GameStop Explained – What happens next?

So I had an article on CDL prepared for this weekend. Research on the Sincere saga all done and dusted.

But come on – who am I kidding.

There’s really only 1 story I can write about this week.

And that’s GameStop.

This short squeeze turned class war has captured the hearts and minds of investors the world over – including this humble horse.

Timeline

We covered the timeline for GameStop in the midweek article, so do check it out for fuller details.

Latest summary below:

2019 – Reddit User DFV (name not safe to print) buys $50,000 in GameStop call options on a fundamentals-based analysis. He shares his story in Reddit thread WallStreetBets (r/wsb), which will become ground zero in the war to come.

2020 – Short sellers attack GameStop throughout 2020. In 2020, shorts largely succeed because of (1) COVID-19 deterring visits to the physical store, and (2) video game purchases moving online. As at Dec 2020, short volume is a whopping 139% of shares outstanding.

Friday, 22 Jan 2021 – Citron Research releases a livestream on Twitter of his short thesis against GameStop. The backlash from the online crowd is tremendous, and he eventually cancels the live stream.

Friday, 22 Jan 2021 – People start buying shares in GameStop, in bulk. Because this is a small cap, low liquidity stock, with high short volume, once prices start going up, it becomes a rocket. 

Monday, 25 Jan 2021 – Melvin Capital, which held a big short position in GameStop, is down by $3 billion (out of a $12 billion portfolio). Steve Cohen’s Point 72 and Ken Griffin’s Citadel invest $2.75 billion to recapitalize Melvin. This only infuriates the mob even more, leading to more frenzied buying.

Tuesday, 27 Jan 2021 – Chamath and Elon Musk both tweet about GameStop, driving the frenzy even higher.

Wednesday, 28 Jan 2021 – CNBC discloses that Melvin Capital has closed off its short position. However, outstanding short volume remains stubbornly high, and trading volume indicates this may not be true.

Thursday, 29 Jan 2021 – A number of big US brokers (including Robin Hood and Interactive Brokers) no longer allow purchases of GameStop. Only selling is allowed. There are reports of forced sales for investors holding GameStop. This causes a plunge in prices from 460s to 120s.

Thursday, 29 Jan 2021 – The backlash against RobinHood is unbelievable. The App is flooded with one star reviews and threats to pull funds. Even Senators are calling for an investigation into the company. The CEO does an interview with CNBC to explain in what is probably the worst performance from a CEO ever (watch it here).

Thursday, 29 Jan 2021 – RobinHood relents. It explains that the restriction in trading is due to liquidity requirements. When the volatility of stocks goes too high, it needs to hold more capital as a buffer. It draws down hundreds of millions from its loan facilities to prepare for Friday trading. It announces that it will re-allow purchases of GameStop, but each investor can only hold 5 shares max (including what they already own).

Friday, 30 Jan 2021 – Citron Research announces that he is quitting the short business after 20 years.

Friday, 30 Jan 2021 – Share prices rocket back up. However, it’s a remarkably quiet day in terms of trading, volatility, and liquidity. By end of the day, RobinHood customer are limited to 1 share of GameStop each. There is now a whole list of stocks that RobinHood only allows you to buy one of.

Friday, 30 Jan 2021 – Remember the original Reddit user DFV, who put $50,000 on GameStop in 2019? It’s now worth $46 million:

The 5 day chart of GameStop:

The 3 month chart of GameStop:

What started out as a short squeeze, has evolved into something bigger…

A lot of people in the mainstream media are painting this as a retail frenzy, a sign of froth.

They talk about valuations, fundamental analysis, how this will end in tears etc.

That’s completely missing the point here.

I highly encourage you to adopt an open mind, go into the reddit thread WallStreeBets (r/wsb) where this all started, and decide for yourself.

The below is just one example, and there are thousands more of such stories. People are sharing stories of how ’08 crushed them, and how it took years for them to recover financially. For some, their parents never recovered.

There’s a lot of deep underlying emotion here.

Yes it started as a bunch of nerds on an online forum trying to make some money.

But all revolutions start from the simplest things.

An African American lady who wanted a seat on the bus after a long day of work kickstarted the civil rights movement.

A bunch of guys throwing tea into the Boston Harbour kickstarted the American revolution that resulted in American independence from the British.

A Tunisian street vendor setting himself on fire kickstarted the Tunisian revolution and resulted in the Arab Spring.

Big things, have small beginnings.

Lots of Dirty Tricks…

In our mid-week post, we said that the shorts would pull all kinds of dirty tricks.

And I think we’ve seen exactly that.

We’ve seen:

• Possibly untrue statements of Melvin Capital closing off its shorts being run on mainstream media
• Major brokers limiting purchases of stocks at crucial timings
• Lots of rigged sales both during and after trading hours to manipulate prices down (including possible short ladder attacks)

Oh and Chamath had a great interview with CNBC, eloquently summing up why mainstream media was completely wrong – only a shortened version is available online now (Update: A reader shared a link to the full interview – available here – may get taken down anytime).

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What happens next to GameStop?

Latest numbers from S3 capital:

• Short interest is now $11.20 billion;
• 57.83M shares shorted;
• 113.31% SI % Float;
• 53.12% S3 SI % of float which includes the “synthetic longs” created by short selling in the calculation.

The data doesn’t tell us who is short, so we don’t know if the big boys like Melvin Capital are still in it. It’s possible they’ve closed their shorts, and these are new shorts who came in along the way.

Whatever the case, with so many shorts outstanding, the epic battle continues.

Possibilities are:

• Shorts win 
• Longs win, shorts are forced to cover
• Price trades sideways

Shorts win 

If the shorts win in this battle, the price collapses, and the shorts make off like bandits.

The longs will suffer big losses.

There are many tricks the shorts can pull to manipulate the prices down, as we’ve seen the past week.

Longs win, shorts are forced to cover

If the price keeps going up, the shorts will continue to bleed cash.

Remember, the loss is theoretically unlimited for shorts, and there is no expiry. The only way out is to cover by buying the share.

But with short volume so high, if everyone starts covering, it could spark off a massive short squeeze.

Which btw – is what people are counting on right now. Same thing as Volkswagen in 2008, where the shorts lost $30 billion.

Price trades sideways

In this scenario, buying and selling pressure balances out, and the price trades sideways.

I think this is the least probably outcome here.

Which do I think happens?

I genuinely think there’s too little information here to make a call.

We don’t know who are the shorts still in it (and at what price), we don’t know what other tricks we’re going to see next week, and we don’t know how many shares retail investors hold collectively (and how many will sell).

It’s important to know your limits when it comes to forecasting, and with the information at hand, there’s really no way to call conclusively how this is going to play out.

So buckle up, it’s going to be one hell of a ride.

Full disclosure – My money (and my heart) is with the small guys though, and I have a small long position. It’s mainly just for the laughs, to support the revolution of our times. It’s money that I am comfortable losing entirely, so please DO NOT take this as financial advice.

What happens next to the market?

And of course, the big question on everyone’s mind is – What is the next GameStop?

The counters being targeting by the online mob now include: GME, BBBY, AMC, BB, NOK, SLV etc. Most of these have had big rallies the past week.

But realistically, I don’t think this trend of buying heavily shorted stocks will last, now that it has global attention.

If I were a big hedge fund with large short positions, you bet that I’m closing off a bulk of those positions immediately. If I haven’t already.

So the shorts will cover, and this may no longer be viable going forward.

In any case, here is the list of most shorted stocks, pulled from Bloomberg on 28 Jan (Credit: InvestQuest). In case you want some ideas on what’s the next GameStop.

Which Broker to use to buy GameStop?

PSA: For those looking to buy into GME, avoid the US brokers!

IBKR banned purchases on Thurs (then required 100% margin for longs).

Lots of stories of forced sales too. Same for TD Ameritrade, Robin Hood etc. Tiger Brokers is affected too because they use IBKR backend.

If you use US brokers, you’re exposing yourself to this risk going forward.

Use the non-US brokers (Saxo, SCB, FSMOne, UOB, DBS etc). 

Referral link for Saxo below if you need (email to [email protected] for the full steps regarding the bonus). 

https://www.home.saxo/en-sg/products?cmpid=af_FH

3 Takeaways – What happens next to the world?

The world is one now

It’s become increasingly obvious, but I think GameStop has really demonstrated this.

The world functions as one now.

With internet, information transfers around the world instantly, 24/7. What happens in US last night affects Asia the next morning.

What started on an online forum in the US has resulted in investors from Brazil to UK to New Zealand to Singapore piling in to support the cause.

For the first time in human history, the human race now functions as one.

Decentralisation is the future

The Trump saga, and now the GameStop saga, has illustrated the fundamental pitfalls of relying on a centralized platform.

Things like Facebook, Twitter, Stock Exchanges etc are centralized platforms. If some guy at Twitter decides he wants you out, you’re out.

Things like Bitcoin and blockchain networks are decentralized platforms. No one player has control over the network.

Decentralization is hardcoded into the platform. Want to change how the system works – you need to get a majority of the network’s computing power to agree.

And after the past month, it’s become increasingly clear that a global world needs a decentralized platform.

No one actor can have that kind of absolute control – and decentralized crypto protocols offer the perfect tech-based solution on which to build the new world.

The 2010s was about centralized, app-based solutions. It gave rise to the FAANG.

My suspicion is that the 2020s will be about decentralized crypto protocols.

Underlying inequality is very high

There’s a lot of underlying discontent ever since 2008.

Wall Street got bailed out, while working families were made to suffer.

And 13 years of low interest rates has resulted in the rich getting obscenely rich, while the poor have to work even harder to make ends meet.

With the 2020 COVID crisis and responses from the Feds and global governments (0% interest rates, infinite QE), it’s clear that none of that will change short term.

These are all things we’ve talked about on Financial Horse for a long time now.

And when underlying tensions are this high, all it takes is a spark to set it off.

Don’t know how it ends, but the lessons from history are clear.

Whenever inequality in society gets too high, and people feel that the system isn’t working for them, there are only 2 possible outcomes.

Either (1) the system solves the inequality using internal mechanisms, or (2) the people change the system to solve the inequality.

I don’t think we’re at that point just yet, but Trump, Brexit, yellow vests, GameStop, these are all symptoms of the underlying problem. If the problem isn’t solved – expect more GameStops.

Closing Thoughts: Has GameStop broken the financial plumbing?

One last thought to add.

Conspiracy theories aside, there is a real reason why RobinHood needs to restrict trading in highly volatile stocks. And that’s because as volatility goes up, the clearing houses will demand that brokers like RobinHood cough up more cash as collateral.

And when every retail investor out there starts buying GameStop at the same time, this cash crunch can really add up for RobinHood.

Which is why we see them drawing down hundreds of millions on their credit lines, and restricting to 1 share per user intraday yesterday. It might really be to solve their liquidity constraints.

Interestingly, we’re also seeing broader market weakness as GameStop plays out, which could indicate that other market players are also liquidating positions to free up cash. S&P500 was down 2% yesterday, and VIX (volatility index) is up 9.5%.

Remains to be seen the full consequences of this – but definitely something to monitor next week.

If the market breaks because a bunch of guys on an online forum are buying a Games stocks, then well… that just sums up 2021 for you.

Love to hear your thoughts!

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As always, this article is written on 30 Jan 2021 and will not be updated going forward. Latest thoughts (and my stock watch and personal portfolio) are available on Patron.

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