[h=2]Game recognize game[/h]Well this is relevant to my interests:
I was going to explain this tweet, but you know what, let’s not. If you read this column regularly you know exactly what is going on here. If not, you picked a terrible day to start, come back tomorrow, we’ll discuss index funds or something, something nice. The other day I wrote that “if you are a smallish company and Elon Musk whispers your name, or a word that sounds a little bit like your name, your stock will double.” GameStop Corp. is a smallish company, or it was a week ago lol, and yesterday Elon Musk tweeted something that sounds a little bit like “GameStop,” so the stock doubled in after-hours trading. The system works. (Also he linked to WallStreetBets, the Reddit forum that has been frenziedly pumping GameStop’s stonk[1] for the past few weeks.) I am surprised he waited until after the market closed. A younger and more adventurous Elon Musk—the Elon Musk of 2018—would already have announced his plans to take GameStop private. By next week he won’t be able to afford it.
If your theory of GameStop’s stock is that it is a market plaything utterly disconnected from any fundamental information about GameStop the company, a way “to use easter eggs in the mechanical infrastructure of the market to make money,” a pure token for YOLO gambling—that doesn’t have to just mean Reddit gambling. The headlines are about WallStreetBets posters with profane usernames making fortunes on GameStop, but by this point the richest person in the world is also paying amused attention to GameStop. Surely a lot of professional investors are white-knuckling this thing, buying it as a trade and hoping they can get out before the redditors do.[2] “Lol GME to 1000 [rocket emoji] [rocket emoji] [rocket emoji]” is a perfectly good hedge fund thesis right now. WallStreetBets started this but anyone can jump in now.
Judging by volumes, everyone has. Yesterday Bloomberg’s Eric Balchunas pointed out that GameStop was “the most traded equity on the planet,” with $20 billion of volume. Tesla was No. 2. GameStop closed yesterday at $147.98, for a market capitalization of about $10 billion, up 93% from the day before, up 641% from two weeks ago. That was before Musk tweeted. It opened this morning at $354.83, why not, for a market capitalization of about $25 billion.
When we first talked about GameStop on Monday, I laid out three storiesfor why the stock was up: a fundamental story (people think GameStop’s business will improve), a technical story (short squeezes and gamma traps) and a nihilistic gambling story (Reddit posters thought it would be funny and lucrative to make a stock go up). This morning John Authers suggested another story, one of anti-establishment anger: People are tired of feeling like the stock market is controlled by big evil institutions, and it is satisfying when a band of misfits on Reddit can stick it to the hedge funds.
Only one of these stories is about GameStop, the company, the one with a headquarters in Grapevine, Texas, and 5,000 video-game stores, the one that had a net loss of $275 million on $5.2 billion of sales in the last 12 months. GameStop’s chief executive officer is named George Sherman. I wanted to type that here because I realized I hadn’t before. It hadn’t come up. George Sherman is not an especially important character in this story. On Monday, I mostly emphasized the technical and gambling stories, but I did start with the fundamental one, the one about GameStop, the one about how maybe GameStop will pivot to e-commerce and turn its fortunes around. “There was at least a speck of fundamental dust for a cloud of meme-stock enthusiasm to form around,” I said. I still think that was probably true, in the long story of Reddit’s fascination with GameStop. I also think that approximately zero percent of the stock’s rise this week can be explained by fundamentals. There has been no news out of GameStopsince Jan. 11, no indication that its turnaround strategy is working, or not working. This week’s action is all technicals and resentment and YOLO.
You know who has a weird job right now? George Sherman. GameStop’s executives and board of directors don’t seem to have said much recently. What could they say? “Huh, nice that the stock’s up.” One important thing to remember is that while you and I and Reddit and Elon Musk can all treat GameStop’s stock as an absurd gambling token, a toy adrift on market sentiment far from any economic reality, it is still the stock of a company. The company’s executives still come to work each day and have to figure out what this all means. Does the price signal sent by the capital markets tell them something about how they should invest and what their hurdle rate for new projects should be? (Lol no.) Should they keep doing the stock buyback that they still have authorized? (Lol no.)
Should they sell a ton of stock to all these redditors who want it so badly? Yes, of course, absolutely, I said so on Monday, but it’s tricky. For one thing if they sell stock at the top they will surely get sued. For another thing, even at these prices, you want something sensible to do with the money; you can’t be like “we’re gonna sell a billion dollars of stock because we can, and use the money to pay ourselves bonuses and open some stores I guess?” Also, though, what is happening with their stock is a strange and for all anyone knows delicate piece of magic, and it’s very possible that filing to sell more stock would mess it up.[3] For technical reasons (more shares for short sellers to borrow), for fundamental reasons (dilution?), for anti-establishment resentment reasons (“ahh Wall Street is taking advantage of this rally for its own ends”) or for general emotional reasons (“man even GameStop is a seller at these prices”). I would not be especially surprised if GameStop announced a stock offering and the stock fell all the way back to, you know what I am not going to type a number here, but let’s just say a normal price.
I say all this not so much because I think GameStop will sell stock into this wild rally, or even because I really think that it should, but because … shouldn’t this be something? Shouldn’t there be some connection between the fun gambling that is going on in GameStop’s stock, and the actual company GameStop? “It is the deep background fact of the stock market,” I once wrote, “the thing that allows it all to work: The point of stock trading, in some vague notional sense, is that it allows companies to raise money by selling partial ownership of themselves.” Companies issue stock to fund projects, stocks go up because investors think companies have good projects to fund, companies use their stock price to recruit employees and pay for mergers and make decisions about what projects to pursue in the real world. I don’t know, I feel like a moron typing all of this. But I just have to type it! Think of how GameStop’s board must feel! The market is telling them something, but it is hard to hear what it’s saying through its maniacal laughter.
You know who else has a weird job, by the way? Ryan Cohen, the former CEO of Chewy Inc., who started buying GameStop stock last August and is now its third-biggest shareholder, with 12.9% of the stock.[4] He took an activist approach to his investment; last November he sent a letter to the board urging it to move faster on a turnaround, and on Jan. 11 he and two of his Chewy colleagues joined the board themselves. This was arguably—some redditors argued it—a fundamental catalyst for GameStop’s recent move; optimism that Cohen can turn GameStop around is part of what drove the stock price up.
Cohen paid about $75.9 million for his 9 million shares, an average price of about $8.43 per share. His stake is worth about $1.3 billion at yesterday’s closing price, or I guess twice that after Musk’s tweet. I bet that, when he was buying the stock at $8.43 a share, and when he was crafting his activist letter to the GameStop board, he thought that $40 a share would be a great outcome. Close some stores, be more efficient, build up the online presence, get to positive net income, blah blah blah, quintuple his money. It would take months or years of sustained engagement, but he is an experienced operator and was probably up for the challenge.
Oops! He’s been on the board for two weeks, he’s done roughly nothing, and he’s up 1,655%, or some other comically large number, depending on what minute you choose to look at the stock price. It is a staggeringly good trade. It’s less impressive in percentage terms than “Roaring Kitty,” the WallStreetBets poster (with a more profane name on Reddit) who leads the GameStop crew and who turned $53,566.04 of option premium into $22.8 million and counting. But Roaring Kitty has been in the trade since September 2019; Cohen has been in for five months and has made more than a billion dollars.
But what can he do? I mean one thing that he can do is work diligently on GameStop’s board of directors to improve the company’s performance, like he planned to do two weeks ago. But it’s going to be kind of a long time, if ever, before GameStop’s performance catches up to its stock price. The market has (let’s say!) already given Cohen full credit for unprecedented, spectacular, sustained success in turning GameStop around; it seems sort of tedious, now, to come to work every day and try to actually do it. Also it might not work, and then where will he be? Not up $1.3 billion anyway.
The obvious trade is to get out while the getting is good, sell all his stock, quit the board and take a month-long victory lap just hanging out on Reddit and bragging. But he can’t really do that either. For one thing there would be certain legal complications if a board member and 12.9% shareholder tried to dump all his stock into this wild rally.[5] There is also the likelihood that the GameStop magic is delicate, and if he announced he was selling his stake the stock might collapse before he could sell.[6] It’s not that the stock rallied this week because of Cohen’s involvement, but Cohen’s involvement is a load-bearing element somewhere down in the basement of this bizarre structure. If he said “that’s it I’m out,” other people might too. He has made a once-in-a-lifetime trade and can’t cash in.
One possible conclusion here is that the world in which GameStop is a fun gambling token and up a zillion percent really is cut off from the world in which GameStop is a company with a CEO and a board and 5,000 struggling stores in malls and a big activist investor with plans to turn its business around. They can see each other, but they can never interact. “Huh, lotta crazy news about something called ‘GameStop,’” George Sherman or Ryan Cohen might think; “it would be weird if they were talking about us.” But they’re not.
Speaking of “that’s it I’m out”:
Melvin Capital and Citron Capital closed out of their short positions on GameStop Corp. as the firms succumbed to the stock’s meteoric ascent.
Melvin Capital closed its position after repositioning its portfolio, according to a spokesperson. Citron Capital’s Andrew Left also said Wednesday that the firm covered the majority of its GameStop short bets at “a loss of 100%” in a YouTube video.
It would be funny if that were the catalyst for the stock to collapse. “Welp, we got Melvin, time to move on to something else.”
[h=2]Hey what else is going on?[/h]Ah, right, super:
AMC Entertainment Holdings Inc.’s stock price briefly quadrupled Wednesday, erasing last year’s pandemic-induced slump amid optimism around a recent fundraising. The cinema operator is among a number of heavily shorted stocks rallying this week.
The stock rose as much as 310% at the open of the regular trading session in New York, pushing it to the highest level since October 2018. AMC said Monday that $917 million in new funds would get it through the next six months as the industry battles the effects of Covid-19, which has shuttered venues around the world.
And:
The most-hated stocks have scorched the naysayers, with a Goldman Sachs Group Inc. basket set for its best month since at least 2008. That’s been accompanied by a “dramatic shift” in options activity toward heavily-shorted securities such as GameStop Corp., BlackBerry Ltd. and Palantir Technologies Inc., according to Barclays Plc analysts.
Frenzied buying of short-dated call contracts has exacerbated the pain for the bears. Normally dealers selling the bullish options buy the underlying stock as a hedge. With enough volume -- and there’s been plenty -- that can drive the stocks higher, making the calls in-the-money. While retail traders had previously favored large-cap tech stocks, the pivot into smaller companies has amplified their heft, the Barclays analysts wrote.
And here’s Bloomberg’s Tracy Alloway with “How ‘Flows Before Pros’ Is Disrupting Stock Markets.” And here’s Bloomberg’s Sarah Ponczek with “How a Penny Stock Explodes From Obscurity to 451% Gains Via Chat Forums,” about how penny-stock traders on Stocktwits and Reddit pushed up a stock called Blue Sphere Corp.:
Blue Sphere soared as advertised on Jan. 19. By the end of the day, it was up 451%, having risen from six-tenths of a penny to over 3 cents. Roughly 2 billion shares traded that day, staggering and yet not altogether abnormal volume in a burgeoning new age of penny stock speculation. The chat-forum posts came in fast and furious as the stock soared: “Incredible day everyone,” “we r gonna filthy rich together” and “congrats to everyone who took the risk & believed in yourself!!!!!!” …
On any given day, there are a dozen or more Blue Sphere-like stories of tiny, profitless companies that mysteriously go from obscurity to viral sensation. Lately the frenzied pace of boom and bust in these penny stocks has started to drown out all the other forms of speculative mania in the pandemic-era market. Call it another froth marker -- retail traders beset with mass psychosis amid zero-commission fees and zero benchmark interest rates -- to be filed alongside the GameStop Corp. saga, the three-fold rally in cryptocurrencies, the SPACs that are minted daily and the record highs being plumbed by major equity indexes.
Cool. Stocks, what even are they.
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[h=2]Oh, Deutsche Bank[/h]This is kind of a weird story:
Deutsche Bank is investigating whether its staff mis-sold sophisticated investment banking products to clients in breach of EU rules and then colluded with individuals within these companies to share the profits.
The internal probe — codenamed Project Teal — was triggered by client complaints last year, according to people familiar with the process. It initially focused on a desk in Spain, which sells hedges, swaps, derivatives and other complex financial products.
The audit found that Deutsche had wrongly categorised client firms under the Markets in Financial Instruments Directive (Mifid) rules. These require banks to separate their clients by levels of financial sophistication, such as retail investor, professional investor or counterparty, which means another bank or financial institution.
Deutsche believes that some of its staff knowingly sold inappropriate or unsuitable products to customers who may not have been able to understand and shoulder the risk they were taking with these positions, the people said. The German lender is not just looking at a few isolated cases, but at what appears to be a broader pattern of misconduct over several years, the people said.
Project Teal is also looking into allegations that there was collusion between Deutsche employees and staff at some of the clients who bought the inappropriate products. One suggestion being explored is that the two sides shared some of the proceeds of the transactions, the people said.
I mean, there are two straightforward stories there. One is: Some Deutsche Bank bankers build a derivative that will make a lot of money if some sucker of a client buys it. It is clearly too nasty a piece of work to sell to unsophisticated clients, but no sophisticated client will buy it (because it is a nasty piece of work). So they sell it to unsophisticated clients and pretend that those clients are sophisticated. Fine, right, traditional.
The other story is: Some Deutsche Bank bankers build a derivative that will make a lot of money if some sucker of a client buys it. It is clearly too nasty a piece of work for any client. So they go out and find some employees at clients and bribe them to do the trade. “You know and I know that it’d be nuts for your employer to do this trade, but it’d be very good for us, and we’ll give you a cut.” Fine, right, very illegal, but also in its way traditional.
The weird part is, you shouldn’t need to do both. Like either you bamboozle an unsophisticated client into doing some nasty derivative with you, because the client’s representative is too unsophisticated to know what is going on—or else the client representative knows exactly what is going on, but you overcome her objections by bribing her. If you have to bribe the client to do a trade with you, the client is probably sophisticated enough to know that the trade is bad? I guess it doesn’t actually work that way. Still feels a bit like overkill.
[h=2]Should index funds be illegal?[/h]Fine let’s do index funds a little. The basic idea here is that if all the companies in an industry are owned by the same handful of giant institutional asset managers, they might as well all be one company. They should not compete vigorously with each other on price, because that lowers profits for their common owners; instead they should divide up the market collusively and each charge high prices. Companies all are, increasingly, owned by the same handful of giant institutional asset managers. The counterargument is that those giant asset managers don’t act like common owners, in some important way. They don’t, say, write strongly worded letters to all the managers of all the companies telling them to act in a way that benefits their common shareholders. Well, they do do that, but not about pricing.
Anyway there are lots of debates about the evidence for this theory, which is suggestive but not what you’d call overwhelming. Here’s Planet Money on a new study:
They decided that the breakfast cereal industry was a great place to study the common ownership hypothesis. For one, Vanguard, BlackRock, and State Street Global each own around 5 percent of each of the big four cereal companies: General Mills, Post, Quaker Oats, and Kellogg's.
In what economists call a natural experiment, the researchers found a kind of control group, Kellogg's. While the other cereal makers' biggest shareholders are Vanguard, BlackRock, and State Street, Kellogg's biggest shareholder is far and away the W. K. Kellogg Foundation Trust, which owns almost a quarter of the entire company. It doesn't own a share in the other cereal brands, so it should only really care about Kellogg's profits. So Kellogg's cereal prices serve as a kind of counterfactual to test if the other big cereal companies are behaving differently. The economists used this and other statistical Trix (I'm sorry) to see if there's any evidence that General Mills, Post, and Quaker Oats are responding to the desires of common owners and setting prices as if they were colluding like a cartel, scheming to profiteer on your breakfast.
"We do not find any evidence of any price effects of common ownership in the market for cereal," says Christopher Conlon, another co-author of the study.
“Although we show that the potential magnitude of common ownership effects would be large, our test finds that standard own-firm profit maximization is more consistent with the data,” they write.
[h=2]Blockchain blockchain blockchain[/h]Oh yeah, this is the stuff right here:
In yet another sign of the upward ascendancy of both the sports card and digital collectibles markets, three limited-edition NBA highlight video cards have sold for more than $30,000 over the past 10 days on NBA Top Shot, a blockchain-based platform that allows fans to buy, sell and trade numbered versions of specific video highlights.
NBA Top Shot is a joint venture, started in July 2019, between the National Basketball Association, the NBA Players Association and Dapper Labs, which is best known as the creator of CryptoKitties, long considered the world's most popular blockchain-based game. ...
The skyrocketing value of NBA Top Shots recently has been remarkable. On January 15, a Ja Morant highlight (No. 1 out of 49) was purchased off the platform's secondary marketplace for a then-record $35,000. According to The Action Network, the Morant highlight's original owner got it out of a pack and sold it in November for just under $2,000. That new owner then sold it last week for $35k, making an exceptional return on investment in less than 50 days. Four days after the Morant sale, a group of investors bought a LeBron James dunk highlight (No. 23 out of 59) for $47,500, capping off a 24-hour stretch in which the site saw more than $1 million in sales. Then, on Friday, a collector purchased a No. 1 LeBron James moment from Top Shots' From The Top Series 1 set for a whopping $71,455, shattering the record.
Here’s Darren Rovell:
It’s true that anyone can view a certain highlight on YouTube and those who own NBA Top Shot moments don’t get any incremental revenue from views. Those are the two more common points brought up by critics of this concept.
But the value is in the scarcity that Dapper creates.
“There are guys buying trading cards and they’re never taking the custody of the cards before putting them into vaults,” said Roham Gharegozlou, CEO of Dapper Labs. “There are people buying shares of cards on sites like Starstock, without ever seeing the card. This is the same concept. We have a lot of believers in what we offer and we have people who don’t get it. That’s OK. We can’t please everybody.” …
NBA Top Shot’s biggest power user is a guy who calls himself Pranksy, a 29-year-old game designer and collector. He says he’s spent at least $800,000 on the platform, most of which he used to buy out accounts since the beginning of the month. He says he has sold $1 million worth of his highlights on the marketplace and the highlights he owns are worth around $3.1 million.
“This takes the traditional collectible into a modern, global era,” he told The Action Network. “All markets are immediate and international. No longer do you have to wait for a card to be graded, or delivered, or fear of forgeries. Yes, the tradeoff is you no longer have that card on your mantelpiece, but in an age dominated by TikTok and Instagram, is that really what the younger generations want anymore?”
[h=2]Things happen[/h]Top Bankers Sound Alarm That Remote Work Is Starting to Grate. What Jeffrey Epstein Did to Earn $158 Million From Leon Black. Everything is seating charts. IMF warns on financial stability threat from vaccine shortages. Second Hedge-Fund Trader Named in Danish Cum-Ex Indictment. Janet Yellen rap musical nope nope nope. “The barge containing material dredged out of the Gowanus has now also fallen into the Gowanus.”
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[1] A “stonk” is like a stock, only, you know … this.
[2] There are some confused conspiracy theories floating around the internet about how evil hedge funds or high-frequency traders are somehow front-running nice innocent WallStreetBets traders in order to make millions on GameStop, but those theories are obviously unnecessary? GameStop has been going up a lot for weeks, and people keep writing about it, in public, on Reddit. “Wow these redditors have really pushed up the stock, and they say they are going to keep pushing it up, maybe we should buy some” is a perfectly straightforward (though risky!) thesis, without any weird secret information.
[3] As we discussed on Monday, they already have a filing to sell up to $100 million of stock, but that is a comically inadequate number now that they’re a $25-billion-or-whatever company; you gotta go big at this point. Also they may have already sold some of it before this week’s nonsense.
[4] The two biggest shareholders are Fidelity and BlackRock, heh.
[5] One potential concern is Section 16, a statutory prohibition on “short swing” trading by insiders (directors and officers and 10% shareholders) of public companies: If an insider buys stock and then sells it at a profit within six months, he has to pay back the profits to the company. Cohen is both a director and a 10% holder, and started buying GameStop in August, less than six months ago. However he did all of his buying before he joined the board, and most of it before he got to 10%, and Section 16 does not “cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security.” So he’s probably mostly okay there. More troubling is the prospect of regular insider trading and securities fraud liability: He’s on the board, he presumably knows some nonpublic stuff about the company, and he dumps all his stock into a huge rally? He’s gonna get sued for that. The complaint would say, like, “Mr. Cohen put out press releases about turning GameStop around, the market believed him, and the stock went up one zillion percent, but then he joined the board, learned the company’s secrets, realized that the turnaround was doomed and dumped all his stock based on that inside information.” This would not really be a fair complaint! The stock did not go up a zillion percent *because everyone believed in the turnaround*, and even if you *did* believe in the turnaround you might quite rationally dump all your stock at *these* prices. Nonetheless that complaint has an obvious appeal.
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