Happy February!
Hope everyone is off to a great start in 2021. Now almost fully adapted to living in a Covid era we seem to have made the big adjustments to lifestyle and are sort of in the fine-tuning stage of what works and what doesn’t in our new socially distanced but virtually connected world. Trying to figure out what we will keep and take from this COVID lifestyle (there have definitely been some positives) while really looking forward to getting back to the things we miss the most when things start to reopen. In hindsight, I don’t think I actually needed to read any analysis on trends or look at global economics as my own family provided a pretty good microcosm as to what is going on with consumers in a COVID dominated economy. Bought a new fancy camera in March when I started working from home to accommodate all my virtual meetings (bit wasteful as I’ve decided that it’s not necessary that all of you see my wrinkles and washed-out complexion in HD, so I’ve gone back to regular computer camera!) and we saw a huge increase in Zoom and any company facilitating the transition to virtual business and a big decrease in office based real estate. Started wearing loungewear to work rather than suits – see huge increase in Lululemon and decrease in Hugo Boss. Started ordering in way more meals – see huge increase in food home delivery businesses like Hello Fresh and the big jump in Door Dash when it went public, see decrease in all restaurant companies. Started gaining weight (loungewear allows you to sneak a lot more weight on before you notice!) – see huge increase in Peloton and other home fitness equipment companies, decrease in personal training and gyms.
Fiscal and Monetary stimulus flood the market. My kids get four months of Student CERB and the $500 January stimulus cheque, none of which is saved. My daughter is both very sad that my oldest son has moved out of the house now that he is married, but also happy in that she has taken over his old bedroom closet as additional wardrobe space. It was necessary as I am pretty sure that every extra dollar she has gotten from the fiscal stimulus has been spent on clothing. I was giving her a hard time about it this weekend and was bugging her that maybe she doesn’t actually need to be buying another jacket when she already owns 20, when my wife observed that of all my kids she is the closest to me in personality and maybe we should be looking at my own Amazon purchases over that same time before I start preaching at her. It’s not a comparison that was going to end well for me, so I was forced to jump off that soapbox pretty quick. See jump in Amazon and Aritzia (you can thank me and Maddie!) and an offsetting drop in mall based real estate businesses. Bought a hot tub in September, was told we could finance it for a year at “0” percent financing, (how can you say no to that?) and then used the money we had saved for the hot tub to buy a recliner for my office. That’s monetary stimulus hard at work, and see also the increase in Wayfair and other home furnishing and appliance companies. I feel that I am either single handedly keeping our economy ticking over or that maybe my mindset is pretty in sync with what all the other consumers out there are thinking!
All of these trends are likely to continue through the year as fiscal and monetary stimulus continues to flood the market, consumers continue to spend and business’ capitalize on pent up demand as the economy reopens. Barring something unexpected (which is always the biggest danger!), this year should be a year which enjoys the expansionary phase of the economic cycle. Amidst all this though is the real story that I want to talk about today and it revolves around a little company called GameStop. If you follow markets at all you will have heard of GameStop by now. If you have a millennial in your family, you will have heard of GameStop. If you are on social media, you have probably already googled GameStop by now just to try and understand one of the plethora of memes that are popping up everywhere. There are just as many GameStop memes out there now as there are of Bernie Sanders in his mittens. I am eagerly waiting for someone to somehow combine the two!
GameStop is a down on its luck video game retailer targeted by hedge fund managers who bet the company was going to fail. It was viewed as the “Blockbuster Video” of the gaming sector that was being left behind as consumers moved towards an online model and away from going to the mall to buy the newest game or console. It became the most “shorted” stock on Wall Street. When you are “short” a stock what you are doing is borrowing the stock at present day prices, usually on credit, and then promising to return or buy those shares back at a preset later date, presumably when they are worth less. In other words, you are betting on a company to go down. Some hedge funds were so certain that GameStop was going to fail that somehow over 100% of the shares of the company were “short”, which really shouldn’t even be possible. It is a fairly common tactic used by the Apex predators (huge hedge funds) to manipulate markets and prey on weak companies. Using a thread on Reddit, called “Wallstreetbets” a group of individual investors conspired and strategized a way to fight these hedge funds. They basically got everyone on their forum to buy GameStop shares and hold them, trading all the shares they could between themselves to drive the price up.
Normally retail investors are pretty much ignored by institutional investors as they have very little impact on markets. In this case, however, there was a confluence of events that brought everyone together. First, we are now living in a market that is driven by social media and influencers. If an influencer has enough followers they can make or break a product, a cause or an idea and in this case social media collided with finance. Dave Portnoy, the founder of BarStool Sports, which has millions of followers, sold his business last year and started a YouTube channel posting his trading ideas. All of his Barstool Sports followers are now getting “stock tips” from him, and he’s by no means the only one. You can find plenty of other “celebrity traders” streaming their trades just like you would find streams of gamers streaming video of them playing Fortnite. A company called Robinhood founded an online “free” stock trading platform that gave easy access to markets through your computer or smartphone. The platform is structured with video game like graphics and psychologically reinforcing signals to encourage trading that mimic a gambling or gaming experience and was aimed, very successfully, at the millennial investor. It was one of the fastest growing companies in the last couple of years and now boasts over fifteen million users. This all coincided with COVID, where you have Casinos and sports betting being shutdown and millions of gamblers sitting at home, bored and looking for some sort of action or diversion and realizing that their stock tracking app on their phones or computers could fill that void. Add to that a rallying cry around a company like GameStop, which has massive nostalgic appeal to so many people who bought their first console or video games from one of their stores (EB Games is a GameStop company) and then throw in an activist/ social protest component to it and that rallying cry resonated with the masses.
Part “save GameStop”, part “screw Wall Street”, and part “we could make a lot of money from this”, the movement involves almost three million investors, all united together and effecting enough trades to drive the price of GameStop from $5 in November up to over $350 as of the time of this writing. Now, you need to understand that if you were to outright buy a stock at $5 and it goes to 0, the most you can lose is $5. But if you use options and leverage and you short a stock at $5 and then it goes to $350, you need to buy that stock back at that price at some point in time to unwind your position – in other words that $5 bet just cost you $350! When prices first started moving up, hedge funds were doubling down on their positions. GameStop wasn’t worth $10 in their opinion, never mind $20 or $30 or $40 etc… But those Reddit users have stayed firm – “we can be dumb longer than you can stay solvent” is their rallying cry. There are time limits and margin requirements that these hedge funds must adhere to. They are eventually going to have to unwind these positions as you can’t hold a short position for the long term. As these hedge funds watch the stock climb higher and higher, they are being forced to cover their bets – this is called a short squeeze. So, what they thought was a relatively small position in the “millions” has actually turned into a risk pool of billions of dollars! As they hit the limits of their credit they are being forced to either close their positions, which actually means they have to buy GameStop at current pricing and consolidate their paper losses and ironically further drives the stock price up, or they have to sell other positions to try and come up with the cash to cover the massive risk exposure. This is one of the reasons we have seen drops in Amazon, Apple, Tesla etc… this week as these billion-dollar hedge funds are being forced to sell their quality stocks to cover their bets on GameStop. It is going to go down as one of the biggest dislocations the market has ever seen between the value of a stock and a momentum driven organized buying campaign. These happen quite regularly when the billion-dollar hedge fund managers trade ideas, but this is the first time that I have ever seen this much success when that organized buying campaign is being spearheaded by the average retail investor. It is a classic Joes vs Pros scenario where at this point, the Joes are actually winning!
To further add a wrinkle into the story, on Thursday, Robinhood – the “free” online trading platform that so much of this trading is being done on, halted trading on the stock and would only allow their clients to sell GameStop, not buy it. This put a tremendous amount of one way pressure (down) on the stock and temporarily killed all the momentum in the short squeeze. The stock fell and gave hedge funds some time to regroup. There is justifiable outrage over this as the Joes arguably had the hedge funds on the ropes, right on the brink of bankruptcy, at that point in time. That story is going to play out for a while. Robinhood will claim that they just didn’t have the capacity, liquidity or cashflow to continue to front the capital for so many shares. That may be a contributing cause to the decision, but it starts to look pretty fishy when you really peel back the curtain to see how Robinhood works. Those free trades that Robinhood offers to its clients are actually funded by something call orderflow payment. What that means is that when you place an order on Robinhood, they sell that information to huge brokerage firms before your trade actually goes through. This gives these large firms an advantage in terms of information flow allowing them to identify trends and place their trades before yours go in. It just so happens that Robinhood’s biggest client is a company called Citadel Securities and Citadel happens to be one of those large wall street firms with a huge short position on GameStop! It looks really bad when you make a decision that screws all your retail clients and directly benefits the very company your clients are trying to fight. You literally cannot make this stuff up! Someone has got to have the movie rights already tied up for this! The end of the story has yet to be written. Right now, the Reddit users are still rallying trying to push the stock higher and bankrupt the hedge funds. Think of it as trying to keep a balloon in the air by blowing on it. You can do it for a while, but with nothing but hot air to keep it afloat it is eventually going to drop. The question really is who is it that ends up getting burned when the balloon drops – Wall Street or Main Street? The entire financial community and a big part of the rest of the world is watching closely to see how it all plays out!
Sorry for the longwinded explanation but I have fielded a lot of questions on this and I personally find it absolutely fascinating! As to long term impact of this on markets, I genuinely believe it is going to be very positive. Generally speaking, you can invest in the market with two different mindsets. The one I subscribe to is that we are looking for quality companies with which to partner so that we can be owners in businesses that align with our long-term outlook and belief structure. That means I get to ignore all the short-term noise being spun around short squeezes and sigma events and rapidly scaling startups and just focus on finding good businesses. GameStop is a show that I am thoroughly enjoying watching but I am certainly not taking any notes! The second way that people invest is rather than having an owner mindset they are simply looking to trade stocks at a higher price than they were bought at. It’s this second philosophy which has created this synthetic market of options, shorts, margin etc… that are constantly being manipulated and engineered into what are essentially gambling strategies. I think whenever you have these “Sigma” or “Black Swan” events it forces regulators to try and reel things back in. We want markets to reward the long-term investors and not the gamblers. I expect more regulation around shorts and leverage, a greater transparency in disclosing holdings and maybe even some tax changes geared towards rewarding longer term investors to be the result of this. I love that Robinhood and influencers and social media has created a whole new generation of investors that are interested in the market. I really don’t know how this story ends but I am pretty confident that it is not going to turn into a blueprint for investing success. I am hopeful that the denouement can maybe help shift the mindset back towards investing rather than gambling! In the meantime, we will keep investing in those quality companies with promising futures and look to stay on our toes so that we can be opportunistic if any of those companies happen to pop up on a Reddit thread!
Planning on connecting with most of you over this next quarter, but as always feel free to contact me at any time if you have any questions, want to review your portfolio, or just talk GameStop! Follow the story, it is a blockbuster movie in the making for sure!
If any of your friends or family are following along, feel free to pass this on.
Stay positive, stay safe, stay disciplined.
Jeremy
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