The GameStop Fiasco Proves We’re in a ‘Meme Stock’ Bubble
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This is the real issue. Everyone crying "Market manipulation! Call the SEC!" is right, except it's entirely Wall Street's doing. If anything good comes of this, we will see tighter regulation around short limits after this.
>There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.
Then ownership records would not exceed the number of outstanding shares
What I am unclear on is who takes the counter party risk in the event the short seller cannot make margin calls and goes bust. The exchange I assume? Who insures the exchange if something like this happens where $10 billion is created overnight at the expense of short sellers?
They could (should?) perform a share issue, which would give them much needed capital to reduce their 485.50M debts and or allow a partial pivot (see Toys R Us's re-launch attempt pre-COVID).
Regardless of short-squeeze Vs. "meme stock" this is good for GameStop if they capitalize on it.
https://www.macrotrends.net/stocks/charts/GME/gamestop/share...
They certainly haven't issued anything near the current price ($200+).
(take this with a grain of salt, read from a /r/wsb post)
How can you short a stock to the tune of 140% of all outstanding shares, enjoy a lend ratio of 23% and then bitch and moan when people buy in and cause the lend ratio to blow up to 83%?
"Cohen’s former hedge fund, SAC Capital, came to dominate share trading on Wall Street before it pleaded guilty to insider trading charges in 2013 and paid $1.8bn in penalties. Cohen escaped criminal indictment himself despite being the living, breathing heart of SAC Capital (its name came from his initials) and now runs a private fund with $11bn in assets." (Point72 is the fund under Cohen who contributed nearly a billion dollars to Melvin for funding of these shorts)
These are people who have and are doing shady things and are getting collectively punished by people who's financial expertise stems from pepe the frog predictions moreso than the government did.
So WallstreetBets picking up the stock does not come completely out of the blue. I would say the 'Fiasco' has as much to do with Melvin and other short sellers making mistakes as it has to do with retail investors.
"That's right, it was I who committed the sleazy transactions and short armed robbery. And I would have gotten away with it too, if it weren't for these meddling kids!"
However, this all falls apart when the company never issues dividends, as many public companies have yet to ever do so. At this point, what does it matter how well the company does or what their profits are? If no dividends will ever be paid, then the stock price is irrelevant to the company as long as it issues no new shares (or if all remaining shares are held by the founder to retain majority voting rights). Whether the stock goes from $10 to $1,000 has no effect on the company, right? So what does the price mean at this point?
What does the price of anything mean? You can look at things like fundamentals; EPS, P/E, etc. but ultimately it just comes down to what everyone else agrees on it being worth.
But the price of a stock is nonsense - if you don't own enough to influence the company, and the stocks don't pay out, then the price is just money that moves in and out of your account. You can't even really say that the price of a stock is an agreement of its arbitrary value; you sell the stock because you expect it to go down, and you sell the stock to someone else who expects it to go up. If you buy a stock at the peak, you are paying the highest ever price for its lowest ever value.
But Google has nonvoting no-dividend shares, and I don't think they are feasibly going to get bought out without crashing first, so the price isn't from that either though. I think it really only makes sense if you think Google is going to issue dividends some day.
That's a bit more philosophical than what I was getting at. What I mean is: why do people say it is good for the stock price when a company is doing well if the price of the stock is completely decoupled (in the case of no dividends) from the company's performance? Or am I mistaken and the price is not actually decoupled?
In a normal market, based on fundamentals, you can say a stock is a good price based on a few key factors like EPS and P/E [0]
But in our current la la land of free money and infinite liquidity, things are basically worth whatever the hedge funds say they are.
[0] https://www.investopedia.com/terms/p/price-earningsratio.asp
Consider e.g. Tesla in 2013. It had a market cap (directly proportional to the stock price, assuming no secondary offerings) in the area of $2 billion. No one would expect it to pay dividends for at the very least the next decade.
Most people assumed it would go bankrupt, like all other car startups. Some few believed it would be successful. When the Model S launch proved to be successful during the following year, the market cap (stock price) increased considerably.
This was consistent with an increased expectation that the company would survive to the point where it would be able to return money to investors, through dividends, stock buybacks or other measures. But nothing about the Model S launch had any direct effect on dividends or earnings. Looking at the situation today, the company has much better revenues and margins. They could easily choose to have good P/E metrics if their market cap was still $2 billion, meaning that investors who bought in at that price were successful in their bet.
Controversy around stock prices are always caused by disagreements about the expected value of the company's future earnings. Unless it's an exceptional case like Gamestop, where the stock price increases for reasons that are mostly technical. (In this case, the potential future requirement for short sellers to buy shares at any cost).
This plays into the theory of the bigger fool. If a stock isn't issuing dividends, it's either profiting and storing large amounts of cash or losing money. If there's profiting and storing cash (the Apple model), you purchase the stock on the thoughts that the board can be replaced with a board that will take that cash and dividend it out. If the company is just losing money, you purchase stocks on the thought that they can turn it around become profitable for either dividends or for stashing cash.
Either dividends are paid constantly or eventually stock holders can force a new more dividend-friendly board.
The price of that stock is never going to be as simple to calculate as the price of the mattress, because of uncertainties in future revenue. In theory a company consisting just of a mattress would have a true fixed price that never changes, but there isn't any such company.
The closest you get is a "blue chip" stock, very large and very consistent in its revenue, often in manufacturing (because there's less innovation and high barrier to entry). Their prices indeed don't change much.
Or it's funnelling the money back into itself to grow. Amazon made "zero profits" for many years because it wanted to growth as fast as it could.
If a company finds that it cannot find any productive ways of using cash then it may return the money to investors in dividends or share buybacks. Management may determine that the ROI for owners is better by keeping the money internal.
If owners disagree they can presumably get new management at the shareholders' meeting by replacing the board, or ordering a change in cash-use policy:
It's worth reading Benjamin Graham to get a really good understanding of fundamental valuation, however the short answer is that a company is a stream of (potential) future earnings. That stream is funded by debt and equity. If you price that future earnings stream and discount it back to today, you get a sense for the net present value of the company. If you subtract the debt and the cash on hand what is left is the equity component. Theoretically this should be identical to the market cap of the company but of course there are all sorts of reasons these will diverge (investors will have different risk tolerances and will therefore assign different values to the discount factors etc).
From a management perspective, the share price is important for several reasons. Firstly for equity raises etc. Secondly some of the executives personal compensation will be tied to metrics that are in some sense linked to share price. Eg they might have a bonus that is related to return on equity. High ROE will tend to cause the price to rise. Finally if the price multiple trails peers, investors will get antsy and you could have shareholder activism etc.
Of course, there's a philosophical argument to be made if the ownership structure is such that a dividend decision like that can never be made.
I suppose everyone is confident that if the leadership of such a company actually tried to assert that "no, your class ZZ share is actually just monopoly money, and your ownership share does not entitle you to any rights", such a claim would be struck down in court. Or cause the stock price to crash to such a degree that the class A shareholders would amend the agreement.
In theory, the meaning of a stock price, or rather, the total market value of a company is how much one should rationally be willing to pay to acquire the company: this is the value of its total net assets plus some accounting for future profits. However, stock prices are also seen as a metric in and of themselves. Upper echelons of most companies are rewarded mostly in stock rather than cash, and so keeping the stock price artificially high can be the easiest way to keep their jobs, which isn't helped by a political emphasis on keeping the stock market from collapsing (it isn't entirely rational that the S&P 500 rose 16% in a year when the economy crashed by several percent).
What does the price of anything mean?
Why is a Audi "worth" $60K but a VW "worth" $30K? A Porsche "worth" over $100K? Why is a Patek Philippe or A. Lange & Söhne Tourbillon watch worth $100K? Why should I pay $300 for one All-Clad pan when for the same price I can get a 10-piece set at Costco?
Surely you have things that you think are worth paying more for while for others you wouldn't spend more than some 'basic' amount.
People perceive things as being of different quality.
It's not that everyone (!) thinks that GameStop (GME) is "worth" over $300 a share, it's just that the folks at the hedge funds are willing to pay over $300 for each share because they have contractual obligations to fulfill, and if they do not they (a) may be sued for a lot of money and/or (b) go to jail.
So each share of GameStop is "worth" this much to the hedge funds because it gets them out of paying the consequences of (a) and (b). Paying $300/share may be "cheap" compared to paying those consequences.
And to go back to my first paragraph: a Porsche is not "worth" $100K to me—because I'm not willing to pay for it, or even for an Audi. But it may be "worth" it to someone else because they are willing to pay for it.
>No one is in charge of this effort, though, of course, some voices are louder than others.
There has been a history of moderators on WSB using their position to push certain agendas. I think it's more accurate to say "We don't know of any group co-ordinating this effort" - because I don't think its far fetched that there is one.
All this article is really saying is "I've taken this sub-reddit at complete face value."
>They’ve shown, in a sense, that if you pick the right stocks, a self-organized community of small investors can make them rise,
Some users are posting investments of over $750k that are now up to $22m in value. How many people on WSB are actually investing and driving up the price? 10? 100? 1000? We have no idea. I personally find it hard to believe that 1000 redditors are investing enough to actually matter compared to the top investors who are investing hundreds of thousands.
A professional trader on the other hand may have more money to trade with, but will not risk their career by making dumb overleveraged bets on a single stock.
My point is that the money these retail investors control due to leverage, recklessness and sheer numbers makes up for the higher AUM of professionals.
The story isn't over yet anyway, unlike with TSLA, literally nothing about GME justifies its current price. It remains to be seen how many of those "retards" are willing to YOLO away their money "for the lulz" and who is going to take their profits.
Diamond hands.
Most stockmarket gains have been happening with companies with no dividends and no executive control for at least a decade. Other than very few exceptions like Apple that one time large companies aren't buying back stock either.
Why should the price of individual stock still have some correlation to the company's profit?
The difference is that people don't have an infinite appetite for losing money, and people are on aggregate losing money as one does when trading with a short term mindset. So I would say that we will eventually leave the meme stock bubble, but it's anyone's guess as to when.
It's can be different for offline gambling where people go to play once in a month, but online companies related to gambling work hard to avoid burning people out too fast. After all they want sustainable income which come from audience that trust them.
Stock market on ther side doesn't have anything like this and it's can make people go broke much faster than casinos do.
Nothing to do with meme stocks.