Why Did Reddit Trigger a GameStop Stock Surge?

[BWV]

And no decent hedge fund will accept someone who only is an accredited investor

 

[bhobba]

is it a good news letter

It is illegal to offer financial advice, at least here in Australia where I am, unless you are licenced so I will need to be carefull about what I say. I subscribe and it is the main tool for my investing strategy with the Donnelly Zone Charts:
https://investingtimes.com.au/wp-content/uploads/2015/04/The-Zone-System-research-paper.pdf

It contains other tools as well:
https://investingtimes.com.au/evidence-of-nine-investment-strategies/
But I only use the Zone system.

For example at the beginning of the pandemic about March the market was oversold which is a buy signal in my strategy. It is now close to being overvalued and, again in my strategy, that is a signal to sell or shift to defensive assets like a blue chip international bond fund. For small cap shares that I use it is way overvalued - buying a small cap ETF in March and selling now would would have given a cool 40% profit. It contains all sorts of other interesting information including the same charts for the US markets - which is at the moment moderately oversold so another strategy would be to switch out of an Australian small cap fund to a US ETF. It is basically a tool for dynamic asset allocation. A good book to use figuring out your strategy is:
https://www.amazon.com/dp/B005XM6NRY/?tag=pfamazon01-20

It provides a lot of information for many different strategies, you chose the one that suits your risk tolerance. This is for informational purposes only, and is not to be construed as financial advice.

Thanks
Bill

 

[Jarvis323]

Doesn't AI control most trading? This whole fiasco will probably end up being useful training data. The AI will just get better at shorting stocks and dodging redditors.

https://www.google.com/amp/s/www.fo...-long-and-short-consumer-stocks-using-ai/amp/

 

[Vanadium 50]

decent hedge fund

I am not sure such a thing exists. Are there more funds than can be explained by chance and survivor bias? It appears not? And becoming a rich hedge fund manager is not the same as becoming a rich(er) hedge fund client? The 2&20 fee structure guarantees it.

Put another way, for a hedge fund to match my yield (12.33%) it needs to return 17.4% just to take care of the fees. Bridgewater Pure Alpha doesn't come close, and the risk (for any hedge, not just this one) is much higher.

While it is possible that hedge funds might serve some people's financial needs, it's hard to see how they serve mine.

 

[BWV]

I am not sure such a thing exists. Are there more funds than can be explained by chance and survivor bias? It appears not? And becoming a rich hedge fund manager is not the same as becoming a rich(er) hedge fund client? The 2&20 fee structure guarantees it.

Put another way, for a hedge fund to match my yield (12.33%) it needs to return 17.4% just to take care of the fees. Bridgewater Pure Alpha doesn't come close, and the risk (for any hedge, not just this one) is much higher.

While it is possible that hedge funds might serve some people's financial needs, it's hard to see how they serve mine.

I don't disagree, but hedge funds were great before they got discovered by institutional investors in the early 2000s and money flowed in. Your 12.3% was thanks to a bull market, but there used to be fairly simple trading strategies, like merger or convert arb that put up net of fee returns like that every year with bond-like vol.

 

[bhobba]

For many, day trading and individual stock picking is gambling wrapped with a sense of financial responsibility marketed by big institutions.

Day trading - forget it - and that is from the experience of giving it a go. I used CFD's (evidently illegal in the US). Basically it was a slow way to losing your money. I did OK overall because just before I gave it away I had some short positions during a major market correction in I think 2007. I just let it run until I thought it had stabilised - that was a big profit that made up for my losses. I should have let it continue - it dropped a lot more in the following weeks.

Short/medium term trading is less gambling - some strategies like the Jim Berg strategy are OK. You can look him up on the internet if you want - for an overview see the following video: .

It actually does work - I just wasn't suited to actively managing it each day as was required. Do not get too carried away by the returns though - because stocks are rarely held more than a year you pay full tax - at least in Aus - keep over a year you pay half the tax - or simply buy and hold and you pay none. After tax returns were no better than long term trading/investing I eventually settled on. But if you want to trade full time then it is an option - just not one suited to me.

Long term investment/trading using funds and dynamic asset allocation was what worked best in my situation. In my dynamic allocation for tax reasons I rarely actually sell - just put in new money to the asset class most out of whack with what it should be. I do not know why but people seem to rarely take into account tax considerations in their investing/trading - but it is very important.

Thanks
Bill

 

[bhobba]

I am not sure such a thing exists.

Mathematician James Simons of Chern-Simons fame might disagree on that:
https://en.wikipedia.org/wiki/Renaissance_Technologies

But you or me making any use of it is so close to zero it's not worth even thinking about. The average hedge fund is IMHO useless, although some financial advisers recommend them as an anticorrelation asset in a diversified portfolio. Personally I want nothing to do with them.

Thanks
Bill

 

[Vanadium 50]

Mathematician James Simons of Chern-Simons fame might disagree on that

I'm sure he would. I expect he would agree with the comment that it's easier to make money running a hedge fund than investing in a hedge fund, although it might be impolitic to say so.

Long term, most hedge funds trail the market. Often by a lot. Most close after just a few years. The remainder can be explained by survivorship bias.

In this environment, the best one can hope for is "yes, most of these are turkeys, but this one is different. It's the real deal. It's the one that has found the magic formula to justify these fees." It might even be true, but how do you pick that one out among all the other ones that are saying exactly the same thing?

 

[BWV]

I'm sure he would. I expect he would agree with the comment that it's easier to make money running a hedge fund than investing in a hedge fund, although it might be impolitic to say so.

simons kicked out all his investors 20 years ago and the firm only manages employee’s money. Compounded at something like 60% net of trading costs and gross of fees since the 90s, by far the best investment record of anyone - but no other hedge funds come close, even competitors like DE Shaw who employ similar quant techniques

 

[russ_watters]

Whelp, it's 9am, the market is opening soon, and Robin Hood is letting redditors buy Stonks! again, so it could be another wild one.

 

[Astronuc]

Whelp, it's 9am, the market is opening soon, and Robin Hood is letting redditors buy Stonks! again, so it could be another wild one.

I watched a couple of minutes this morning right after the open.

GameStop Corp. GME 399.95 +206.35 +106.59%
                   410.96 +217.36 +112.27%
                   354.35 +160.75 +83.03%

I think trading halted for about 5 minutes, then it varied between 300 and 325. A lot of volatility.

 

[etotheipi]

 

[Vanadium 50]

OK, the last of the split messages:

There has been a suggestion that somehow short sales are, while legal, immoral. I'd like people who think this to expound on this.

Are other transactions betwen willing partners immoral? Why or why not?
If so, which ones? Put and call options?
Is one side of the transaction OK but the other not?
Is it OK for institutions to trade with each other but not individuals?

In short, I am very interested in why people think short sales are wrong, and how this might (or might not) be generalized.

 

[BWV]

OK, the last of the split messages:

There has been a suggestion that somehow short sales are, while legal, immoral. I'd like people who think this to expound on this.

Are other transactions betwen willing partners immoral? Why or why not?
If so, which ones? POut and call options?
Is one side of the transaction OK but the other not?
Is it OK for institutions to trade with each other but not individuals?

In short, I am very interested in why people think short sales are wrong, and how this might (or might not) be generalized.

Farmers have been short selling their crops since Hammurabi's day

 

[Vanadium 50]

Thales of Miletus invented options trading. When he wasn't inventing mathematics.

 

[gleem]

Just found this article reviewing the history of "WallStreetBets" on CNN Business as well as some of the reasons it has become so popular and why it is dangerous to participants.

 

[kyphysics]

Whelp, it's 9am, the market is opening soon, and Robin Hood is letting redditors buy Stonks! again, so it could be another wild one.

Still limited buys on GME, though.

I wonder what'd happen if they didn't have limits?

 

[kyphysics]

GME losses now ~$20 billion for hedge fund shorties and they are still not backing down:
https://www.cnbc.com/2021/01/29/gam...te-nearly-20-billion-in-losses-this-year.html

• Short-selling hedge funds have suffered a mark-to-market loss of $19.75 billion year to date in the brick-and-mortar video game retailer, according to data from S3 Partners.
• Still, short sellers mostly are holding onto their bearish positions or they are being replaced by new hedge funds willing to bet against the stock.

 

[Vanadium 50]

some strategies like the Jim Berg strategy are OK.

He appears to be an advocate of what is called "technical analysis", a school of thought that holds that one can forecast future prices from historical data, primarily price, but also volume and sometimes open options contracts. I think Wikipedia's statement is fair: "Whether technical analysis actually works is a matter of controversy."

Even granting that it works in all cases, it would fall into my "out-trade your partner" category. Surely JPMorgan Chase will be better at it than I am.

 

[kyphysics]

Question: Why aren't (or, are they?) the hedge fund clients exposed to these GME losses not just pulling their money out (or, can they?)?

How are these fund managers exposed able to continue to fight on (yes, I know Melvin was infused with capital from several other funds)? . . .Wouldn't this freak out all their clients?

 

[Klystron]

Here is a screenshot of GME prices over 5 days. Graph displays candlesticks and Bollinger bands.

Same price display for 1-day at 11:30 PST 29Jan2021. Churn and burn?

 

[bhobba]

He appears to be an advocate of what is called "technical analysis", a school of thought that holds that one can forecast future prices from historical data, primarily price, but also volume and sometimes open options contracts. I think Wikipedia's statement is fair: "Whether technical analysis actually works is a matter of controversy."

He sure does. All short-medium term traders do it and many combine it with fundamental analysis. His strategy is basically look for fundamentally sound stocks whose price is on the rise - a momentum strategy. Wait for a pullback, then for the pullback to show signs of ending, That is the buy point. Then put in a stop underneath it that you sell if it goes below that and a profit taker if it rises above it. I have back tested and live tested it years ago when I was into that sort of thing, and followed the example trades he puts in his newsletter. It does work - but is a pain to implement - nowhere near as easy as nearly set and forget long term investing, where you simply adjust your tactical allocation when you regularly add money to your portfolio. It produces reasonable profits, but is not tax effective. It is fine if you want to trade for a living, are able to spend the time, muck around with charting programs the night before and put your orders in when the market opens (no sleeping in). You have to live day to day off your profits. It's more like a job. If you like it - fine. If not you may as well do a job you like and long term invest. If retired you just want to enjoy your retirement. That's why I no longer even invest - I just can't be bothered - now is the time to relax and enjoy it. To be fair to invest doesn't actually take much work. From my pension I have about $1000 left over each month and could add that to an investment portfolio - but now I just keep it in the bank. I may take it up again one day. But all it will do is increase the money I have enough for my lifestyle anyway.

Thanks
Bill

 

[BWV]

Question: Why aren't (or, are they?) the hedge fund clients exposed to these GME losses not just pulling their money out (or, can they?)?

How are these fund managers exposed able to continue to fight on (yes, I know Melvin was infused with capital from several other funds)? . . .Wouldn't this freak out all their clients?

Hedge funds have limited liquidity - typically only quarterly withdrawals with 60 or 90 day prior notice. Losses like this typically force funds to shut down as investors put in withdrawal notices

 

[kyphysics]

Hedge funds have limited liquidity - typically only quarterly withdrawals with 60 or 90 day prior notice. Losses like this typically force funds to shut down as investors put in withdrawal notices

Thanks! Interesting to know.

Any idea if what I'm reading (unofficial sources...just Reddit, etc.) is true: that the shorts don't have a time-limit for when they have to be covered? Although, one person explained that there is a premium they have to bleed if they don't cover, so it's not possible to hold the shorts forever...

Wondering how this situation plays out with both WSBers and the hedge funds holding out against each other it seems.

 

[gleem]

Here is a take on the GameStop buying and the investment houses by a professional financial advisor and editor of the Bauman letter

 

[BWV]

Thanks! Interesting to know.

Any idea if what I'm reading (unofficial sources...just Reddit, etc.) is true: that the shorts don't have a time-limit for when they have to be covered? Although, one person explained that there is a premium they have to bleed if they don't cover, so it's not possible to hold the shorts forever...

Wondering how this situation plays out with both WSBers and the hedge funds holding out against each other it seems.

No time limit, but there are solvency issues - brokers will force a margin call if the assets in the fund are not sufficient to cover the short. Remember a short sale is a liability, so as the price of GME increases, the liability increases causing the equity value of the HF shorting the stock declines. Brokers set limits, typically 25% equity before they require a margin call. So a fund that took a tiny position in GME would be fine and would in theory never have to cover (as is anyone who was short the whole market). But a 5% initial short position after a 17x increase would be 85% of the fund (assuming no other price changes). For funds that had some leverage to begin with, this would be fatal - an 80% decline in value and (assuming the short proceeds were held in cash) a corresponding increase in leverage from 0 to 80%.

 

[Vanadium 50]

But the counterparty might not want a margin call now, knowing it will likely bankrupt the fund. They might want to wait until the prices have become more reasonable, leaving the fund solvent but owing them a lot of money.

If you owe the bank $5000, you have a problem. If you owe the bank $5,000,000, the bank has a problem.
-and-
I want my sheep shorn, not slaughtered.

 

[bhobba]

Just an interesting comment about investor psychology. Years ago now I read a book called the Little Book That Beats The Market that described a value based strategy of stock investing:
https://www.magicformulainvesting.com/Home/AboutTheBook

Value investing is one of the few strategies that there is evidence it can beat the market over the long term. It uses a formula to find such stocks that you can find in the book, but others that find value stocks also work, such as the p/e ratio. Anyway back testing showed it beat the market. Since the book was written they looked at how it performed - and it still worked. You may think - hang on - once people know it the efficient market hypothesis means it will stop working. But it still worked. Here is the suggested reason as to why. You only needed once a year to sell 20 stocks and buy 20 more - hardly much work. You say great - might give it a go myself. But interestingly what the author found is very very few people could stick to even such a simple strategy. They fretted and worried when the market went up and their stocks went down for example. Also there is administrative work associated with even such a simple strategy. He found only 3% of people could stick to it - most - including the author - wanted someone else to do it for them. And therein lies the big issue with investing - you can come up with a simple easy strategy like the book details - but motivating yourself to keep doing it over the long haul - which is the only way to make the big bucks by compound interest - is far from easy. After all most would rather spend money and have fun. It's like the experiments they did with I think it was jelly beans. Kids were given a bowl of jelly beans and told they would get twice as many if they refrained from eating any. Most could not resist. But those that did resist were found to do better in life. Delayed gratification seems a good predictor of success.

Thanks
Bill

 

[Mondayman]

I'm not knowledgeable about economics or stocks unfortunately. This event has me starting to research so I can understand better what's happening.

I'm curious how this plays out for Gamestop long term. I was an avid gamer, and I have a dozen or so friends who are hard core gamers. I can say without a doubt that in the last four years, not one of us has frequented a game store such as Gamestop or EB Games. The trend has entirely been towards online transactions for everything: games, additional content, Xbox live, etc. Even with people buying stocks or whatever, I don't see the business itself improving a whole lot.

 

[kyphysics]

Is there ANY way for the hedge funds with big GME short exposure to cover their shorts at a small enough price to live to see another day. They don't have much bargaining power, right?

WSB's Reddit posters are all coming out saying they're holding their shares and not selling. If enough people do this, is the end game ultimately the bankrupting of these funds?

 

[bhobba]

I don't see the business itself improving a whole lot.

Nor do I - that's why it was targeted for short selling. But there were enough people on forums such as Reddit that actually like going to the store. So they bought shares hoping to keep its stock price from falling too much and it going out of business. That sent the share price up - basic economics - demand goes up - so does price. Now to sell short what you do is borrow shares from somewhere like an institutional investor, sell it, and later buy it back at a cheaper price thus making a profit. But let's say you just decided to get into the short selling action on this stock. You would see the price rise making a loss so you buy it back. This in turn creates more demand, and combined with the Reddit guys also buying it, up goes the price even more. Then for some other short sellers they are making a loss so they have to buy. It creates a positive feedback loop if you understand a bit of engineering. Positive feedback loops can quickly cause large changes. Soon the share price has risen considerably leading to large losses from those that short sold the shares. It would have been even worse for those that when the price rose they did not sell straight away hoping it was just a temporary blip - its fundamentals were not sound would be their thinking. Or maybe it just happened so fast they could not get out quick enough. For those it could mean the loss of a fortune. And of course the Reddit guys that originally bought them would have seen large gains. Normally institutional investors like Hedge funds 'give the finger' to the ordinary investor. This was a case of the ordinary investor 'giving the finger' to financial institutions. And they did not like it one bit. Some of the comments I heard on the news were laughable. But really it's a case of you live by the sword, you die by the sword. Funny thing is once this settles down the stock price will start to fall because of less demand - and then it will be a good short selling opportunity. But do not get too greedy - or the same could happen to you.

Thanks
Bill

 

[bhobba]

WSB's Reddit posters are all coming out saying they're holding their shares and not selling. If enough people do this, is the end game ultimately the bankrupting of these funds?

I doubt the Reddit guys are the only owners of stock. But if they were then the short sellers will have to go to those that lent them the shares and say we will have to buy them from you instead - and the price they would want would be - how to express it - 'nasty'.

Thanks
Bill

 

[Mondayman]

This was a case of the ordinary investor 'giving the finger' to financial institutions.

This is all I need to hear. Nothing against money, I just generally feel the need to flip the bird to some of these useless fat cats.

 

[mfb]

It would have been even worse for those that when the price rose they did not sell straight away hoping it was just a temporary blip - its fundamentals were not sound would be their thinking. Or maybe it just happened so fast they could not get out quick enough.

You need to find people who sell it. If multiple/large short sellers need to buy it at the same time there might simply be not enough shares for all of them.

If you buy shares for X then X is everything you can ever lose. If you short them then X is everything you can ever gain (buy them back for nothing) - but you can lose a large multiple of X.

Multiple hedge funds say they covered all their shorts, but there are still many of them around. Some people will try to short it now, of course. We'll see if they can keep their positions.

 

[Vanadium 50]

Some people will try to short it now, of course.

Easier said than done.

The way one shorts a stock is that one borrows the stock, sells it, buys it back later (hoping it will cost less so they can pocket the difference) and returns it. What does this look like for the counterparty? They get the same gain that they would have had the stock stayed in their own account, plus a little extra for their trouble. That little extra compensates them for the risk of something called "failure to deliver" - essentially the person you loaned the stock to running off with it. Of course, eventually this gets sorted out, so more realistically, it means that the owner of the stock won't be able to get it back exactly when he or she wants to sell it. And even when things go right, contracts typically give the borrower three days to deliver.

The problem now is that the risk to the lender of GameStop stock is very high - with the market craziness, he may want to sell it Right This Minute, and further it is likely that the person he lends it to is doing his very first short sale, so the odds of something going wrong are even higher than usual. So the "little extra" does not compensate the lender for the additional risk, and that means it is currently very difficult to borrow shares of GME to short them.