlings. And now stocks like AMC, Nokia, and Blackberry (which is, yes, still in business) have also caught Redditors’ fancy.

It’s easy to see the meme-stock boom as just a speculative bubble, and evidence of how the current stock market has lost touch with reality. Speculative bubbles in so-called “story stocks” are, after all, familiar things on Wall Street. In the late 1950s, uranium stocks soared, followed a few years later by bowling stocks, and then RV stocks. (In 1969, a company called Skyline Homes saw its shares rise twentyfold.) And we all know what happened to internet stocks in the late ’90s. But in fact, what’s happening with meme stocks is very different from those previous crazes.

In a classic speculative craze, investors may take cues from each other — the fact that everyone is buying internet stocks makes you think it’s smart to buy internet stocks — but they’re not working together to make stock prices rise. With meme stocks, on the other hand, that’s exactly what’s happening: The small investors on the r/Wallstreetbets subreddit (which has 2 million subscribers) and other sites are taking part in a conscious collective effort to drive the prices of these stocks up. No one is in charge of this effort, though, of course, some voices are louder than others.

But it is a self-organized campaign with people using the message boards to communicate with each other, encourage each other, and reassure each other (thus the many posts on r/Wallstreetbets admonishing fellow “autists” — their self-mocking term for each other — to not lose their nerve and to keep holding GameStop’s stock). Thus threads with titles “We are the captains now,”

“Have no fear, GME gang. We are consolidating in preparation for tomorrow’s moon landing,” and “GME — it never has to end.” In other words, what’s happening with GameStop looks less like a speculative bubble and more like a contemporary, internet-mediated version of the “bull raids” that were characteristic of the stock market in the early 20th century, when organized pools of investors would combine to drive stock prices up. The traders on r/Wallstreetbets — which describes itself, tellingly, as “Like 4chan found a Bloomberg Terminal” — are trying to do the same thing to Wall Street.

Perhaps more interestingly, it also looks a lot like what happened during the 2016 presidential election. Over the course of that campaign, a loosely organized community of alt-right meme lords and their followers, centered on sites like 4chan and Reddit, adeptly used social media to elevate Donald Trump’s candidacy while barraging Hillary Clinton with an endless flow of memes targeting her supposed inauthenticity and corruption. What they did, in effect, was exploit the opportunities created by social media to disrupt the normal workings of the political system, at least in part for the lolz.

How are they doing it? By embracing companies that Wall Street, for good reason, hates: beaten-down firms in legacy businesses with weak economic fundamentals. The Redditors don’t love these companies because they think their future prospects are genuinely great, even if in most cases there’s been some catalyst that suggests the underlying business could improve going forward. Instead, what meme stocks all have in common is that they start off with a cheap stock price and a relatively low market cap, and they’re heavily shorted, meaning that hedge-fund managers are betting that these stocks are going to fall. GameStop, for instance, was and still is one of the most heavily shorted stocks on Wall Street.

Both of those factors have been key to the success of these meme campaigns. First of all, stocks with single-digit prices tend to be more appealing to individual investors (even though the nominal price of a stock shouldn’t affect your willingness to buy it) because it’s more fun and easier to imagine making a lot of money quickly if you own 100 shares of a $4 stock rather than one share of a $400 stock. And because these companies have relatively small market caps and low floats (meaning not that many shares are outstanding), concerted buying pressure from individual investors can more easily move the price.

Targeting stocks that are heavily shorted, meanwhile, makes it possible to orchestrate short squeezes. When a heavily shorted stock jumps in price — because, say, a crowd of individual investors all decide to buy at once — short sellers that can’t take the pain start buying back shares to cut their losses. (In Wall Street parlance, they cover their short.) That drives the price higher, which in turn inflicts more pain on those short sellers who are still in, and so on.

Meme-stock traders have also become adept at using options — which you can now trade commission-free on most online platforms — to create the same kind of positive feedback loop, with buying in effect begetting more buying. Going after heavily shorted stocks is also smart because it taps into the long-standing distaste for short sellers, and gives meme-stock traders an enemy to focus on. Short selling is an essential component of any healthy stock market: Myriad studies have found that the presence of short sellers makes stock prices more accurate. But investors generally don’t care about whether stock prices are correct — they want stocks to go up.

So anyone who is betting that stocks will go down is seen as a killjoy at best and an enemy of the state — or, in this case, of the community — at worst. That’s why, when well-known short seller Andrew Left of Citron Research said last week that GameStop’s stock price would fall to $20, he was savaged on social media and effectively cowed into silence. The point, then, is that even though GameStop’s current stock price is utterly irrational — it will never make enough money to justify a $6 billion market cap — the way Redditors and others have driven its price up has been quite smart.

They’ve shown, in a sense, that if you pick the right stocks, a self-organized community of small investors can make them rise, almost entirely by an act of collective will. In an odd way, it’s a remarkable testament to the internet’s ability to facilitate collective action. The challenge, of course, is that once that collective will begins to erode — either because people want to cash out or just get bored — there are going to be no fundamentals supporting the stock price, which means once these stocks start falling, it’ll be look out below. But by the time that happens, much of the crowd will have moved on. There are always going to be crappy, heavily shorted stocks out there—which means there’s always going to be a chance for more lolz.”

What the Hell Is Going On With GameStop’s Stock?
by Alex Kirshner  /  Jan 26, 2021

“In April, GameStop was a struggling video game and electronics retailer trying to sort out its future as the pandemic worsened consumer trends that were already working against it. The chain was losing money and staring down a long-underway shift in the gaming industry that pushed business away from GameStop’s brick-and-mortar model. (It turns out people don’t like walking into stores during a pandemic to buy games they could just download from home.) The company had posted $470 million in losses in 2019, eight years after reporting a $340 million profit.

Right as the pandemic hit, it announced it would close 300 locations permanently. GameStop’s stock price on April 1 was $3.25. It’s not clear things have improved much for GameStop. The company is actually closing more stores than it expected at the onset of the pandemic. But one thing has changed for the better: When trading ended on Monday, GameStop stock had hit $76.79—four times its price to end 2020 and 23 times its price from the early days of the pandemic.

The stock then jumped to $96.67 on Tuesday morning before dropping into the 80s as its roller-coaster run continued onward. GameStop has not, as far as anyone knows, completed the greatest comeback story in the history of free enterprise. But it has had one of the most memorable runs on the stock market ever. It’s a story that encapsulates quite a lot about life in 2021: the democratization of financial markets, the mobilization of a giant online community, and the ability of obsessed amateurs to alter reality when they put their minds to it, especially when there isn’t much else to do.

The tale of GameStop’s stock price—and the central role of a subreddit called r/WallStreetBets—will be taught in business schools one day, no matter how it ends. The stock had been in steady decline since late in 2015, when the company reported disappointing earnings. GameStop, which was founded in 1984, had a simple business model: selling video games and equipment out of its physical locations. That became less lucrative as it became more common for gamers to buy games online, generally from non-GameStop sources, and download them directly to their consoles or PCs. The pandemic crash in March brought the stock to an all-time low, and a slight rebound over the spring and summer lagged behind the major indexes. In August, the well-known investor Ryan Cohen—founder of online pet food giant Chewy—took a 13 percent stake in GameStop.

In November, he wrote a harshly worded letter to the company’s board, lambasting it for not keeping up with “the transition from physical hardware to digital streaming,” among other errors. He took specific aim at GameStop’s CEO and blamed the company for squandering billions of dollars and “a massive amount of market share.” The letter generated a lot of press. By January, GameStop appointed Cohen and two associates from his investment company to serve on a newly expanded board. Cohen’s arrival turned GameStop into a “cult stock,” one financial analyst explained to Bloomberg News, where retail investors believed he’d be a corporate savior. Two days after the announcement that Cohen had joined the board, GameStop’s stock surged more than 50 percent, going from $20.42 to $31.40 after reaching as high as $38.65. That’s when the company’s story went from typical to bizarre.

Around this time, institutional investors, apparently including at least one well-known hedge fund, took out massive short positions against the stock, which trades as GME. These investors figured that amateur investors saw Cohen’s big name and ignored the difficult fundamentals facing the business, overvaluing the stock as they bought it up in droves. So the professional investors tried to make money off GME’s decline by borrowing the stock, selling it high, buying it back low, and pocketing the difference, minus the fees to borrow the stock.

Lots of investors tried to short-sell the stock. (How many investors have “long” and “short” positions is not difficult to figure out.) As of Monday, 71.2 million shares of GameStop stock involved a short position, per Bloomberg, more than the total amount of publicly tradable shares, something that’s only possible because not all shares of GME are available for purchase. One group that noticed the shorts on the stock was r/WallStreetBets. The Wall Street speculation community has more than 2 million members, hundreds of thousands of whom are online at any given time, to say nothing of lurkers.

In September, an enterprising subredditor had posted a seven-point treatise titled “Bankrupting Institutional Investors for Dummies, ft GameStop.” The subredditor noted the stock already had a significant short exposure (months before Cohen joined the board) and predicted that short sellers would be forced to abandon their positions and, in buying back their stocks, drive the price up. R/WallStreetBets users delighted in the idea and took it as a chance to egg one another on. Hype around GME continued bubbling up around r/WallStreetBets over the ensuing weeks, from posters who apparently saw it all along as a profit opportunity. The stock’s boom has made some of them big money.

The most famous is a user calling themselves “DeepFuckingValue” who had apparently turned a six-figure investment into nearly $14 million by this Monday. Others may have just wanted to screw short sellers, who are by definition rooting for shareholders and companies to suffer. They’re also often considered to be sophisticated investors, cast against the determined amateurs populating internet forums.

At the end of November, the subreddit ascertained that hedge fund Melvin Capital Management was shorting GameStop, and the community rallied with fury against the New York–based fund. “When these boomers made their bet, GME wasn’t a big thing on WSB yet,” one poster wrote. “I don’t feel bad at all taking money from these rich greedy hedge fund managers.” “They’re not even playing with their own money,” another wrote.

“I’m an old millennial. I’m tired of getting screwed by the globalist elites,” said another. “This isn’t left or right republican or Democrat. It’s the 1% versus everyone else.” Whether for profit or ideological reasons, the Redditors are winning. They’ve bought the hell out of GME, and short sellers have begun to abandon their positions en masse, leading the stock to go up even more as they buy it back. It’s a classic short squeeze. Melvin Capital was down 15 percent for the year on Jan. 22, according to the Wall Street Journal, leading the fund to take a $2.75 billion rescue package from other rich investors. On that day alone, short sellers against GameStop lost $1.6 billion, financial analytics firm S3 Partners said.

It’s not clear how the story ends. Some professional analysts think the stock is due for a crash. Citron Research managing partner Andrew Left has argued the stock will fall to $20 per share. He tried to explain his reasoning in a livestream last week but couldn’t because his Twitter account got locked after too many people tried to guess his password. He posted the video on YouTube and said GameStop backers were sending pizzas to his house and signing him up for dating profiles. Left decided to stop bashing GameStop, citing harassment by the “angry mob.”

It isn’t just a technological shift that has worked against GameStop. Gaming companies now offer subscription plans, like Xbox’s Game Pass, that have made individual game purchases obsolete for some players. Future consoles might not even have a slot for a disc, further pushing the industry into downloaded games. GameStop does have a loyal fan base that enjoys the experience of walking into a store and buying a title. It also has a large trade-in business, though it’s not clear how the post-pandemic world will affect that. All of which is to say: GME’s future could go any number of ways, but the reason its stock price quadrupled in three and a half weeks isn’t that its business fundamentals are just that great. It’s that, under a strange set of colliding circumstances, one group of stock traders sees GameStop as the perfect weapon against another.

If this feels outrageous, it might only be because a bunch of supposedly unwashed Reddit users are involved. After all, GameStop isn’t the first stock to be subject to a giant short squeeze or to see its resulting value make little sense. When Porsche bought up a bunch of Volkswagen stock in 2008, short sellers scrambled to get out of their positions and briefly made VW the world’s most valuable company. It’s not clear why Porsche’s boardroom should have any more authority to dictate what happens in the market than a group of internet users operating in public view.

Certainly, GameStop isn’t the first stock to move heavily based on what a specific group of people has to say about it. Financial professionals spend all day talking about stocks on their Bloomberg terminals and yelling at one another on the phone about them. If one considers the Redditors to be untowardly moving the market by talking in public, aren’t professional traders doing the same when they talk in private? Is there any difference between internet dorks hyping a stock and some hedge fund magnate going on CNBC to explain why the market will do as he’s predicted?

Viewed through another lens, the rebels of r/WallStreetBets are doing old-fashioned internet organizing of the guerrilla kind you might find in politics today. TikTok teens and K-pop stars can sabotage the ticketing operation of a presidential rally. As long as there are enough amateur investors to throw weight around, they can decide whether a stock moves up or down. (Unfortunately, as with other internet hordes, some from this one have a taste for harassment.) Viewed through still another lens, someone on Reddit who’s investing for profit is merely doing what professional Wall Streeters do every day.

Anyone doing it to sabotage the pros on the other side of the GME deal is betting with their heart, not unlike internet gamblers betting on sports or presidential politics. The GameStop saga isn’t just a lesson in the internet’s broadening of access to markets, but in how the pandemic has accelerated that trend. A significant share of the bets on GME’s stock going up have taken the shape of call options, where an investor pays a smaller amount up front for the right to buy a stock at a certain price by a certain date.

For instance, the viral Redditor whose GameStop holdings are now worth nearly $14 million apparently spent $25,000 to buy options on 80,000 shares (at about 31 cents per share) that give them the right to buy the stock at $12 until April 16. The value of those options at the end of the day Monday was $5.2 million.* Call options are not new, but they’ve become a smash hit among casual investors on the internet during the pandemic.

As white-collar professionals sat cooped up in their homes and watched their disposable income grow with less to spend money on last spring and summer, user-friendly investment apps like Robinhood saw significant growth. Young traders reportedly gravitated toward options, which can generate quick windfalls but are riskier than standard stock purchases.

If you pay $3 for the right to buy a stock at a particular price, and the stock doesn’t exceed that price to give you a quick profit, then your three bucks were a total loss. Plenty of inexperienced investors have lost their shirts this way during the pandemic. Others decided to buy options on GameStop, and some of them have made life-changing money.

Does any of this make sense? Not really. But it makes no less sense than the stock market itself sitting near record highs each day just as expiring federal unemployment benefits are pushing 8.1 million Americans into poverty and U.S. senators are balking at an enhanced stimulus package. It wasn’t the GameStop stock’s Reddit hype team that first decided the market needed little tether to the daily realities facing most people, or even to a specific video game retailer. In other words, hate the game, not GameStop.”

How Civil War History Explains Memestocks
by Emily Flitter  /  April 2, 2022

“In 1861, Jay Cooke, a minor money man hoping to help the Union army, lobbied Abraham Lincoln’s government to make investing accessible to more Americans. In 1972, Bill Gross, destined to earn the nickname “the Bond King,” realized that more value could be squeezed out of the products that Cooke wanted to sell — government bonds — if they were traded by experts. And in 2021, a Reddit user named Roaring Kitty led a band of regular Joes on a crusade against financial engineers of Mr. Gross’s ilk. And that arc of U.S. economic history helps explain why people were calling me a puppet on the internet. At least that is how I came to understand it. At first, all I knew is that I was facing intense backlash from Roaring Kitty and company after I wrote about the evolution of what they, and other smaller retail investors, believed — a baseless theory that various powerful entities were out to get them and tank their stocks. While I was awash in all their bad vibes, I was also reading two new books: “The Bond King,” by the NPR host Mary Childs and the forthcoming “Bonds of War” by the historian David K. Thomson. I realized that there is a strong link between the Civil War-era campaign to sell bonds to working class people and a stock-hoarding movement among financially inexperienced masses connecting on the internet. It’s called financial populism.

Over the past century and a half, finance in the United States has been characterized by an ebb and flow of who feels Wall Street is for them, who feels (or is) excluded. Understanding how we got where we are now is one way to demystify the Reddit-based investing revolution, which is powered by a conspiracy theory along with a deep resentment of the way real power and wealth seem so out of reach for most people these days. About the conspiracy theory: A year into the pandemic, a group of doctors, factory workers, salesmen, dentists and other investing amateurs came to the defense of companies facing existential challenges: a chain of empty movie theaters and a secondhand video game retailer. Hedge funds, run by superrich and increasingly powerful people, were shorting shares of those companies. The smaller investors fought back. They gathered on a Reddit forum called r/WallStreetBets, where group members goaded and cheered one another into buying more and more shares of these companies — GameStop and AMC Entertainment — vowing to hold on to them “with diamond hands.” Stocks became stonks, jokey things infused with the currency of internet memes. The buying only stopped when a handful of retail brokerage firms cut off access to the market like a bartender cutting off a sloppy drunk. The stocks’ prices crashed and the biggest zealots moved from r/WallStreetBets to a new subreddit, r/Superstonk, and began posting essays many thousands of words long that they called “dds,” short for “due diligences,” to explain what had happened. These were ostensibly research reports, modeled, perhaps, after professional financial analysts’ publications. They made the baseless claim that securities regulators, brokerage houses and the people in charge of the market’s day-to-day functioning had gotten together and agreed to create fake shares of the stocks, which they were secretly passing on to hedge funds preparing to short them again. To fight back against this supposed scheme, the Redditors pledged to buy as many more shares of GameStop and AMC as possible to bring about the “mother of all short squeezes,” or the MOASS for short, when short sellers would be forced to pay whatever price the Redditors asked — maybe even $1 million a share — to cover their bets.

Reality check: There is no giant conspiracy, there are no fake shares; there will be no MOASS. The January 2021 short squeeze did cause breakdowns in the stock market, the most dramatic of which occurred in the brokerage houses that eventually shut down trading in those stocks, not based on any moral authority, but because they were about to run out of money to cover failed trades. But the Redditors accomplished something real. Like Jay Cooke, who pointed out how hard it was for most people to get access to investment products in 1861, the Reddit crowd highlighted structural problems in the stock market and prodded regulators to try to fix them. The Securities and Exchange Commission has since proposed several changes to stock market operations that would make them more visible and easily understood and faster. Wall Street has long boasted that its great-great grandfather firms saved the Union during the darkest period of the Civil War by generously lending Lincoln’s administration money. This claim, which financial titans repeat to imply that their work is morally good and descended from opponents of slavery, is now getting a fresh look. In “Bonds of War,” Mr. Thomson describes how, after arranging an initial $50 million loan in early 1861, elite financiers in New York, Boston and Philadelphia basically told Lincoln’s Treasury secretary, an Ohioan named Salmon P. Chase, that they wished him the best of luck.

They felt it was too risky to keep buying U.S. debt, especially since individual states had regularly defaulted on their debt during the antebellum period. Jay Cooke, a financier from Philly who wanted to make the big leagues, persuaded Chase to make it easier for Treasury notes and bonds to be sold in small denominations, then started going door-to-door signing people up to buy them. He specifically targeted “small subscribers,” as he put it, who came away from agreeing to make their investments “almost with tears in their eyes, so overjoyed at the patriotic scene.” Mr. Thomson, an assistant professor of history at Sacred Heart University, chronicles how Cooke assembled an army of salesmen and sent them all over the country looking for people who had saved a little money and wanted to make a statement while spending it. Buying Treasuries let Union sympathizers — including formerly enslaved people, Native Americans and residents of Southern cities — express their support for the cause no matter who or where they happened to be. It made buyers feel powerful. For the first time, wage-earners played a crucial role in the U.S. financial system — and they knew it. A new class of financial participants was born. On and off, well into the second half of the 20th century, the image of the investor that Jay Cooke helped create prevailed, especially during the periods in which the United States was deeply involved in world wars and appealed yet again to patriotism in search of financial support. If Jay Cooke made Americans feel like they mattered, Mr. Gross — unintentionally, you could say — instilled in them the opposite belief. Ms. Childs’s book is about the expansion of finance as a whole, told through the history of Bill Gross’s life’s work as the founder of what would eventually become the biggest bond fund in the world, PIMCO. Mr. Gross, whom Ms. Childs portrays as a single-minded whiz-kid seeking to prove his worth to his parents and former classmates, chipped away at the notion that anyone could be an investor by criticizing the buy-and-hold strategy for bonds. He began studying tables of bond issues and “making money buying the better bonds and selling the worse ones.” This made big money for big organizations, but it also made everything more complicated, bringing about a rule of experts.

Mr. Gross got the bond market going just as the dollar was disconnected from a fixed price for gold, ending the last vestige of the gold standard. The financial system grew much more subjective and more hospitable to operations conducted on the largest scale possible. Buying bonds was increasingly viewed as something that ordinary people just didn’t do. The technology to buy and sell them didn’t keep up with the technological innovations that brought stocks to life in the imaginations of retail investors. While no one was cut off from buying bonds, they weren’t regarded as fruitful investments for just anyone. Eventually, Ms. Childs writes, Mr. Gross and his allies and competitors grew not just powerful, but arrogant. They seemed to feel that any means they could think of to serve their clients, regardless of their wider consequences for society, were justified. This was contemporary Wall Street culture taking shape. More and more, in every asset class, including stocks, the biggest gains were going to the biggest investors. I was in the middle of Ms. Childs’s book when I began exploring posts on r/Superstonk. I soon noticed a paragraph of text that seemed to be repeated over and over again by a slew of different posters on the forum. It expressed joy at the defeat of “smug fine art collecting ‘high class’ billionaires” at the hands of Redditors who were “completely immune to all the psychological warfare” perpetrated against retail investors “for decades.” The difference between the medium the Redditors chose for their rebellion and Mr. Gross’s area of expertise is important: Throughout his career, Mr. Gross generally viewed the stock market as a place where dumb money gathered. He never quite saw the point in participating in it. The Redditors would probably label this as snobbery, but the truth is the stock market is more susceptible to populist activity than the bond market. Although the oft-repeated post was not referring to Mr. Gross specifically — he played no part in the Reddit rebellion — it was clearly a rallying cry for people like Jay Cooke’s “small subscribers” against the big financiers who took so much power away from the American public. Those ordinary people are now using the internet to try to get it back.”



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