What is GameStop?
For those of you, like me, who never heard of them before this past week (okay, so my interests are a little more singular) GameStop is an American video game, consumer electronics, and gaming merchandise retailer. They are headquartered in Texas with some 5500 retail stores throughout the world. They, like so many other retailers, were hit hard by the pandemic and by customers favoring downloads over discs. So their stock prices were hurting and on December 31 they closed at $18.84/share after having sunk as low as $2.57/share over the last year.
So why has this fledgling company dominated the news this week?
On January 27 their stock closed at $348.58.
Yep, their stock shares spiked like a covid fever. Okay bad joke. But they do have a bunch of disorderly investors ( are these maskless Karen and Chad types?) on Reddit and other forums that fueled some fire.
Or was it market manipulation?
“It’s a story in which people from Main Street have reaped lottery wins at the expense of uber wealthy Wall Street hedge funds.”
My favorite tweet about this uproar was from my most-liked economist, former US secretary of labor, and brilliant Cal Berkeley professor of public policy, Robert Reich:
“So let me get this straight: Redditors rallying GameStop is market manipulation, but hedge fund billionaires shorting a stock is just an investment strategy?”
So what is the history behind the hoopla and the making of poor men into rich men and the making of rich men into less rich men?
And, why GameStop?
Enter Ryan Cohen. Last September, GameStop stock was hanging out under $5/share. But, Ryan Cohen, the founder of Chewy.com (I love Chewy, I order from Chewy) thought the company needed a boost. But this was not before he had been buying up shares of GameStop stock. Shares to the tune of 9 million.
“In August 2020, the 35 year old Cohen was forced to make an SEC filing. He was forced to do so because he had been acquiring shares in the mall video game retailer GameStop and his position had gotten so large, it triggered a required SEC disclosure. The size of his position? 9 million shares.”
The internet caught wind.
“The genesis of this sudden surge has been traced to Ryan Cohen – the founder of the online pet food giant Chewy – who took a 13 per cent stake in the retailer in September and started pushing for it to become a specialist online retailer of games and gaming products.”
The Fever Spikes
He is also one of GameStops newest board members. And that is what spiked the fever.
“The rally in GameStop was initially triggered on Jan. 11, when news broke that activist investor and Chewy co-founder and former CEO Ryan Cohen is joining GameStop’s board. The stock jumped on the announcement on hopes Cohen would drive a change in strategy.”
Yet, it started before Cohen’s joining the board. He was working on the GameStop facelift before the new year.
“He took an activist approach to his investment; last November he sent a letter to the board urging it to move faster on a turnaround, and on Jan. 11 he and two of his Chewy colleagues joined the board themselves. This was arguably—some redditors argued it—a fundamental catalyst for GameStop’s recent move; optimism that Cohen can turn GameStop around is part of what drove the stock price up.”
All the lovelies on Reddit and other forums who were in Ryan Cohen’s court and rallying behind GameStop were buying shares of stock, which drove the price up.
“Millions of retail investors (average Joe’s) mainly driven by a Reddit stock trading forum (r/wallstreetbets) thought that GameStop Stock would go up and started buying stock.”
This was contrary to what Wall Street hedge funds thought of GameStop. They thought the price would go down and bet that way. And so in a turn of events the poor got rich and the rich got played.
“Normal people started to assume that Gamestop stock would increase and started buying stock. So many people did this that the price of the stock went so high that at least one of the hedge funds betting against GameStop lost billions of dollars.”
“It all started with Wall Street hedge funds betting that GameStop stock would go down.”
“GameStop continued to rocket higher as retail traders showed no signs of letting up. Amid the massive squeezes, Melvin Capital closed out its short position in GameStop on Tuesday afternoon after taking a huge loss, the hedge fund’s manager told CNBC’s Andrew Ross Sorkin. Short seller Andrew Left of Citron Research said Wednesday he has covered the majority of his short position in GameStop at a loss.”
Does this brouhaha matter?
It seems to matter because Congress is paying attention. And it seems like both sides of the aisle are coming up for air long enough from their insurrection tit-for-tat to realize that the big boys (hmm – the big boys fund both sides of the aisle -don’t they?) got played by pedestrians on Reddit.
“The Senate Committee on Banking will hold a hearing “on the current state of the stock market,” after Reddit’s GameStop squeeze ignited a fiery debate that pitted retail investors against hedge funds.”
This uprising by Reddit users is a reckoning, the “me too” movement of financial hopefuls, dreamers, wannabees, who jumped over the great divide and landed in the land of gold by sheer numbers and collaboration.
One Republican, Josh Holmes, the former chief of staff to former Senate Majority Leader Mitch McConnell, R-Ky put it this way on Twitter:
“Wall Street, welcome to our world.”
The world he was talking about was MAGA. That populist insurrectionist mess that almost toppled democracy and may still.
“There are scores of similarities between former President Donald Trump’s “Make America Great Again” movement and the GameStop surge. There is a sense of fighting back against disrespect of the elites, belief that systemic rules have been written to benefit insiders at the expense of regular people, and new internet technologies that widely distribute power that was once held exclusively by a small group.”
“This is an event,” he explained. “This is a social and economic moment in our society. There are a few times when you can definitely point to a moment and say society has changed, and this is one of them.”
And in many ways he is right. But the point he is making is that the reckoning is what Robert Reich was alluding to: that at some point the tables turn and the tables turn onto themselves.
The Democrats articulate it differently, though concerned nonetheless:
Senator Sherrod Brown the incoming committee chair on the Senate Committee on Banking put it this way:
“American workers have known for years the Wall Street system is broken – they’ve been paying the price,” Sen. Sherrod Brown, the incoming committee chairman wrote in a statement. “It’s time for the SEC and Congress to make the economy work for everyone not just Wall Street.”
“In the House, Rep. Maxine Waters, who chairs the House Financial Services Committee, said she also intended to hold a hearing. “As a first step in reining in these abusive practices, I will convene a hearing to examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors,” she said in a statement.”
The matter is, and why Congress took notice, is because the online trading platform RobinHood where a good portion of the Reddit users were trading GameStop stock was hit with a class action lawsuit on Thursday after RobinHood restricted GameStop trading. RobinHood got scared.
“Separately, Fox Business reported that Robinhood was anticipating an SEC investigation that “involves market manipulation.” “The SEC somehow goes and looks at the Reddit boards and tries to figure out who’s hyping what, who’s touting what, and maybe sort of link it with trades,” Fox Business’ Charlie Gasparino said, citing “regulatory sources.” “
The Moral
Oops. Taking from the rich and giving to the poor isn’t what it used to be. Just kidding.
But a hedge fund handles a major percentage of Robinhood’s accounts. Oops, again.
“A hedgefund handles 60% of Robinhood’s accounts, and they make money if those stock prices stay low. That’s “shorting a stock.”
It does seem like something foul is going on. The proletariat class has been blocked from buying GameStop from a number of brokerage firms. I guess sharing is not caring in the brokerage world.
“Robinhood still is not allowing people to buy it. Many other brokerage firms that provide service to retail investors are also not allowing Average Joe’s to buy the stock – including TD Ameritrade and Charles Schwab.”
But if there is a silver lining in all this then the Flocks of Reddit and the Wolves of Wall Street have finally brought Democrats and Republicans to agree on something. And if that ain’t something for the good of the country I don’t know what is.
“Politicians and ordinary people on all sides of the political spectrum notice that something isn’t right here. Average entrepreneurial Americans who wanted to make some money in the stock market are being manipulated by the big institutions.”
Sharing is caring and it’s nice to know that stock market investment caring can extend to Regular Joes.
Author: Sherri Margolin (Dark Matters)
Disclaimer: Absolutely nothing you read in here should be taken as investment advice. The discussion of securities and ideas is never to be considered a recommendation to buy or sell any. Always do your own due diligence.