Apologies in advance for the length of the GameStop/Robinhood situation. The goal of this blog is to give a synopsis of the “goings on” in the world. This, however, was unavoidable, as it is one of the most fascinating things to watch and I am just a nerd at heart so, I couldn’t resist. This for me IS the pared down version of events. Hopefully, it’s easy to understand. Enjoy!
Let’s Take the Ride
The GameStop saga is a ludicrous stock mania born of pandemic boredom and FOMO, piggybacking off of a clever Reddit revenge plot, which targeted hedge funds, who made a reckless bet on a struggling retailer—and it’s going to end with lots of people losing incredible amounts of money.Derek Thompson
That is how, Derek Thompson, writing for The Atlantic summarized it in one sentence. So what happened? A few weeks ago, GameStop (GME) was trading as low as $20/share and that rose to over $400 in a few days. How did that happen? First, it is important to note, that at the heart of this, GameStop is a failing brick-and-mortar company. Even before the pandemic, GameStop lost $500 million in 2019 and its stores were mostly closed in 2020 due to COVID-19. Because of this, institutional investors and hedge funds were shorting the stock. That means they were betting the stock price would continue to fall.
Quick Short Sale Explanation: A short sale is when an investor/short seller borrows a stock, sells the stock, and then buys the stock back to return it to the lender. If the stock price drops after selling, the short seller buys it back at a lower price and returns it to the lender. The difference between the sell price and the buyback price is the profit. Here’s an example, if an investor thinks Apple is overvalued at $100/share (meaning they think it should be and will go down to $90 share) they can borrow some shares and sell them at the market price of $100. So, the investor borrows 10 shares and sells them at market price collecting $1,000. When the price drops to $90/share, the investor buy 10 shares for $900, gives them back to the lender and keeps the $100 difference. (their pot of $1000-$900 repurchased shares). If the price goes up to $110/share, the investor buys 10 shares for $1100 and returns them to the lender; losing $100. ($100 more than their $1000 pot). Why sell it at the $1100 if you know you’ll lose? 2 reasons: 1. These contracts have time limits and expiration dates where you have to return the shares regardless of the price. 2. If a stock is rising, it could continue to rise, in which case the amount of money you could lose is essentially limitless.
Back to GameStop: The hedge funds were shorting GameStop big time. By one metric, it was the second-most-shorted company listed in the NYSE and Nasdaq. This is because the stock has been literally falling for years and hedge funds were making billions betting against it. Some day trading investors in an online Reddit group, Wall Street Bets, say they were tired of the hedge funds shorting the stock, so they hatched a plan of revenge. If we buy up the stock it will raise the price and the big guys will lose. Simple right? That’s what a lot of readers of the message thought too, so they all started buying, and buying, and buying. Thus, the stock price rose a lot and very quickly.
Thus, when the stock rose, this forced the hedge funds to repurchase shares to avoid losing more money. Despite this, many of them lost millions. By Wednesday investors shorting the position had lost $23.6 billion in total. Revenge, here was very green. Also, the initial buyers who bought Gamestop when it was cheap were able to sell it and make millions.
But wait there’s more: Thursday, Robinhood (where 50% of the GME stock buyers are), Webull and a few other brokers suspended trading of GameStop. Speculation and outrage as to why this happened started immediately. Some saying the clearing firms who process securities, mandated it.
This partial shutdown of trading sparked comments from the political right and left And in one of the craziest moments of this entire thing : AOC (Rep. Alexandria Ocasio-Cortez, D-NY), Sen. Ted Cruz (R-TX), and Donald Trump Jr. (Son of a madman with the same name) were all in agreement that the suspension of trading was wrong. To which AOC responded in a series of Tweets:
“I am happy to work with Republicans on this issue where there’s common ground, but you almost had me murdered 3 weeks ago so you can sit this one out”
“Happy to work w/ almost any other GOP that aren’t trying to get me killed. In the meantime if you want to help, you can resign.”
“You haven’t even apologized for the serious physical + mental harm you contributed to from Capitol Police & custodial workers to your own fellow members of Congress. In the meantime, you can get off my timeline & stop clout-chasing. Thanks.”Alexandria Ocasio-Cortez @AOC
Ok back to Robinhood: Thursday night, Robinhood CEO, Vlad Tenev, spoke with CNBC and said: They limited the buying of these securities not at the direction of any fund or market participant, but to preemptively protect the business and its customers. He mentioned that there are clearing deposits and margin requirements that must be maintained. These are set by a central clearing facility for stock trades, the Depository Trust and Clearing Corporation. The required reserve fluctuates based the amount of trading. So, essentially, the volatility of these stocks in recent days meant Robinhood may not have been able to maintain those reserves. While, Tenev denied it, that sounds like a liquidity problem.
Here’s another issue: Robinhood, a no fee trading app, is marketed to the everyday investor. During the pandemic it has exploded with young/new investors who were bored or looking to make some income. Now, this situation has garnered the attention of Congress, the Federal Reserve, hedge funds, the media, and other trading platforms. Which, is usually the precursor to new regulations. Robinhood’s business model is being questioned because due to the level of trading they announced they were raising $1 billion in funds from its existing investors. Also, in the midst of everything, to keep operating, Robinhood, drew on a line of credit from six banks, amounting to between $500 million and $600 million, to meet these higher margins requirements. Most glaring, is that they did all of this, maintaining they do not have a liquidity problem.
This looks like shaky ground to me. Both from the overvalued Gamestop stock, which will burst, to the fact that Robinhood is raising so much money to cover these trades. Then there are the regulators that are paying close attention. I just hope the regulators do not come for the commission free trading. Because it’s always the everyday person that pays in the end, not the hedge funds. That will not change.
Additionally, a Robinhood customer filed a class-action lawsuit, which claims Robinhood’s actions rigged the market against its own customers when it barred traders from buying shares. As of this being published, trading has resumed on Robinhood, but it is still limited in amount and GameStop’s stock is up.
What year is it again?
A 55 year-old black man, died last week of bladder cancer and told his family he wanted to be buried near their home in Oberlin, Louisiana close to “his old stomping ground at the sheriff’s office.” When his wife, Karla Semien, chose a place a few miles outside town, Oaklin Springs Baptist Cemetery, she was told,
“Oh, we’re going to have a dispute. We can’t sell you a plot,” Semien recalled the woman saying. “This is a Whites-only cemetery. There are no coloreds here.”Semien recollection from a worker at the cemetery.
Their interaction has since prompted the graveyard on Thursday of this week to lift the race-based restrictions in its contracts, which stretch back to the site’s founding in the 1950s. This week. This week they lifted their white only policy. This week. Let that sink in.
“H. Creig Vizena, president of the cemetery’s board, told The Post he was shocked and ashamed to learn that Semien had been denied a plot — or that the graveyard even still had race-based restrictions. He said he had not been aware that cemetery plot contracts said gravesites could only be used to bury “the remains of whitehuman beings.” With only about 200 plots, the issue had simply not come up, he added.”
Unnecessary Nerd Fact: A graveyard is a burial ground beside a church. A cemetery is a stand alone burial ground.
J&J: Johnson & Johnson announces it one shot vaccine does protect against COVID-19, but is not as effective as the other two currently on the market. It was 66% effective at preventing moderate or severe illness and 85% effective against serious symptoms. One issue: it worked better in the U.S. than in South Africa where it encountered the mutated virus.
Philadelphia: City officials tasked a 22 year-old Temple grad student, Andrei Doroshin, with disseminating the vaccine/ setting appointments via a website he created. They said they gave him the task because he and his friends had organized one of the community groups that set up COVID-19 testing sites throughout the city last year. But they shut the vaccine operation down once they learned that Doroshin had switched his privacy notice to sell patient data. Doroshin also conceded that he took home four doses of the Pfizer vaccine and administered it to his friends, although he is neither a nurse nor licensed health practitioner.
Elberton, Georgia: To speed up sending kids back to school, a medical center in rural northeast Georgia made the decision to vaccinate teachers, bus drivers and cafeteria workers. This cost the facility their entire vaccine supply. The Georgia Department of PublicHealth is suspending all shipments of the vaccine to the facility for six months because they violated policies by inoculating people who were not eligible.
Tanzania: “Tanzania’s president, John Magufuli, says God has eliminated COVID-19 in his country. ” While other African countries are seeking millions of doses, Magufuli this week accused people who had been vaccinated overseas of bringing the virus back into Tanzania. He also questioned whether the vaccines work. The Africa Centers for Disease Control and Prevention director John Nkengasong told reporters that “if we do not fight this as a collective on the continent, we will be doomed.”