OT: Reddit Kills the Stock Market

Submitted by JamesBondHerpesMeds on January 27th, 2021 at 12:53 PM

Anyone following this stuff with GME, AMC, etc. with some thoughts?

For anyone not clued in, the gist: a Subreddit called WallStreetBets decided en masse to buy up stocks that large institutional funds have placed negative bets on (e.g. put options). Stocks like Gamestop, AMC, and others that have been hit hard by the pandemic, hedge funds shorted them, and now a bunch of folks on Robinhood and other apps are pushing trades up more than any other stock (including blue chips like Microsoft, Tesla, industrials, etc.).

Blue4U

January 28th, 2021 at 2:20 AM ^

LOL.  Your perception about traders that short make me feel like I should be battling the Marvel superheros cause I'm the dastardly villain.  Shorting a stock doesn't destroy companies.  It's done EVERY day without harm.  You have much to learn about the intricacies of trading/investing.  You should understand the subject matter before you comment.  You'll look less ignorant 

Joined: 09/13/2011

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micheal honcho

January 30th, 2021 at 10:58 AM ^

They are taking a loan for X shares of stock in a company that MAYBE they see as a loser, MAYBE. And expecting to return those X shares at a reduced value and pocket the difference. Please explain the intricacies of how this action helps anyone but the fund doing it? Does it help the targeted company? Does it help society as a whole? And what about shorting because they have 20 billion in assets and know that regardless of a company’s actual health, their weight can lead others to the same action, making it a self fulfilling prophecy? Seems like a brutal game to me. But hey, free markets are supposed to be brutal right? We love brutality, unless it’s not our brutality but instead pointed at us. I compared it to a drug dealer because 1. A drug dealer is a free market capitalist. 2. A drug dealer does not give one shit about the human damage he inflicts in his pursuit. 
What does a company that’s facing a load of downward pressure on its stock do? It reacts to improve its fundamentals. It might shudder plants & reorganize, shedding workers. It might offshore jobs to save costs. It might neglect some maintenance aspects of its business to project greater financial health to please the shareholders. Shorting is IMO just one malignant symptom of the greater problem that has been directing more and more of the worlds wealth into fewer and fewer hands. That is the brutal philosophy that the ONLY thing a company has obligation to is the shareholder. Brutality be damned we charge forward shouting “free markets!” Let the bodies hit the floor boys. 
 

Was the behavior of our stalwart financial institutions in the run up to 2008 also OK by you? Directing customers $$ into MBS’s that they knew were losers just to try and mitigate their losses and pass them to the unwashed masses? How about opening bank accounts in customers names without their knowing just to drive up the value of their shares? Then having the CEO just bold faced lie about it in sworn testimony? 
 

If the investment class has shown us ANYTHING in the past 20yrs it’s that they will do ANYTHING to get that return. I see shorting as just another brutal and predatory behavior invented to feed that beast. But I’m sure a more nuanced view could explain all of its wonderful contributions to the world. Problem is the messenger of that view was probably a witting or perhaps passive participant in the previous fleecing and has lost all credibility with me. People should have gone to prison following 2008. The fact that they didn’t tells me they are still running the game. Looking to invent ways to service that capital at 8% when we can borrow as consumers at 2.8%. I put nothing past their brutality in this pursuit. 

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Blue4U

February 1st, 2021 at 3:03 AM ^

I've noticed the majority of your posts are long winded and filled with gibberish.  You seem to be the only one on the site enamored with your superior "intelligence" and opinion.  Good luck with that.

It's glaringly obvious that you're one of those diehard liberals with the mindset that capitalism and the stock market is the Great Satan of the world.  Let me remind you the financial crisis of 2008 was created by none other than the demi-god of the democratic party, Bill Clinton himself.  In '98-99 he repealed key portions of the Glass-Steagall Act enabling the Banks to behave in the manner in which they did.  Up until that moment, it was against the law for Investment Banks to deal with mortgage products (CDOs) and insurance products (credit default swaps).

Now for debating the value of shorting a stock.  I guess some would say it can be used as a form of hedging a trade, much like put options.  Or maybe an investor/trader believes the company/stock price is overvalued.  Or maybe someone just wants to make money when the market/stock goes down.  There's many reasons why someone could or should short a stock or for that matter, buy a stock.  I'd like to further this debate with you but I trade for a living and it's time for me to peddle some more drugs.  Pray for my capitalistic soul

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247Hinsdale

January 27th, 2021 at 4:16 PM ^

I don’t object to short selling in general.  The problem with GameStop is that more shares were shorted than were available in the market.  So while much of the talk has been how to regulate r/wsb, the SEC, in my opinion, should be focusing on the shorts who created a situation where this squeeze could occur.

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ypsituckyboy

January 27th, 2021 at 2:36 PM ^

I didn't downvote you, but here's my $.02:

There are people in NYC at investment banks whose only job is to follow a very small number of companies, maybe even one company, or one very niche industry. And they're networked with other people doing the exact same thing. Why in the world would you think you have more information to make a more informed decision than them?

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Blue4U

January 27th, 2021 at 3:25 PM ^

I don't think I have more info than them but I've been doing this for 20+ years and I have a comfortable life from trading.  I had 22 years of federal service (7 military, 15 Post Office) towards a  decent retirement that I walked away from to trade full time and I haven't regretted it one second.  When I was making 2-3 times my annual Postal salary while working less than half the time, I decided leave.  I started off trading stocks, then moved to FOREX and now I trade futures.  My mentor was a very successful trader that worked with and was taught by Harvey Houtkin.  Harvey Houtkin is known as the father of modern day trading.  

You and I have had similar discussions about this in the past and I know you're skeptical about day trading but there are many of us that do find success.  I agree that most fail but I'm fortunate to be the one of the outliers

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Durham Blue

January 27th, 2021 at 10:22 PM ^

Pretty much the only stock that I could say I've made good money on is AAPL (Apple).  Everything else through my investing "career" has been adequate or not so great.  In other words, the stock market has not made me wealthy like the select few.  I feel like I need to be a lot better connected to those in the know and "downloaded" on information to do really well.  I put away 15% per paycheck into my 401k which buys mostly mutual funds that generate a modest percentage, hopefully if all goes well, year after year.

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othernel

January 27th, 2021 at 1:01 PM ^

A better title would be "Individual investors on Reddit do what exactly same thing Hedge Funds and Investment Bankers do every day"

I love that people are calling this fraud or market fixing, when it's all being discussed in a very public forum, and executed by people are are mostly investing a couple hundred dollars, tops.

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bronxblue

January 27th, 2021 at 1:28 PM ^

I don't know if it's fraud (I think most people are doing it for the stated purpose of making a couple of bucks and screwing around with some hedge funds for the lulz), but there are rules about market manipulations that can get you into trouble.  Those more institutional investment companies are regulated and cna absolutely get in trouble for what they do and say on their Bloomberg terminals, for example.  And there have been reports that some of the people benefitting most from this activity may have coordinated it more than they are letting on.

I don't particularly care either way except that I think there is going to be a class of people who lose not-insignificant money on this endeavor and it won't just be the short position holders that kicked it all off.

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1VaBlue1

January 27th, 2021 at 1:08 PM ^

I am an admitted financial neophyte with virtually no interest in the market.  So, please allow me to summarize what's going on here:  The large funds were short selling (betting that the stocks would continue to fall) these companies, so day traders (ie: little guys) decided to buy - which escalated the price and caused the big funds to lose money.  Is this a correct approximation?

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ImRightYouKnow

January 27th, 2021 at 1:15 PM ^

Exactly. It's basically a war of attrition at this point between millions of individual investors and a handful of rich hedge funds. 

The two major outcomes: 

  • Hedge funds have to either by back those stocks they shorted for 100x what they sold for, likely causing them to go bankrupt. Or they just go backrupt, at which point, the liquidating company will probably buy the stock for 100x what they're sold for anyway. 
  • The individual investors begin to sell, due to people needing to cash out their winnings for things like food and expenses, and the stock comes down to earth again, and Hedge funds will buy back the lower priced stock. 

Hedge funds have more money, but do not have a lot of time to continually take losses, and the individual investors are just that, individuals, and do not work in lock step. 

Basically, there are theories on what price the stock needs to strike before the Hedge funds collapse. Some say $500, some say $1000, some are saying $5000. 

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MGoCarolinaBlue

January 27th, 2021 at 1:34 PM ^

My understanding is that this explanation is accurate, but not complete.

One particular hedge fund, Melvin Capital, has a very large short position which expires on Friday, at which point Melvin is obligated to buy shares in order to return them to the lenders they borrowed from.

So the people on reddit are all insisting "don't sell no matter what" because they all want to make it to Friday when in theory the price would skyrocket higher due to the shorts being forced to cover. This is called a 'short squeeze'.

There is also a 'gamma squeeze' in play, which I understand as being a scenario where people trading options on the underlying stock manage the risk of their option portfolio by also buying the underlying stock. So as the stock goes higher and higher, they have to buy more of the stock to maintain what they've decided is an acceptable level of gamma. This obviously increases the demand and drives the price further higher.

This whole thing actually started a while ago, with reddit user deepf*ckingvalue posting some info about how he thinks gamestop is undervalued and Ryan Cohen (Chewy co-founder) who has bought a seat at the board of directors is going to turn it around and transition away from being a brick and mortar store. So this reddit user has been posting daily updates of his portfolio for the last year or so, showing all of his losses and getting hugely memed on. Well as of yesterday I think he broke $20 million on it. Not bad!

I don't entirely understand what happens if this thing keeps going until Friday and Melvin Capital just declares bankruptcy instead of trying to buy back the shares they owe, but I suppose it could end with the retail investors, particularly the ones who bought in late at these obviously, blatantly, obscenely overvalued prices, holding the bag if they didn't get out in time. But a lot of the redditors are posting that they don't care, they aren't in it for the profit, they're in it for the memes, etc. From a game theoretic standpoint, this is all super interesting because it's like a huge game of the prisoner's dilemma where everybody is trusting everybody else to play like a "super-rational" actor.

The other interesting aspect is of course the regulatory one. Of course the current regulatory apparatus isn't built to handle this. How do you regulate a bunch of people posting "Hello fellow <insert ableist slur here>, my wife's boyfriend insists that GME is undervalued so me and my diamond hands are holding until the squeeze is squoze. Let's all enjoy our tendies together on the moon <insert rocket emojis here> by the way I am on drugs and this is not investment advice"? Or you could argue that in fact the irresponsible actors here are the funds like like Melvin Capital that took out these massive short positions.

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1989 UM GRAD

January 27th, 2021 at 1:18 PM ^

My son (2023 UM Grad) is an avid gamer and redditor. He told me about this a few months ago. I laughed and told him Game Stop was worthless. I guess I should've paid more attention to his suggestion to buy some shares of GME. 

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bronxblue

January 27th, 2021 at 1:20 PM ^

It is funny that despite all the "stick it to the man" claims of that subreddit powering this deal, the three people who are receiving the biggest benefit by far is the billionaire investor Ryan Cohen (who is on the board of Gamestop), a subprime auto-loan billionaire from Michigan, and the CEO of Gamestop.  So basically three incredibly rich men are seeing their stocks go up incredibly high and a bunch of hedge funds are losing billions.

It's comical to a degree but if you told me in 6 months or a year we learn that there was a concerted effort by some people to pump and dump this stock in violation of some SEC rules I wouldn't be surprised.  Again, I'm not an expert of SEC regulations but it does feel like a lot of people who don't know a ton about investing may wind up bearing the financial brunt of this movement when the price inevitably crashes back down.

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dearbornpeds

January 27th, 2021 at 1:43 PM ^

Don't forget Michael Burry (Big Short fame) who purchased large amounts of Gamestop months ago for his hedge fund (Scion Capital).  This was public knowledge in the late fall and the stock began a slow upwards move.  I don't know if he's bailed on it yet but he came out this week and said it was ridiculous. I wouldn't be surprised to learn he sold his position the next time his holdings are revealed.

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bronxblue

January 27th, 2021 at 2:53 PM ^

Yeah, he was a name as well but if memory serves me right his stake wasn't that high.  I believe those top 3 investors hold something like 25% of the outstanding shares, and the CEO is by far the smallest holder with under 4% (and he has scheduled sales plans and the rest so he wouldn't necessarily be able to profit off this uptick without getting board approval otherwise).  

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bronxblue

January 27th, 2021 at 2:59 PM ^

Yep, and the banks don't remotely mind all of this action because they can collect fees on the various transactions.  Even the people buying with apps like Robinhood (which don't charge up-front fees for trades) are still benefitting the banks and larger institutional lenders because the users are buying the stocks from these firms and then getting a price that allows the banks to leverage for profit.  So it's mostly still the house winning, only that sometimes the player feels like it's a new game.

Anyway, in the long run this is going to be a blip but I have a bad feeling we're going to see a lot of people who aren't great with money and handling risk getting hurt when this bubble pops.

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Blue4U

January 27th, 2021 at 3:39 PM ^

I wholeheartedly agree.  I'm leery of Robinhood and similar aps tho.  Back in the 90's when internet stock trading became "the thing", so many people lost money that the SEC (not that SEC) created the pattern day trader rule. I personally think aps like Robinhood give people a false sense of understanding and knowledge concerning the difficulty of making money in the market and if they don't educate themselves and have good risk management, they'll deal with some pain 

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Ron Burgundy

January 27th, 2021 at 1:22 PM ^

WSB is funny so I've seen this build up, but watching what's happening is surreal. FTR, people keep saying this is all Reddit day traders taking down big bad wallstreet, but with the absolute volume going obviously big money is on both sides here. 

 

The craziest thing is reading people on WSB giving their self reprots. These are students, single moms, currently unemployed people, etc. who are getting told by anonymous posters to put literally their entire savings into this single stock for an awful company. And it's working! Truly incredible stuff, although I shudder at what will happen in the future when it doesn't go so well (or those who don't get out in time).

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