WEST RIVER, MARYLAND – Today, we turn away from Washington and look to Wall Street for our usual dose of claptrap.
And yesterday… in what must be some kind of Bubble Climax… the price of a video game company purveyor, GameStop, traded as high as $370… and then up above $500 in this morning’s pre-market.
That’s almost 80 times higher than its price this time last year… and more than 26 times higher than it was at the start of this year.
Every oldtimer on Wall Street knows that you’re supposed to buy low and sell high. But this is no “oldtimers’” market.
This is a casino, where gamblers bet against each other… all with chips furnished by the Federal Reserve.
What played out in the stock market yesterday was a high-stakes poker game between those betting that GameStop shares would go down – mainly a couple of hedge funds – and those betting that they could force the share price up.
Fake and Foolish
But perhaps readers are in need of some context… as we were.
On the banks of the East River, as well as on the banks of the Potomac, almost everything is now fake and foolish. There is no star to steer by… no fixed point of reference… no magnetic North.
Fake money has screwed up everything – markets as well as politics.
U.S. stock markets fell yesterday – not enough to make any difference… but enough to make the headlines. MarketWatch has the news:
U.S. stocks book worst daily losses since October as Powell stresses long road to recovery and short squeeze drama plays out
Stocks closed sharply lower Wednesday, leaving the Dow and S&P 500 index negative for 2021, on mixed earnings reports and after Federal Reserve Chairman Jerome Powell underscored the long road to economic recovery ahead, following the central bank’s first policy meeting of 2021.
The Dow Jones Industrial Average skid 633.87 points, or 2.1%, to close at 30,303.17, posting its longest losing streak since Friday, February 28, 2020 when the market fell for seven straight trading days
Dear Readers wisely pay little mind to what is happening on Wall Street.
The Street has gone bananas. It’s supposed to discover what stocks are worth. Millions of careful investors with sharp pencils and sharper minds are supposed to tote up expected earnings and discount them to “present value,” based on their calculations of risk and interest rates.
But both pencils and minds have gone dull. By almost every measure you choose – comparing share prices to earnings, sales, book value, GDP, clicks, electricity consumption, the nap on wooly caterpillars… you name it – stocks are overpriced.
It’s not hard to see why. Interest rates are phony. And at negative real yields (adjusted for price inflation), any stream of earnings is an Amazon of liquidity and value.
So young traders can think anything they want. And tuning into chat rooms such as WallStreetBets, they can make a sport of it.
Like a Rocket
In the case at hand, a pair of hedge funds saw that GameStop was overbought. Headquartered in Grapevine, Texas, it had respectable sales of $5.2 billion in its last full financial year, ending October 31, 2020. But it lost $275 million during that period.
A company that loses $275 million per year is not a moneymaker; it’s a money destroyer.
And yet, at its peak, the company was priced as if it had discovered the Holy Grail. Or developed an eternal youth drug. Or inked a contract to sell Donald Trump’s new autobiography, “How I Made America Great Again. LOL!”
Of course, it had not.
And that’s the point, as Bloomberg’s Matt Levine pointed out. You don’t need to do all that math and research anymore. You just buy a company with a rocket emoji next to its name. The rocket 🚀 is all you need.
(The insiders must be selling stocks like crooks unloading stolen money from the getaway car.)
Earlier this year, the hedge funds sold the shares of GameStop short. That is, they sold shares in the company that they didn’t own… betting that the stock would be a lot cheaper when they had to cover their bets.
This may be a rocket, they said to themselves, but it is soon going to explode in mid-air and fall to the ground.
On the other side were the proto-momo (momentum) players. Every market has its buyers and sellers, its winners and losers. And it’s the momo guys who are setting the pace in this one.
The spirit of it was further revealed in a comic video making its way around the World Wide Web. In it, The Joker, played by Joaquin Phoenix, explains to his interviewer host, played by Robert De Niro, that the baby boomers have essentially destroyed the economy.
Millennials have no chance, says The Joker, of ever enjoying the financial success of their parents and grandparents. They might as well take their pittance – from unemployment or stimmy checks – and roll the dice.
In the case of GameStop, the momo delinquents (the “longs”) expected to cash in on the new name recognition and dumb luck. After all, everything goes up, doesn’t it?
And there was so much “short interest” on the other side, they saw an opportunity to squeeze the shorts, adding to the excitement, the drama, and the profits.
If the longs could bid up the price, the shorts would be forced to “cover” – buy the shares at a higher price… and thus push the price even higher.
As it turned out, they pushed up the price so high – with the help of “short covering” – that the hedge funds had to retire from the field, leaving their horses dead on the field – with 100% losses.
Between them, buyers and sellers, GameStop was the most traded stock in the world this week.
And it’s all good, pointless fun. YOLO. (You only live once).
Managing Editor’s Note: Today, Bill and his Bonner-Denning Letter coauthor, Dan Denning, reveal their new Trade of the Decade. Bill’s previous two trades of the decade combined would have seen a 500%+ return… versus just over 120% for the S&P 500.
If you’re already a Bonner-Denning Letter subscriber, look out for this important Bonner-Denning Letter update in your inbox today. If you’re not yet a subscriber, you can sign up here.
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