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Market Update 02.01.2021

Market Update 02.01.2021

February 01, 2021
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Today is February 1, 2021 and it is 6am.

GameStop

I have received several calls in the past week asking me about the recent events surrounding the run up in certain heavily shorted stocks like GameStop, AMC and Nokia. I want to give everyone my guess as to what has happened and is currently happening as I type this.

The trading platform Robinhood has been touted as a state-of-the-art financial technology platform enabling the “little guys” to transact on an equal footing as the “big guys” on Wall street. A pseudo democratization of trading for everyday investors. Thus, the name Robinhood. Their TV advertisements promote this notion heavily along with a gamification like interface that encourages no cost active trading. The target audience is clearly the tech savvy millennial that may well be now working from home due to Covid or for that matter, out of work living at home attempting to make a living trading in the market. In some respects, it reminds me of all the people that in 1999 were quitting their day jobs to become day traders during the momentum market of 1999 which had very little basis in fundamental realities. And for those of us that lived through 1999 we all know it ended badly for virtually all those converted day traders.

So, the story being perpetuated is that like-minded online communities (little guys) like Reddit or Wall Street Bets come along and decide they believe there are many heavily shorted companies in the market that have been over sold to the downside by greedy hedge funds (big guys) unfairly profiting off of their ability to massively short these companies through the use of tremendous leverage (Big guys with a seemingly endless amount of low cost money). These like-minded little guy traders seemingly decide to cooperate using Robinhood’s platform to begin massively buying these heavily shorted companies thereby creating a short squeeze of the greedy hedge funders that shorted these companies. These stocks start to rally in some cases 200% in a day. For once the little guy seems to be winning! This action continues to the point that these seemingly worthless companies are now trading in some cases at $400 a share. The ultimate revenge of the little guys vs the big guys.

Suddenly word now develops that some of these greedy massively short hedge funds are on the verge of insolvency. Before you know it, Robinhood stops the little guys from buying any of these heavily shorted positions thereby enabling the hedge funds on the short side to regroup. Robinhood will only allow selling of these shares and no buying for the little guys. This action virtually guarantees that these positions will slowly decline as there will only be selling pressure and no buying pressure to offset.

Now the little guys are crying foul believing they have been duped. This new generation of trader has learned an age-old truth the hard way. That truth is that the big guys always play by a different set of rules. In other words, when things get dicey for the big guys, rules are thrown out the window or changed, whether it was the rescue of Long Term Capital (1998) or the saving of certain financial institutions in 2007 at the expense of other financial institutions or the bailout of grossly mismanaged companies like GM or Chrysler 2008 while letting other smaller companies flounder and fail.

Now, I have a little different take on what really happened here. I am not convinced that the little guys were actually the real driving force behind the rocket rally of these heavily shorted stocks. In fact, my guess is that it was not little guys generating the millions and millions of shares traded in these names on a daily basis through Robinhood but rather possibly a competing set of hedge funds or financial institutions taking the opposite side of the trade. When $64 Billion of notional value is traded in GameStop in one day, I find it very curious that “little guys” could generate this type of market action. My guess is that this was a concerted effort by either larger hedge funds or larger financial institutions to squeeze competing hedge funds or competing financial institutions. So, while the media promotes the David vs Goliath storyline to attract eyeballs and sell advertising, I think the reality is more like Goliath vs Godzilla storyline (Hedge Fund vs Bigger Hedge Fund) which just doesn’t have the emotional appeal of the “little guys” vs “fat cat wall street big guys”.

So, my message is a simple one when it comes to speculating in companies that have negative earnings.  Buyer Beware.