Gamestonk!! Caveat emptor: The Gamestop saga and the FOMO bubble


‘Gamestonk!!’ Everything you need to know about the astonishing GameStop shares saga – and the stock market state of play in early 2021 – is wrapped up in that one nonsense tweet from the world’s probably richest man.

That word tweeted by Elon Musk on Tuesday night, with a link to the Reddit thread r/wallstreetbets, further fuelled a trading frenzy that’s seen a struggling US computer game retailer become the world’s hottest stock.

GameStop is also now a battleground between small investors and Wall Street, a get-rich-quick scheme, a stick-it-to-the-man tale, and a parable of the FOMO rally times.

Stonks is a tongue-in-cheek term for stocks, in the new breed of trader’s chat rooms. And an absurdist portmanteau tweet to stoke the fire from Musk – who manages to both be the wealthiest person in the world and revel in outlaw status – just about summed the whole crazy situation up.

Until recently GameStop was just another struggling retailer trying to recover but then the US video game store became the focus of a shares battle between small traders and hedge funds

Until recently GameStop was just another struggling retailer trying to recover but then the US video game store became the focus of a shares battle between small traders and hedge funds 

GameStop became a battleground between orchestrated small traders and Wall Street this week... and then Elon Musk tweeted 'Gamestonk!!' to further fuel the fire

GameStop became a battleground between orchestrated small traders and Wall Street this week… and then Elon Musk tweeted ‘Gamestonk!!’ to further fuel the fire

If you’re in on it, you’ll know what’s going on; if you’re an investor with an eye on social media, then it will have registered in the past day or two; and if you consume your news at a slightly less frenetic pace than the modern world demands, you might be wondering what on earth this column is about.

The brief backstory is that GameStop (stock code GME) is a struggling long-standing US video game retailer hit hard by coronavirus and lockdowns, which announced plans to close a large number of stores last year.

In autumn, a new activist investor stepped in – Ryan Cohen, the successful founder of a multi-billion dollar internet pet supplies store Chewy – and GameStop’s status as a beaten-down company ripe for revival stepped up a gear.

Cohen was going to position GameStop to take on Amazon in online game sales, similar to how he fought the same Goliath with Chewy.

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However, as is often the case, not everyone was backing that story. A number of hedge funds and other big investors took short positions to bet against GameStop – and as is their way some published theses on why they were convinced the share price would fall and how they’d profit.

So far, so value investing. Except then some weird stuff started to happen.

Just over a fortnight ago it was announced Cohen would be joining the GameStop board.

This was the kind of good news that boosts a share price and it duly climbed from $19.95 on 11 January: it had risen 50 per cent within a couple of days and had almost doubled to $39.12 by 20 January.

So far, so value investing. Except then some weird stuff started to happen 

But then momentum dramatically picked up and GameStop shares started to rocket. By Monday they were at $76.79, on Tuesday they reached $147.98, and at the time of writing they are at $332.02.

That is a near 1,600 per cent rise in 16 days.

Behind it lies an orchestrated attack from members of the Wallstreetbets Reddit forum, which also spread to social media, with small-time traders buying into GameStop to send its share price higher and put a squeeze on the short sellers.

The more GameStop shares rise the tighter the squeeze, as a feedback loop is created whereby the short sellers have to buy stock themselves to cover their positions and more individual traders join the frenzy to make money as the price goes up.

GameStop shares are up almost 1,600% in just 16 days on what's been dubbed weaponised trading by small traders spurred on by the Reddit thread

GameStop shares are up almost 1,600% in just 16 days on what’s been dubbed weaponised trading by small traders spurred on by the Reddit thread

Magnifying the effect dramatically is that many of the small traders aren’t actually buying GameStop shares, they are buying call options – derivatives that give them the right to buy at a set price within a certain time frame, allowing them to profit if the share price is higher at that point.

This enables people to trade with borrowed money – on margin – and magnifies their gains.

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The messaging on the Reddit thread is a mix of confrontational antagonism against the financial system, light-hearted trading banter, and hit-and-hope-let’s-get-rich chat.

It’s the same flavour found in bitcoin and cryptocurrency discussions, and while it lacks the evangelical true-believer element of the crypto world it makes up for that in the fervour of some participants’ belief they are taking down the financial system.

Elon Musk manages to be both the world's estimated richest person and revel in outlaw status and his tweet sent followers off to the Wallstreetbets thread, adding attention

Elon Musk manages to be both the world’s estimated richest person and revel in outlaw status and his tweet sent followers off to the Wallstreetbets thread, adding attention

Momentum trading is nothing new. If you want to learn about the art of buying shares on the up and trying to sell out before they go down, read the classic Reminiscences of a Stock Operator, the lightly fictionalized biography of trader Jesse Livermore and his life in the bucket shop trading houses of the early 20th century.

What is novel with GameStop is small traders realising at scale their power to come together and make prices go up at will.

It’s been described as weaponised trading and likened to how ants can move a huge volume compared to their size 

It’s been described as weaponised trading and likened to how ants can move a huge volume compared to their size.

One trader on Wallstreetbets, with the moniker DeepF***ingValue posted to claim they have turned a long-standing YOLO (you only live once) long position of $50,000 in GameStop in late 2019 into just shy of $23million.

Melvin Capital Management, one of the US hedge funds betting against GameStop, pulled out of its short yesterday – and is reported to have lost 30 per cent of the $12.5billion it manages since the start of 2021. 

Another hedge fund, Citron, which suffered as chat room traders sought to punish its short position had already backed out.

The weaponised trading has also moved onto target other companies and try to lift their share price, with old tech names such as Blackberry and Nokia getting the treatment, as well as US cinema chain AMC. 

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A debate is raging as to whether the SEC should step in, or whether the little guys and girls taking on the hedge fund big shots is something it should keep its nose out of 

GameStop is also a story that’s now broken out of the chat thread and social media world, into mainstream media headlines, and onto regulators’ plates.

A debate is raging – albeit far slower than the story is unfolding – as to whether the US financial regulator the SEC should step in, or whether the little guys and girls getting together to take on the hedge fund big shots is something it should keep its nose out of.

Veteran financial commentator John Authers described this in his Bloomberg column as ‘rage against the financial machine‘ and the first ‘angry bubble’ he had seen in his time in the markets.

He highlighted that while many might quite rightly be angry with the financial system of recent decades, ‘anger, even more than greed, has the capacity to make us throw caution to the winds’.

And for me this gets to the heart of why the matter is problematic.

On the surface, GameStop is an amusing stock market story at a time when we all need a laugh: if people want to get involved in daft greater fool momentum trading – knowing that if they end up being the last fool they will lose money – then so be it.

But underlying it is a huge speculative bubble in shares and high-risk option trading, and from tulips, to the 1920s, and the dot com era, ultimately it’s the individual investors who always lose the most when those bubbles burst.

Gamestonk!! Caveat Emptor.

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