I’m an award-winning financial journalist, editor of @WSJHEARD, and a former top-rated stock analyst. Previously ran an emerging markets research team at Credit Suisse. AMA about the meme stock squeeze - why it was rigged, who's pulling the string...
I think that the game wall Street (as a whole) plays is to get us individual investors excited to play the game and try our hand or to pay them fat fees for them to try beating the market for us. That's the ironic thing, discussed in some detail in my book - the technological innovations that made "free" trading possible on a smartphone have also made it possible for you to pay Wall Street peanuts for funds that will beat 80% of professionals in any 10 year period.
Why has GME stayed over $100 / share since the short squeeze? Didn't everyone predict the meme push would be a flash in the pan and it would be right back down to $4?
Stocks can stay elevated for a long time for no reason other than lots of people think they are worth as much. GME is worth more than a year ago anyway because it raised cash and is more viable, so maybe $20 to $40. But you have to realize that about 80% of the float is now owned by retail investors who have their own idea of the value and it is mostly avoided by short sellers who might take the other side of that bet.
it is mostly avoided by short sellers who might take the other side of that bet.
Its short interest is currently at 9 million shares, or about 18% of the float.
There are so many stocks with higher short interest. Allbirds, Cassava Sciences, and many more. Furthermore, short interest is also a function of turnover and days to cover and GME trades a lot.
For context, that is 3 days to cover.
That's interesting. Then, in a sense, wrt this particular stock, there was a "democratization". In that the price is now determined just by a decentralized group of retail investors holding stock as a commodity, with hedge fund short sellers terrified to get involved in it?
Well I would be careful with that. If the price of anything is just a matter of what the next guy will pay you once you're ready to sell then one day that person won't show up. Instead of thinking of stocks, think about your house if you own one - what would democratizing homes look like? What is only split level homes were worth 50% more than they had been historically and people bought and sold them for a long time at that price. Would that last forever, or would it one day fall back to what a home of equivalent size, quality and location goes for? The latter of course.
I get what you're driving it, but a home is maybe a bad example, because I can live in a home, but I can't live in a stock, right?
What way is there to value a stock except what dividends it pays and how much you can sell it for later? At least at volumes that a retail investor would hold (as opposed to an activist investor or someone who wants to control the direction of the board e.g.)
Sure, but if I offered you 50% more than your home is worth on Zillow right now and an identical home next door were for sale at the original price then you'd make that trade, right? A stock isn't jst a ticker symbol that moves - its value is the cash the company will one day return to you as a dividend or buyback.
Yeah I get that in a conceptual sense. Except most US common stocks don't pay dividends, and buy-backs aren't even all that common for US companies (at least for tech companies, which is mostly what I invest in).
The (somewhat tortured) analogy to homes here would be like if a bunch of people moved to my neighborhood, bought up 80% the homes driving the prices up 20x, and refused to sell for less. And the neighborhood used the increased tax base to improve infrastructure (the way GME was able to secure capital with their increased share price).
In that sense, the homes are still worth more, aren't they? There's not a glut of exchangeable homes to swap in to undercut this supply...
Don't get caught up on the word "dividend." Even if a company never paid one (Berkshire Hathaway never has), if it uses its cash productively to invest or buy other businesses then it can become more valuable. If you sold all the parts of Berkshire plus its cash than it would be worth about what it fetches and those individual businesses produce lots of money.
It gets circular though, right? Like TSLA trades at a crazy high, astronomical P/E ratio because of a belief in future growth of the company, which really means a belief that people in the future will buy the stock for even more than it's being traded for now.
An early stage B2C software company will have a higher revenue multiple than a manufacturing company, because limits to growth and scale are much much lower.
It's never just the assets and holdings of a company that determines value (otherwise it would be impossible for GME to have traded for several years below $10 to begin with).
I think what I'm getting at is that this example seems to drive home for me that share price is more an emergent phenomena of collective perception, and only somewhat influenced by business fundamentals or holdings.
Maybe in a normative sense, share price "should" be determined by fundamentals, but it really seems the case that it's not. And logically so -- every business will one day eventually fail, but stocks are not all uniformly zero.
Yeah, very astute. As Benjamin Graham said, though: "In the short run the market is a voting machine. In the long run it is a weighing machine."
Thanks. I get a lot of emails about being a shill or whatever. I don't own stocks and can't accept as much as bus fare from a person on Wall Street - I just get a salary. I've been writing about the stock market for 29 years and there are still things I don't know, but I know more than most. You're entitled to your opinion - I'm just here to answer your questions.
Why do you believe there was a short squeeze? The SEC stated that the shorts never closed. The events in last January were delta hedging by the market makers. No?
The SEC's argument is very odd. Short interest in GME was almost 140% of float and declined within days to 50-60%, which is a huge change. And within that time some short sellers ENTERED the trade. So the original funds that were short had to cover more than the company's market value in about six trading sessions. That is off the charts. The SEC's point is that the main impetus was retail purchases of the stock. That was huge at first, but retail accounts were net sellers from Tuesday the 26th through that Friday. A lot of the buying was a combination of short covering and then options dealers delta-hedging all the short-dated out of the money calls being bought that week.
The SEC would disagree there. According to them it was retail fomo primarily that pushed the price up.
So who are we to believe, an analyst who hasn't done enough research for this AMA, or the SEC which investigated these events for months?
Not that I believe the SEC has our best interests at heart either. Gotta say I'm surprised they put that out in their report.
I've read the report. It's hard to deconstruct these things, but there was an almost unheard-of level of short interest at the outset as well as a historic level of retail buying of shares ad options because of belief in a short squeeze. The dollar amounts invested in options had way more impact because dealers were required to purchase shares as the price rose to remain hedged. It's complicated. Many options and market structure professionals disagree with the SEC.
Hiya Spencer! Thanks for doing this AMA.
What do you think would happen if all of GME's float is DRS'd, exposing rampant naked short selling in the marketplace?
First of all, I have no dog in this fight - I can't even own a stock due to my job. I just get a salary. The term "naked shorting" is misunderstood. The short interest you see officially is pretty close to what it really is. There are failures to borrow, but there isn't a big money-making opportunity here that has been discovered by the people who told you this. If there were then some clever guy on Wall Street would force the issue.
Okay, so there's likely nothing shady going on with GME. Got it.
Hypothetically though, what do you think would happen if the whole float amount of a company is DRS'd, while millions of shares are still active on the market, or in brokers' names?
A stock halt? A lengthy investigation, perhaps?
Has something like that ever happened before?
Theoretically that would corner funds that sold it short, but let me explain why that's almost impossible: Index funds own a good chunk of most stocks these days and part of the reason they are so cheap is that they will lend out their shares. Look at the ETF IWN, for example, and scroll through the top 10 holdings.
Oh, didn't completely answer. Yes, stuff like this has happened, but very rarely since the SEC was formed in the 1930s, which is why it's so wild that a group organized on Reddit accomplished a major, coordinated squeeze.
I didn’t coordinate shit and no one coordinated with me. I just like the stock. You should be careful with that implication if you refuse to do your own research on what happened
With all due respect, I'm not accusing anyone here of collusion or of doing something improper or illegal. Let's use the phrase "got together on Reddit."
Literally no one believes your stupid ass insistence against the idea that this was coordinated.
Okay. So one of you thinks it was "coordinated" and one doesn't. I guess that's a loaded word.
Well done for not attracting too many detractors so far!
Since last January we've learned that brokers had to switch off the buy button to survive, that hedge funds actively distort or manipulate pricing, and that 90-95% of retail market orders do not go via lit exchanges (source: Gary Gensler). Does it shock you just how disadvantaged retail traders are? What changes would you like to see, if any?
Again, a complicated thing. You are right that most retail orders were not through lit exchanges because favored brokers use PFOF to pay the bills. ironically that is the one way in which retail traders get treated better - the spreads are tighter. But retail investors get fleeced in one, big, ugly fundamental way - they are told that "you were born an investor" and then they use gamified apps that induce FOMO. These companies WANT YOU TO BE ACTIVE. They don't care whether or not you make or lose money. Don't deal with people like that.
Do you think fundamental analysis or technical analysis (ie charts, macd,etc) is a better tool for individuals to use?
What criteria should individuals use for best results ( such as market cap, p/e ratio, etc)?
I'm not a financial advisor but I was an equity analyst for many years before becoming a journalist. I personally would only evaluate a long term stock holding based on its fundamentals - you are buying a part of a business, not a squiggly line with a ticker symbol.
On a somewhat unrelated topic, what are your thoughts about the great resignation? It seems people are starting to get sick of the dichotomy between record corporate profits/market all time highs and stagnated wages. The market very often seems completely out of step with the day-to-day reality of average americans. This pattern really doesn't seem sustainable.
It's an interesting time. I think the pandemic caused a lot of people to reassess the treadmill they find themselves on and that shift will have profound effects for the economy. People will still work, but more on their own terms and for more money. Labor has been squeezed for decades as corporate margins have boomed. Now that will go into reverse for a while, I think.
You agree that the real squeeze is yet to happen?
No, sorry, I don't. Think about it this way: There are 50,000 hungry people on Wall Street with more money and better computers than us retail investors. If they had an inkling of a huge, looming short squeeze then why wouldn't they shout about it from the rooftops or try to make money themselves.
So you think the shorts closed? Even though the sec report states otherwise?
Yes, there is some short interest in these stocks, and a lot of other ones too. There aren't so many shares short that one day there will be a massive squeeze bigger than in January 2021 according to anything the SEC has said. I think that its statements have been selectively interpreted.
Well, reported short interest dwarfed for sure. Short interest has been moved into other vehicles. ETF shorts. Derivatives. You know about the 30k 0.5p contracts that were created for January 22 and are now starting to appear again for January 23? Just one of the many ways the real SI is hidden… The SEC report very specifically said that the „squeeze“ was NOT driven by shorts covering or closing. Then the infamous buy button event happened and the official SI magically declined. During a drop of 350 to 40$? Mkay. Sounds legit.
So you think that the short interest figure being reported is a lie?
What is the largest mistake you see retail investors continue to make?
Being very active, acting on tips, and trying to beat the market. It's like quicksand - the more you struggle the deeper you sink. There's a big, profitable industry with a marketing budget that wants you to play.
The concept: "the way the ordinary investors beat the pros is by refusing to play their game."
Isn't the typical retail investor still technically playing their game by investing in the stock market? (Even if holding for long periods of time)
No. If you buy an ETF with an expense ratio of 0.03% then they are making diddly. In fact you cost them money and have to be subsidized by other people who are more active than you.
Just like people who pay off their credit card every month and rack up airline miles - they ride off of the millions of people who carry balances.
Technical problems sorted out and ready to answer your questions!
The evidence is very clear that your level of activity is inversely correlated with your returns . A long term investor in low-cot products who avoids panicking in bear markets or chasing bubbles will outperform 85% of retail investors and 80% of fund managers over any 10 year period
Of course you will hear people who made a fortune on ver concentrated bets, but the odds were against them.
What are your thoughts on Uranium? Seems the fundamentals have been there for years, then Sprott came into the market and continues to sweep the material, but the spot price still hasn't gone back to incentive prices ($65) for mines to reopen.
Where is this endless supply coming from?
I've written quite a bit about uranium - very interesting market. The market has been structurally short for years, but there are a lot of tailings that can be reprocessed. The problem is that a lot of the companies you can invest in (miners like Cameco) can be undercut by the Kazakhs. But CCJ has had a nice rally in the past year.
Hello! What’s your opinion on NFT’s and Crypto? do you think that eventually they will die out?
I really have no idea. NFT's seem pretty ridiculous to me, but they've worked out well for some people - for now. It sure seems easy to create them, and also a new cryptocurrency. And I read about a "rug pull" 2 or 3 times a week. Be careful.
I don't think you need to compete. There were two overlapping goals of the wave of GameStop buying: 1. Stick it to Wall Street 2. Make money. Well the way to do it is NOT to play all Street's game, as I explain in the book. It has never been easier or cheaper to participate in the stock market without trying to outsmart anyone - use cheap passive vehicles on which Wall Street earns very, very little.
OK, thanks everyone - bye.
So is the squeeze over? Will there be another of this magnitude with a different company? There are qanon adjacent subs that seem to think that this isn’t over. What’s your take on that?
I don't think that lightning can strike a second, third, or fourth time because the conditions in January 2021 were unique, but there will be smaller squeezes
Today about 85% of hedge funds explicitly watch social media. It is also a lot more expensive to accomplish a GameStop style squeeze because options premium is a lot more expensive now
What are your thoughts on seeing the multitude of novice investors continuing to buy GME and DRS?
I find it hard to believe that these giant entities haven't continued to game (pardon the pun) the system to ensure they, the retail investor, loses.
Do you think that this past year of seeing the growth sectors hammered has anything to do with the hedgefunds trying to recoup potential losses?
I'll never pretend to understand more than 1% of the research many of the redditors have done on this topic but with all of the news coming out about investigations the picture is quite clear. Big money does not play fair.
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