Stimmy cheques.

In my June 2020 article, ‘Global economy - big shock absorber, no engine’ I wrote about trading platform Robinhood weaponising first time traders, after the government had handed out stimulus cheques (stimmys).

Here’s a refresher:

“As you know from my last blog, there are many first time day traders and speculators sitting at home with not a lot to do. However, some now have excess liquidity from welfare cheques that allow the financing of equities betting. Imagine five or six million new punters in the U.S. alone, with $1,000 of government financed welfare cheques to spend. Call that $5-$6 billion of new equities rocket fuel that can be churned every 48 hours. Same in Australia, although smaller numbers.” June 2020.

Well, last week we watched that virtual army assemble in force on Reddit to apply the short squeeze on GameStop short sellers, and bury one or two hedge funds.

GameStop is/was and may again become a close to bankruptcy US brick and mortar computer game reseller with a heavily short sold position. That is, hedge funds betting it would collapse and disseminating information to push the price down.

Not Elon Musk’s favourite people. 🤔🤨🥱

Together, the army bought call/put options at high/low exercise prices against parties that had been happy to sell options to earn an option premium.

Option sellers had to borrow and buy huge quantities of the stock to cover their positions, and because of the volumes demanded GameStop shares were bid up from under $20 last week to $400 in a few days.

The stock cratered but is still holding at $325 at Friday’s close.

In the process, the price went up, probably minting an army of 19 year old first-time day trader millionaires, and at the same time squeezed out traders and hedgies with short positions who were betting on the price falling by up to 100%, not rising 2000%.

Hence, the short squeeze 🐱‍👤 and #ineedabailout for hedge fund, @melvincapital 🧨🧨

We are now you, and you are now us.

The real story here is not a finance or operational story. It’s about the Reddit army short squeeze which is the latest expression of the anti-boomer/anti-wall street hedgie trope, uncovered by and weaponised by QE Infinity, pandemic stimmy cheques, Robinhood, and social media.

And helped along by a solitary “GameStop!” tweet from Elon Musk who hates short sellers with a passion. This partially explains Tesla’s rise, which still has ~7.4% of its shares sold short.

And it’s a lesson in how some millennials have been looking at stocks, or rather, the lens through which they regard hedge funds and wall street.

Armed with stimmys and fintech platforms, they now see themselves as the market maker for under-privileged and victimised stocks. Oh, and they don’t believe in sacred cows.

What’s a stonk and a meme stock?

For some of my Xer/boomer readers that might have missed it, a stonk is a tongue in cheek reference to a stock, misspelled just like you would tweet ‘hodlers’ when referring to holders of crypto.

A meme stock is a stonk referred to in a meme based representation of the world according to millennials, that’s been targeted or for some reason needs to be amplified, like GameStop.

Memes in general use self-deprecating recurring tropes to convey thoughts and feelings about a struggle with a thing or a futile circumstance that doesn’t track, in the collective opinion of the hive mind. The more the view is shared by the hive on social media, the more it becomes an established and sharable ‘mood’ 🥑🥑

And it’s become a clear and present opportunity to hurt 💰💰 hedge funds by playing them at their own game, and short squeezing the shorts.✂🗑

But there’s nothing new about this and it’s another form of what Netflix (which used to send DVDs in envelopes before streaming) did to blockbuster. It’s about learning or accessing a platform that can learn, and turning that learning against the old master.

The master’s irony here is that it’s actually been made possible by CARES Act stimmys, and the Fed.

Irony, revenge and profit all in one package.🎊🎊

OK boomer now expressed in the short squeeze.

Who knew an army of Reddit day traders and meme stock disciples would buy out of the money calls and puts in GameStop, to such a level and in such a way that created massive short covering mania that took down experienced wall street short sellers. 🦹‍♀️🦹‍♂️

Option demand was reported to be the equivalent of around 150% to 160% of the total shares on issue, something I’ve never heard of before.

I still have a question over whether the Robinhood and other trading platforms could keep up with the speed of transactions and perhaps the 160% was a false read due to a blockage in the plumbing, but whatever the truth, the millennial army moved a market like it’s pretty much never been moved before.

OK hedgie, bye bye.🙋‍♂️🙋‍♀️

And AMC was next.

Lots of short seller interest in AMC (a theatre chain), so the army formed on Reddit and went to work on the shorts.

But in a twist, the price rise created an environment for private lender, Silver Lake, to take advantage of a rising market and convert ~$600 billion of bonds into equity, and then selling the resulting shares.

Different sources suggest different outcomes for Silver Lake. Some say they lost when the share price cratered, but Bloomberg suggests a $113 million gain from the trade, before hedging costs.

I will look into it further, but it really doesn’t matter. The point is that from the company’s perspective, it got rid of its debt and to the extent it survives (courtesy of the Reddit army) any earnings value will translate directly into the share price now the debt has gone.

Raising equity and/or paying down debt opportunistically given pandemic loans unavailable and banks won’t lend - I get it, why not?

In the final analysis and based on fundamentals, not technicals, is this a good outcome or a zombie? 🧟‍♀️🧟‍♂️

Financially weaponised millennials are a force.

This Army is real. It’s the latest expression of dissatisfaction with boomers and the out of reach asset prices that millennials and zoomers are facing.

Still, it’s dangerous to forget how big these cohorts are and how dangerous fractional trading and banking apps are in the hands of a socially motivated army.

Robinhood and other enablers are weaponising this growing army that in this particular iteration of the anti-boomer, anti-establishment trope have found a profitable way to use options and trade in fractions to get their message across, and in the process make piles of money from stimmys. 🧙‍♀️🧙‍♂️

Ripple effects of the Army.

Sure, parts of this are bizarre (like the fees being made to package up shit mortgages within so-called investment grade rated collateralised debt obligations back in 2008), but there is an even still darker side to it all.

Other than for printing a few millionaires and serving a dish of revenge to hedgies, there are a number of ripple effects you should be aware of. There are many, but here are 5 for starters:

Given the Fed says asset inflation is not in its wheel house, fake markets caused by the Reddit army could make sub-prime look like a warm up, given the quantity of corporate and household flow into risk assets.
Sometimes stocks are shorted because they should be (not saying I agree with it). Given the sort of stocks the army appears to be saving, there is a risk that zombie companies survive because of pandemic loans and the Reddit army, not because of fundamentals.
Short squeeze attacks on hedge funds often create a ripple effect into other stocks on other markets. This is because a short squeeze not only causes a rush into a stock to cover a short position, but if there are losses, winning stocks might also need to be sold to cover those losses. It is likely that some of last week’s drop on ASX might have been caused by affected short sellers that needed to sell outperforming ASX tech, materials and reflation stocks.
Massive wins like this embolden those actors to keep going #whatsnext. As many of those actors are new to markets, they may be susceptible to risks that they are unaware of, but could derail their game as different participants step in and arb or game the system.
More focus on market regulation in an attempt to bring about stability can spill over into other markets, like crypto. 👮‍♀️👮‍♂️

I wouldn’t necessarily point the finger at Robinhood and other fractional trading platforms (unless blocked settlement plumbing was involved) as they are simply pursuing their business models in an environment in which regulators have been asleep at the wheel.

#wakeupcall again for regulators.

As for those watching the rocket ship, I would simply say that if you don’t understand it, don’t partake.

But if you get it and you’re happy to potentially get caught in a stock that could be bankrupt, or make a lot of money thanks to option leverage, then so be it 🦸‍♀️🦸‍♂️ but remember there’s no need to go all in and there’s a high probability of catching some shrapnel from the blast radius and having your ass handed to you 🤢💀!

What now?

There is little doubt that these movements will continue and find different ways to express themselves. This time the game is buying inexpensive out of the money options in enough volume to create a short squeeze as option writers and shorts run for cover.

Still, it’s a free market and the Reddit army exposes why “that’s how it’s always been done” loses out to technology, and progressive thought. 🤖👽

Can hedgies, instos and regulators keep up with the army? Not sure anyone really cares at this stage of the proceedings.🤯

And, the euphoric mania seems to have shifted up a gear - one part finance, one part social and three parts revenge for not being able to eat Avo toast every morning.

What’s next? A decent asset with a lot of unsavoury short actors and plenty of options. Maybe a Silver ETF? 💿💿💿

The remarkably ironic part of all of this is that while the army has been weaponised by fintechs and social media, it’s been financed by boomer policies and institutions, i.e., CARES Act stimmy cheques and the Fed. As we Xers would say, what a classic!

See you in the market? Er,……not unless you bring the army 👩🏼‍🤝‍🧑🏿👩🏼‍🤝‍🧑🏿👩🏼‍🤝‍🧑🏿👩🏼‍🤝‍🧑🏿👩🏼‍🤝‍🧑🏿👩🏼‍🤝‍🧑🏿

Mike.

Stimmy funded attack on hedgies short MemeStonks gets served cold