GameStopStop

 

The daftest non-story that appears to be causing consternation with a larger number of people than is actually warranted is the nonsense about GameStop and the 'shareholder revolution' that is a real storm in a teacup and a huge non=story right the way up to the point the SEC manage to get their nose stuck in and then it turns from a non-story into a pro-Trump, pro-smallpeople, anti-establishment story.

I suspect that 90% of people have no idea what the story is, why (or if) it matters etc etc.

If anybody wanted to understand what's going on then they would have to have an understanding of how stock markets work, why they matter, what hedge funds are, what daytrading is, what reddit is etc etc etc.

Far being it from me to start educating anybody about any of these trifling matters. Not least as I'm one of those 'lucky' individuals that have spent more time than feels healthy without a good shower and dose of antibiotics talking with, dealing with and shaking hands with those anonymous fund managers in those glass towers in the city of London.

In short, no pun intended but you need to be in the know to...er...know! A failing bricks and mortar business in the US that is not like Blockbuster but close enough to draw an equivalence with something that people have actually heard of, is failing... coz it's a bricks and mortar company, in a digital business, in a digital world. 

It really does not take a rocket scientist, although there area surprising number of rocket scientists working in financial companies, to spot that this business has a higher than likely chance of not being around for very much longer. Certainly when the stated business plans look weak, the covid epidemic is ravaging the mall businesses and competitors are shredding any margins they might make in the games they sell.

That's where hedge funds pop up!

The hedge funds, organisations of which I have no particular love, take several forms and do various things, many of which cause headaches when markets take sudden right turns! In this particular case, a hedge fund made a bet that GameStop was going to fail. Oh stop, you're kidding, given everything that I have said, you think this business is going to fail, oh reallllllyyyyyyy! So much for the rocket scientist that spotted this one.

But a hedge fund makes money not by spotting it but by doing something about it. Without delving into the technicalities. A hedge fund typically, having spotted this opportunity, borrows shares in the company! Yep, it borrows shares. In truth, it rents them. Because firstly it has to return the shares it borrows in the same condition it took them and second it has to pay a rental fee for the use of the shares.

Anyway. It borrows them in a practice called shorting whereby it borrows them at market price (which does not change as no share transactions have occurred) and then sells them! Erm, confused, don't be. You see at the end of the rental period the hedge fund has to buy the shares back and return them, plus rental charge, to the owner. So for thr hedge fund to make money, again, no rocket science here, the share value must fall between the hedge fund selling and buying back the shares. 

If the share does not fall, the hedge fund loses money. Personally, I really don't care as hedge funds tend to be financed by the very very very wealthiest in society looking to make even more money that they'll never spend. So, don't care! Well, don't care unless the pension fund I happen to be responsible for has done a deal with this particular devil! Then I care quite a lot. But moving on...

The hedge fund does not just leave this to chance or even market sentiment. Sometimes, as in this case, the hedge fund will publish their rationale for why the company will fail and therefore why the share price will fall, collapse or even stop trading. Oh, but why would they do that, duh, it's kinda reverse marketing. They point out what should be obvious but somehow seems to have escaped the attention of others making the market in a bid to force sales of the shares therefore forcing down the price of the share they are shorting!

Hopefully that makes sense. In short by telling people this looks like a pile of crap, smells like a pile of crap and maybe even tastes like a pile of crap then everybody suddenly takes note and realises this is a pile of crap and everybody starts selling before their neighbour does.

In this case. Some smartass on a social media channel decided that this was not right and that GameStop was a decent company and that hedge funds are bad people not far off being vultures gnawing at the still living corpse of hard working business people. I don't go quite that far. Hedge funds are vultures but GameStop. with ot's current business plan, is as likely to make a comeback as Elvis Presley!

Anyway. With some clever 'rise up against the establishment' viral posts this one individual managed to encourage a considerable number of others to fight back against the hedge funds by buying shares in the company. The shares are limited edition prints and the more people want them the higher the price goes. That's what happend. 

The share price that was supposed to go lower, went stratospherically higher and the hedge fund, like a boxer fighting Tyson and finding half his ear missing, had to retire from the fight with losses that leave most small countries crying!

So far, so good, so far, I could not give a flying f.... That, for better or worse, is how are modern markets work and I'm relatively happy with the setup but have qualms about wealth distribution in many other ways.

Where does that leave us. An artificially high valuation on a company. A hedge fund in tatters, a few very very very wealthy people a tiny little less wealthy and a company called GameStop!

After all this and with such an incredible valuation all must be rosy for GameStop and it's employees and owners and customers. Hmmm, well, if the company and/or directors/owners still had a large number of its own shares then it potentially could sell these and fund a transition of the business so that it might survive as an online business or some other initiative. 

But there is no sign of this being the case. In fact there is signs that some of the owners/directors have taking the opportunity of a large unexpected windfall to sell what holdings they had to the stampede of day traders buying shares because Mr Numbnutts told them to and thus suddenly finding they can get the retirement villa in Florida that they really dreamed of.

Meanwhile, in lalaland. The US government noted the situation. It tends not to be a good thing for someone when the US Government starts noting things. It was not in this case. The day trader portal mainly behind the surge in small shareholders purchasing of shares and options (lets not look under that rock today) started to limit or stop any further purchases in GameStop (and the handful of other shares being targeted in the same manner). That's where anti-establishmnetarianism sticks its ugly head into the mix!

Why should the share dealing platform determining that trading should be limited or stopped in this share. Hmmm, because somebody suggested if it did not then perhaps it should be investigated as a financial services business with lots of emphasis on investigated! It, and a number of similar businesses, succumbed to pressure and limited or stopped transactions in these shares.

Suddenly, the efficient market (which was never efficient but lets not go there) was no longer efficient as the small trader was being stopped from trading because it hurt the feelings of the established major traders (those being the major traders that were largely responsible for the catastrophe of 2008/10).

And then, the share price of GameStop started to collapse like a, well, like a balloon that's just caught the attention of a curious kitten!

Ironically if the hedge fund had borrowed and sold at the days starting price and bought back at the end of trading they would be soooooo much richer than they are today. But they didn't so tough!

That just leaves the day traders. Their options to buy will be limited but they can still sell and sell they should. As with all things, there will be some that make a lot of money and some that will lose a lot of money and a large number that are roughly square apart from dealing costs. Again, I don't care, that's trading for you and 90% of day traders don't make money and some jump from bridges because of poor decisions, I'm sorry for anybody that ever gets to that point but they are the equivalent of a casino gambler that takes the deeds of the house into the casino knowing the outcome.

None of this is worthy of a headline but it has gotten plenty of them. The SEC and Government interfering IS worth a headline and should get plenty of them because this plays into the Trump mantra of swamps, government interference, the little man being disadvantaged etc And even if Trump and his cronies have said nothing much yet, they will.

Of course that is yet another irony, because members of Trump's own family are heavily involved in hedge funds, in trading, in Wall street so it's not like they're really on the side of the ordinary man on the sidewalk, but then they never have been.

In a few days time none of this will be remembered. The GameStop share price will be back to where it was, or lower as the hedge fund predicted. The online community will have returned to dreaming about being able to afford one whole bitcoin (they just need to wait, they will one day) and the hedge fund will have invested against some other poor unsuspecting (but doomed and badly run) quoted/listed company.