Gamestop: a dangerous game


The bubble hit a spectacular peak last week – but that’s okay, we’re just having fun, right?

Last week… in a bubble-like kind of climax… the price of a video game provider, GameStop, shot up to over $ 500.

That’s nearly 80 times more than its price at the same time last year… and more than 26 times its price at the start of the year.

All stock market veterans know that you are supposed to buy low in order to sell higher. But we are not in a market of “veterans”.

We are in a casino, where players bet against each other … all using chips provided by the Federal Reserve.

What took place in the markets last week was a game of high stakes poker, pitting those who bet GameStop stocks would fall – some hedge funds mostly – and those who bet they could jack up the share price.

Idiot and dummy

But maybe the readers need a little background … and so do we.

Today, almost everywhere, everything is fictitious and silly. There are no constellations for orientation… no fixed reference point… no magnetic north.

Counterfeit money has distorted everything – markets and politics alike.

Our readers, very wisely, are not interested in what happens to the day to day markets. It must be said that the markets have gone mad. They are supposed to find out what stocks are worth. Millions of meticulous investors, with sharp pencils and sharper minds, are expected to calculate expected income and relate it to “present value”, based on their calculations of risk and interest rates.

Unfortunately, pencils as well as minds have become blunt. Whatever criterion you choose – price / income comparison, sales, book value, GDP, electricity consumption, clicks, number of hairs on peacock caterpillars… whatever – stocks are overvalued.

It’s not hard to see why. Interest rates are bogus. And at negative real returns (allowing for price inflation), any stream of income turns into an Amazon river of liquidity and value.

Young traders can therefore think whatever they want. And by plugging into chat rooms like WallStreetBets, they can make it a sport.

Like a rocket

In this case, a pair of hedge funds saw that GameStop was overbought. Located in Grapevine, Texas, the company posted respectable sales of $ 5.2 billion in its last full fiscal year, ending October 31, 2020. But it lost $ 275 million over the same period.

A business that loses $ 275 million a year is not making money; it destroys some.

Despite this, at its peak, the company was valued as if it had discovered the Holy Grail. Or designed a pill for eternal youth. Or signed a contract to sell Donald Trump’s new autobiography, How I made America great again. LOL!

Obviously, this is not the case.

That’s the problem, as Matt Levine at Bloomberg points out. You don’t have to do all that math and research anymore. Just buy a business that has a “rocket” emoticon next to its name.

The rocket is all you need.

(Insiders must be selling their shares like burglars unloading the stolen money from the trunk of the car they used to escape.)

Earlier in the year, the hedge funds short-sold GameStop shares. In other words, they sold shares of the company they didn’t own… betting that the stock would be much cheaper when they had to run their bets.

It may be a rocket, they thought, but it will soon explode in midair and fall back to earth.

YOLO

On the other side, there were the “proto-momo” players (momentum). Every market has its buyers and sellers, winners and losers. The “momo” guys are setting the pace, in this case.

A video that went viral shed a little more light on the whole affair. In this video, the Joker, played by Joaquin Phoenix, explains to an interviewing reporter, played by Robert de Niro, that the baby boomers have basically destroyed the economy.

The millennials have no chance, says the Joker, of ever enjoying the financial success of their parents and grandparents. They might as well accept their alms – unemployment benefits or aid checks – and play dice.

In the case of GameStop, “momo” offenders expected to hit the jackpot through hype and sheer luck. Everything is climbing, right?

There was so much interest on the other side of short selling that they saw a chance to put pressure on the sellers. shorts, thus increasing the excitement, drama and profits.

If buyers could push the price up, sellers would be forced to “hedge” – buying the shares at a higher price… and therefore pushing the price even higher.

It turns out they pushed the price so high – with the help of these blankets – that the hedge funds had to abandon the land, leaving the corpses of their horses on the plain – with losses of 100%.

Between them, buyers and sellers, GameStop was the world’s most traded stock last week.

But all of this is just sane and futile play. YOLO – You Only Live Once, we only live once !

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