Retail investors top Wall Street pros as stock market recovers from coronavirus selloff

GameStop: Why social media-driven traders are beating Wall Street

Retail investors top Wall Street pros as stock market recovers from coronavirus selloff

An unly company has found itself at the centre of a much-heralded sea change in investment trends, as video game retailer GameStop’s stock continues to skyrocket – at least for now.

But the bizarre spectacle around the surge in the US consumer electronics firm’s share price has become a war of words – and dollars – between traditional Wall Street barons and small-time retail investors catalysed by social-media buzz.

Virtually overnight, the value of GameStop went from extraordinarily low to breathtakingly high. The coronavirus pandemic had slammed the Texas-based chain with more than 5,500 retail locations. Struggling to shift from brick-and-mortar stores to an online seller, the company was shuttering many of its mall shops.

Yet now, the gaming merchandiser is taking a victory lap, just as other companies have also seen their fortunes brought back to life by so-called “Reddit rich” rookies exchanging free stock tips on the social media site.

What is the background here?

In April 2020, Gamestop announced plans to close 450 stores. Its stock dipped to below $3 per share. The stock then slowly recovered by the end of the northern hemisphere summer and in September, investor Ryan Cohen rallied around the retailer, pressing for the company to take on Inc.

Cohen snatched up a 13 percent stake in GameStop and along with two partners, jumped onto the company’s board. That was when the firm’s cult- status began to emerge.

How much is GameStop now worth?

By mid-January, the stock had surpassed $30 per share. But the momentum did not stop there. During the past week, its value has catapulted past $300 per share, reaching a peak of $373 on Wednesday morning in New York.

[Bloomberg]The stock’s surge has created $2bn in personal wealth for the firm’s three largest individual shareholders, including Cohen – none of whom appear to have sold their shares yet.

Why are heads turning?

Small-time investors purchased what they saw as undervalued GameStop stock using the Robinhood mobile app and other new trading services that aim to democratise market access. At the same time, a number of big Wall Street financial players bet against GameStop and shorted the stock.

So please explain to me what shorting a stock is

This is a strategy in which investors borrow shares they do not own and then sell them on the expectation that their price will fall. They then buy those shares back – something known as “covering” – once their price drops and hand the shares back to the party they borrowed them from in the first place.

More than 70 million GameStop shares are currently being shorted, resulting in losses for large institutional investors amounting to an estimated $6bn.

Is this what experts call a ‘short squeeze’?

Yes, a short squeeze occurs when a stock price sees a rapid increase – not necessarily due to underlying fundamentals – but because of short sellers covering and liquidating their positions.

With GameStop, this began on January 22 and continued this week.

What does this say about the power of Reddit?

On Monday, Reddit users were saying they “broke GME”, referring to the ticker symbol for GameStop. Trading of its shares was temporarily halted by the New York Stock Exchange nine different times to contain the volatility, after the stock doubled in under two hours. Many millennials in the WallStreetBets forum are celebrating their power over Wall Street titans.

Legions of Reddit-inspired stock pickers and a stampede of TikTok-addicted day traders went head-to-head with established investors who doubled down on their opposing bet, in a financial war of attrition. The investors backing GameStop have promoted the face-off as a battle royale between everyday punters and powerful hedge funds.

Social news aggregation site Reddit has become a platform for forums such as WallStreetBets which have allowed retail stock traders to beat much larger investment firms [File: Bloomberg]

Can veteran investors still win their wager?

One conventional investor, Citron Research, continues to refer to GameStop as “failing” and disparages supporters as “herd investors” artificially inflating the stock’s value. But that firm has stopped shorting the shares, reportedly following online harassment by GameStop fans.

Melvin Capital Management, another established player, has seen its assets lose 30 percent as short positions – including those in GameStop – have floundered.

But the hedge fund has nonetheless been bailed out in recent days by other funds such as Point72 Asset Management and Citadel LLC.

Melvin closed out its short position – in other words, it bought back the shares it had borrowed – in GameStop on Tuesday, as GameStop became the single most-traded stock in the United States.

Many in the mainstream financial media have sided with the seasoned investors, while some analysts condemn the market frenzy as a bull-headed sign of manic trading.

Though the short sellers may eventually be forced to fold, sceptics argue that the stock ultimately will return to a valuation consistent with market fundamentals.

Regardless, the price movements could take months to reach some kind of equilibrium.

Which other stocks are similarly positioned?

The same Reddit community has been orchestrating this type of manoeuvre with a few other heavily shorted stocks such as AMC Entertainment, Eastman Kodak, Bed Bath & Beyond and video rental firm Blockbuster’s liquidation company. Notably, AMC has been rescued from imminent pandemic-driven bankruptcy as a result.

All of these companies have confronted financial ruin – largely as a result of economic forces beyond their control, in sectors as varied as in-person film viewing, big-box retail and VHS movie rentals.

Electronics firm BlackBerry Ltd and fashion retailer Express Inc also experienced apparent short squeezes over the last few days.

Sharp upward moves in their shares have flown in the face of bets placed against these embattled companies struggling for solvency.

Theatre company AMC Entertainment has been rescued from imminent pandemic-driven bankruptcy as a result of its recent share price surge [File: Carlo Allegri/Reuters]

But is this fervour creating a market bubble?

Selecting hot individual stocks to quickly buy and sell runs contrary to the long-term strategy of diversifying risk in one’s portfolio that most financial planners advocate.

Retail trading platforms TD Ameritrade and Schwab have already restricted trading of GameStop and AMC, as government regulators consider their options for how to limit the potential for significant down-side losses.

Some market watchers think a speculative bubble analogous to the dot-com boom – and subsequent bust – of 2000-2001 is being driven by the s of WallStreetBets players, while other investors suggest that many of these newly rescued companies were seriously undervalued and due for a comeback.

Source: Al Jazeera


America is in turmoil and stocks are booming. Is the market broken?

Retail investors top Wall Street pros as stock market recovers from coronavirus selloff

New York (CNN Business)The stock market is not the economy. But rarely has the gap between Wall Street and Main Street felt so wide.

The United States is going through its worst race crisis since 1968 following the death of George Floyd, an unarmed black man, at the hands of a police officer in Minneapolis. Riots have hit cities across the nation. Looting is rampant. And President Donald Trump is threatening to send in the military to stop the violence.

The civil unrest could exacerbate the coronavirus pandemic that has already killed more than 100,000 Americans. That in turn could deepen the economic collapse that has forced more than 40 million people to file for unemployment. Meanwhile US-China relations are imploding, imperiling the trade war ceasefire reached between the world's two largest economies.

And yet, the stock market is downright booming.

The S&P 500 closed Tuesday at the highest level in nearly three months. The Nasdaq has spiked 40% since March 23, fueled by the resilience of Big Tech, and is now within striking distance of all-time highs.

There are two major reasons for this: unprecedented stimulus from the Federal Reserve, and investors not wanting to miss out on monster returns once the economy recovers.

Joe Brusuelas, chief economist at RSM International, said he can't recall a time when the disconnect between Wall Street and the real economy was this great. He blamed in part the sharp decline in the number of public companies in the United States.

“The market is broken. It no longer reflects a forward outlook that is truly aligned in the real economy,” he said. “That's a problem because at some point, the public will say these markets are rigged.

Robert Shiller, the Nobel Prize-winning economist, told CNN Business that this backdrop of rising risks and surging stock prices leaves the equity market “vulnerable” to a setback.

“This is a fire bell in the night. This moment. Suddenly seeing rioting in cities all over the country,” Shiller said, quoting Thomas Jefferson's famous 1820 description of the extension of slavery in the Missouri Compromise as something that filled the founding father with “terror.”

“I don't think standard economic models are much good at forecasting right now,” Shiller said.

Ferocious Fed response masks economic turmoil

One reason Wall Street continues to celebrate, despite the turmoil taking place in its city and others, is the forceful economic rescue mounted by the federal government.

Most notably, coronavirus spurred the Federal Reserve to take steps that make its 2008 response look tame by comparison. The Fed slashed interest rates to zero, promised to buy an unlimited amount of bonds, rolled out a series of emergency programs and is directing the purchase of junk bonds.

The Fed response, led by Chairman Jerome Powell, has worked wonders at revitalizing financial markets that seized up just three months ago. And Powell has vowed to do more, if necessary.

“There is a very, very significant Powell Put under stocks right now,” said Kristina Hooper, chief global market strategist at Invesco.

That means that while Main Street is still grappling with coronavirus, racial crisis and the impacts of both, Wall Street is doing just fine. Fed policy has allowed markets to decouple from economic reality.

The FOMO factor

It's also normal for markets to sniff out recoveries long before average Americans feel them. That's what happened when US stocks bottomed in March 2009, even though the economy was still in shambles. That began the longest bull market in American history.

There are some faint signs that the current economy is bottoming. For instance, the number of unemployment claims has gradually declined, and mortgage applications are rising. Airline passenger activity is climbing as well.

Shiller, the author of “Irrational Exuberance,” said many investors have FOMO, or fear of missing out, because they didn't participate in the last bull market: “They remember not catching it last time.”

And then there's the impact of Trump's public confidence in the economy's ability to rebound rapidly.

“Donald Trump encourages a sort of self-confidence. You don't have to believe Trump — you only have to believe that other people believe Trump,” said Shiller.

How will the economy be affected?

Yet there are concerns that the recovery could be delayed or derailed by the race crisis, depending upon how long it lasts. Already-weak consumer and business confidence could fall further, leading to additional cuts to the spending that drives the economy.

“It's going to be a depressant. It will slow the trajectory of the reopening in the short term,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence. “If this persists, it will add a whole new level of uncertainty.”

It's too early to know whether the unrest will worsen the pandemic. Although some protesters are wearing masks, many others are not.

US Surgeon General Dr. Jerome Adams told Politico on Monday there is “every reason that we will see new clusters and potentially new outbreaks” following the protests. That could force some states to unwind their plans to reopen businesses.

“We have to worry about the potential for a resurgence in infections. Any one of these protests could be a super-spreader event,” said Hooper.

'People are angry'

Although the unrest was initially sparked by the killing of George Floyd, the continued broader economic discontent is an undercurrent. The United States has long suffered from stark inequality, particularly across race and gender divides, and the lack of reckoning has fueled a sense that the American dream is not alive and well.

The top 1% of households controlled $36.8 trillion at the end of last year, according to the Federal Reserve — up an eye-popping 651% from the $4.9 trillion they held in 1989. The bottom 50% of families held only $1.7 trillion at the end of last year, up a far more modest 112%.

The divide between rich and poor was worsened by the Great Recession and its aftermath. The US government's response relied heavily on easy money from the Fed, rather than the kind of fiscal stimulus that can help lower-income Americans.

“The policies used to get the great financial crisis exacerbated wealth inequality,” said Invesco's Hooper.

Extreme inequality isn't just a social issue. It could become a problem for Wall Street.

That's because it can lead to periods of instability that make businesses and consumers reluctant to spend, hurting corporate profits. And inequality will increase the popularity of proposals to make sweeping changes to a system that some voters see as rigged such as Elizabeth Warren's push for a wealth tax.

Unrest could amplify the divide even further

A similar story is playing out today.

First, the coronavirus pandemic disproportionately hit poorer Americans, many of whom work in the hospitality and service sectors rocked by the pandemic. Nearly 40% of low-income workers lost their jobs in March alone, according to the Fed.

Secondly, the decoupling of the stock market from the real economy is amplifying inequality because many poorer Americans have little to no exposure to stocks.

“They're not benefiting from the rise of Amazon and Microsoft. They live in a completely different world,” said Brusuelas.

And then there's the civil unrest, which doesn't just reflect inequality. In an economic sense, it could have the unfortunate side effect of making the divide even worse.

Lower-income communities have been hit hard by riots, looting and vandalism. It can take years for less affluent neighborhoods and small businesses, many of which were already hurting from the pandemic, to recover from the damage.

“This will exacerbate the divide,” said Booth. “Two weeks of delayed reopening won't affect Target or Walmart. But for small businesses barely holding on, it could make the difference between life and death.”

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