Updated: Feb 5
Year-to-Date Strategy Stats as of today:
+4.30% : Turner Quant Advantage (TQA)
- 0.36% : Tactical Growth (TG)
+2.64% : Diversified Income (DIS)
- 1.45% : Leveraged Index (LI)
- 1.11% : S&P 500
I have been getting a lot of questions about what is going on with GameStop (GME), the "Little Guy", the hedge fund elitists, Robinhood, etc. There is a great article written about this by Allison Morrow. Here is the link: Confused about this GameStop saga?
Don't get me wrong... I appreciate all the hyperbolic discussions about the David and Goliath symbolism surrounding the GameStop saga. But, let me make sure you understand the facts:
GME is not the only ticker where there are huge numbers of short sellers. TSLA and AAPL have more short sellers than GME. Why does this matter?? I just want you to keep all this hyperbole surrounding GME in perspective. And while many people hate the concept of short selling, there is nothing inherently wrong or unethical in the process. Short sellers are simply speculating that the future share price will be lower than it is currently. Similarly, buyers of a stock are simply speculating that the future share price will be higher than it is currently. The big difference is, the short seller can lose far more than his/her investment; whereas, the buyer can only lose his/her entire investment.
What I don't like about the above, is the "pump-and-dump" aspect of what is going on right now. The Little Guys are pumping the share price of GME far above what I would consider representative of the actual value of the GameStop company. They are attempting to accomplish two objectives, as pointed out in the article referenced above: 1) Increase the price of the shares that they own for their own benefit; and, 2) Stick it to the short-selling sob hedge funds. And, I don't like the "dumper" part of the pump-and-dump strategy, either. I don't mind anyone shorting any stock, but I don't like it when these short sellers get free air time on the likes of CNBC to promote the concept that the company that they are shorting is going out of business... they (the 'dumpers') are doing nothing but talking their own book and trying to artificially drive share prices lower.
What's going on here isn't a lot different than what happened with the chat rooms in the late 90s. People pumped stocks, dot com stocks, for months. Remember the online broker ads of the young kids beating the market? No different here in the mentality. But, to a degree, I can see some logic in the Little Guy's thinking... The WallStreetBets people were super smart in identifying hedge funds (who thought they were bulletproof) that shorted more than 100% of the GME stock, which is probably illegal. This self-acclaimed army of Little Guys found the weak spot of the hedge funds and absolutely crushed them. It is truly genius. But, there is likely going to be a bad ending for the Little Guys. The Little Guys have artificially pumped the share price of GME to unsustainable levels and they seem to believe that by drinking their own Kool-Aid, this meteoric rise in share price will continue indefinitely, making them all rich and bankrupt the elitist hedge fund evil Darth Vaders.
Maybe... just maybe... GameStop is actually worth 1,000% more than it was a month ago. Count me dubious. Think about that last person who bought GME shares for $468 per share, or the ones who bought yesterday at $325 per share. What happens to their life's savings when GME drops to $100 per share and then $50 per share and then back to $17 per share? These poor folk will lose millions; perhaps billions of dollars, collectively. The ONLY way they can salvage their over exuberant buying is if for some reason, GME stock is actually worth 20 to 30 times what it was trading at just a month ago. Are GameStop stores popping up all over the country? Has the GameStop company announced block-buster earnings reports? Has it forecasted a 1,000% expect growth? Nope... GameStop shares are, in all likelihood, worth about $17 per share and I have no idea if it is a good short at $17 per share or not.
As much as it pains me to say this, the thousands of small ("Little Guy") investors who virally pumped GME stock up $1,000%, were ignorant in what they were likely creating... a massive collapse of their emotionally charged house of cards. This will be a hard, expensive lesson for many of them to learn. I am sure there were some smart investors in the group who jumped into the boom early and they made a killing at the expense of the thousands of Little Guys, but I'll bet those same investors are long gone by now, having sold their shares to the unwitting Little Guy buyer who was excited to pay $468 per share for a stock that is only worth $17 per share. Those thousands of investors who thought they were fighting the good fight, simply did not have a clue about what the final outcome would be. They were duped and they let greed and avarice overwhelm their common sense. I have listened to several high-profile political commentators and politicians (and you know who they are) extol the virtues of how the Little Guy has taught the elitist hedge fund billionaires a painful lesson. My advice to these high-profile political figures is, stay with what you know and do not try to explain something that you know little to nothing about.
I certainly do not care if the hedge funds lose their shirt by shorting a stock; that's the kind of risk they take all the time and they have to pay the consequences when their bet goes against them. Likewise, I know that some of the pumper Little Guy investors bet their entire life's savings on this very unwise trade and they will likely lose most, if not all of their money. That is what happens when you venture into something that you know very little about. This will cost them and it is a lesson, unfortunately, they need to learn... and they should NOT be bailed out, although I'll bet some in congress will try to bail the Little Guy out when this all come crashing down sooner than later.
It is not that I am heartless about this. But, they (the Little Guys) made a fatal mistake the moment that they thought by bankrupting the hedge fund elitists, they would not incur a huge risk in the process. They thought that by their actions, they would keep GME from going out of business. I'll bet some of these Little Guys, actually thought that their money would flow into GameStop when they bought GME shares; that's how little some of these investors know about about how the stock market works. In all likelihood, GameStop is the same today as it was a month ago; the new board notwithstanding. All the pumping-and-dumping of shares of GME stock had no effect on the business, other than give them a ton of free advertising... and with that, maybe their share price will only drop to $20 per share instead of $17. That would be great for everyone that owns shares at $17, but not so much for those who own shares at nearly $500.
Finally... take a look at this chart:
Any rudimentary analysis of GameStop would indicate that the probability that the GameStop company will be worth enough in the future to justify this pumped up price is very low. In other words, the risk seems unduly high to buy GME at these nosebleed levels... but, the Reddit group (the Little Guys) thinks otherwise. I hope they are right.
The market is overbought and a correction could be underway. Buying any stock when its share price has exponentially moved higher is simply taking on more risk than I would be willing to take.
Now... to the last point I want to make... There should not be any collusion between brokerage firms and hedge funds or institutional players. TD Ameritrade has told me on multiple occasions that they do not make better 'deals' with multi-billion dollar firms than they do with small firms and while I can't prove that is the case, I will believe them until their actions prove otherwise. I do not know anything, personally, about the RobinHood brokerage firm, but at the very least, it appears they have done a horrible job of public relations. TDA also stopped the buying of GME shares on Thursday, just like RobinHood, but TD attributed it to their technology group not being able to keep up with the demand. I tend to believe them after speaking with a number of the higher-level support staff. If, as time goes by, we find out that any of the brokerage firms have an incestuous relationship with large hedge funds where the hedge funds get to control the outcome of volatility and share price, heads should roll and people should go to jail. I still believe in the system and regulatory compliance/oversight, until I see otherwise.
Perhaps the Little Guys did us all a favor in making sure we are all on a level playing field; and if not, perpetuate the regulatory entities to make it a level playing field. But, in the end, I am afraid that it will be the Little Guys that lose the most; particularly those who bought into the hype at the top.