Eagle, CO
Where to begin? What a wild start to 2021 with all the GameStop headlines.
This is the first time in my career that literally everyone I know is talking about stocks. Family and friends that would never ask me about the markets, let alone a specific stock are calling, emailing, and texting about GameStop.
This is what I imagine the euphoric markets leading up to the dotcom bubble must have felt like. I wasn’t managing portfolios then; I was just graduating high school… So, I just have other people’s experience to lean on. Thankfully, one of those people is Ken.
By now, I think most of you have an idea of what went on related to shares of GameStop (GME) stock over the past few weeks. But for those who don’t, the short version is that a bunch of “kids” participating in an online message board turned the tables against some Wall Street insiders and made a lot of money for themselves while causing steep losses in a few hedge funds.
It’s a real life “Robinhood” story… Pun intended.
The online message board is called “wallstreetbets” – part of the Reddit community. And, believe it or not, many of the members actually use the free trading app called Robinhood.
You can’t make this stuff up.
The mainstream narrative would have you believe that a bunch of small-time retail traders pulled off a coordinated “short squeeze” paired with a “gamma squeeze” to take advantage of poor positioning by some hedge funds.
Question: Had you ever heard the term “gamma squeeze” before last week (or today)? I didn’t think so.
I will come back to that, shortly.
Anyway, the common narrative goes on to claim that the hedge funds actually called in a favor to Robinhood and asked them to shut down trading in GME in an effort to limit further losses. I am not saying it did or didn’t happen. Nothing would surprise me at this point.
And now, it has become a “movement.” A very emotional movement. It is the “retail traders” against the “suits.”
And it is all just so ironic.
Never in my career have the short sellers been classified as “establishment.” The short sellers have always been the outsiders. They are the folks calling out big investment bank buy ratings.
In a highly dubious practice, some short sellers even write and publish negative research on companies after making bets that those companies will decline in value. At least one well-known short seller has discontinued their short side research as a direct result of the current situation. It turns out that publishing hit pieces and profiting from them can make a lot of other market participants angry… who knew?
Anyway, my point is that short sellers are not and have never been the “suits,” as most recent headlines I have read would have you believe.
Here is another thing… I don’t know any “retail” investors/traders that really know what a “short squeeze” is, let alone a “gamma squeeze”. Nor do I know any who would know the ideal time to press one or both of them…
As we already know, the guy who has claimed most of the celebrity for his wallstreetbets activity not only owned 50,000 shares of GME (even at $10/share that was $500,000) hardly a “small time” trade… and to top it off he was also a licensed investment professional at the time he openly posted his position on the message board. He only recently resigned from his job at Mass Mutual on January 28th, 2021.
That does not quite meet my standard definition of a “retail” trader leading the charge against Wall Street insiders…
The whole common narrative is probably false. I doubt we have all the information yet and bet we never will. It is a fun story though. It is hard to argue with that.
At the end of the day, it pleases me a great deal to see insider hedge fund managers pay dearly for their overconfidence. Which clearly happened in a few cases like that of Melvin Capital, for example.
Overall, I think the insiders probably made out fine. I think Citadel (for example) probably made a lot of money with all that increased trading volume across all the exchanges.
I think this was mostly an event of hedge funds trading against each other and getting retail traders swept up in it.
I bet a lot of very small traders lost a lot of money buying GME at $500, meanwhile all the insiders who were trading walked away with their money.
Senvest Capital made $700 million for example, according to the Wall Street Journal.
In another example, the Koss family was selling shares of KOSS while they went from around $3 to just over $127… The insiders were selling to the reddit crowd, again, to the tune of around $44 million.
I have personally read a few stories of people using $50,000 or more in student loan money to buy GME call options when the stock was $500. That money is gone now.
As much as I would love to see the underdog win and take money from the Wall Street establishment, I do NOT think that is what happened here, on average. Sure, I bet there are some success stories. But for every one of those, I bet there are 10 horror stories.
History is replete with stories of folks trying to “corner the market” in this, that, or the other thing. None of them go according to plan. For that reason, they are all entertaining stories… but probably not good long-term investment strategies.
The Hunt Brothers and the silver market is probably the most famous of these stories.
Long-term investing strategies should not be exciting or entertaining. If investing, or even trading is entertaining, then you are probably doing it wrong. It should be boring. Like doing taxes or something. Which is really another principal reason that this whole common narrative version of the GME situation was always bound to fail. It was never based on anything but emotions – a recipe for disaster.
GME is probably worth $10/share today and it is probably in terminal decline. Meaning, it is headed to zero.
The best and most obvious evidence of this is that management never created new shares of their company to sell to the public when they were going for $500/share… they didn’t do it at $400, $300 or $200 either. And now, the shares trade for $65.
If you had something that was worth $10 and for some strange reason you could sell it for $65 right now, what would you do?
This doesn’t take a savvy businessperson to figure out.
You sell as much as you can sell as fast as you can sell it until the price goes back to around $10! Then, you buy it back if you like.
GameStop needs to raise money to invest in converting their business from a place where people simply go to buy video games in person. They just missed the opportunity of a lifetime.
The management team at GameStop is incompetent. They have demonstrated it in several ways over a number of years as their stock price fell from $57 in 2013, to around $2.50 in 2020.
Current management has presided over the destruction of around 96% of the value of GameStop over the past 6 years, meanwhile the stock market more than doubled in value and other companies in the video game space did much better than the market. They should be ashamed.
That said, they did recently add Ryan Cohen, the founder of Chewy, to their board after he bought a substantial number of shares and started agitating for changes. Mr. Cohen has been very quiet about his plans for the company, but I would venture to guess that it involves making GameStop the “online destination” for ordering video games and accessories.
But that hasn’t happened yet. And even if it works out in the long-run, they don’t get credit for that future performance in the share price today – at least not from me.
If it isn’t clear: *We don’t have any exposure to GameStop shares and we have no plans to get involved.
January Performance
The S&P 500 (SPX) was down a little more than 1% in January. Our Appreciation Strategy actually finished up slightly which is excellent. Making money while the market is going down is a great place to be. The Income Strategy unfortunately lagged the market… again.
The Income Strategy is full of stocks that are out of favor and have been for a while now. I am not sure when that will change, only that it eventually will. If we decided to break the rules and include more “appreciation” type stocks in the income strategy, that would probably be the catalyst for income stocks to start performing well! That is just how it goes.
What I think might be a better solution for clients who are 100% invested in the Income Strategy is to discuss with your advisor (Ken, Kyle, or me) the idea of including an allocation to the Appreciation Strategy on some basis.
In the meantime, I am considering some modifications to the Income Strategy, but no decisions or changes have been made yet.
Outlook
Johnson & Johnson (JNJ) recently submitted an application to the FDA for emergency use authorization of a “single-shot” vaccine for COVID19.
This is big news for the reopening of America. We are already starting to see restrictions lifted in many places as reported new cases decline from recent highs.
This single-shot option is big for a couple reasons: the most obvious is that we can get the world vaccinated more quickly. The other is not so obvious… So, let me ask…
Why would anyone want to get two shots when they could get one and be done?
Answer: They won’t.
So, JNJ’s single-shot vaccine is very bad news for any company that was banking on a two-shot solution, like Pfizer.
Going back to insiders earning their bad reputations, the CEO of Pfizer was selling millions of dollars worth of stock, likely to retail investors, the day news of their vaccine was released to the public.
Since then, shares of PFE are down about 19%, and falling still.
My job as a portfolio manager is to invest for tomorrow and beyond, based on the information we have today. And the information we have today suggests that as Americans get vaccinated the economy is beginning to reopen.
With all the money printed over the past year (and more on the way) we are coming up on the 1-year anniversary of some really awful economic numbers which should be easy to beat, especially if people are getting back to work and such. This means the market is poised to continue marching higher in spite of extremely high valuations everywhere you look (except “income” stocks, of course.)
At the same time, we are witnessing what seems like a new “mania” every week which is abnormal, to say the least. A steep correction like the one we had last year, to flush out some of the folks who have come think this investing thing is “easy,” would not surprise me one bit.
The market has a special way of giving attitude adjustments to participants when needed. This time is not different.
Elevate strategies are well positioned and prepared for whatever comes next.
S&P 500 year-end predictions
We received 50 total S&P 500 predictions.
They ranged from a high of 4,725 (up 25.8%) to a low of 2,750 (down 26.8%).
The average of all 50 guesses was 4,000 on the nose – up 6.5%.
The median guess was 4,019 – up 7.0%
My personal guess was 4,633 – up 23.3%. I was the second highest number.
Only 5 people predicted the market would be down
As always, thank you for reading!
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisor
*(Full disclosure: I do personally have a position long GME puts which I have maintained since well before this frenzy got started.)
Legal Information and Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.