Reddit versus the Hedge Funds — Latest GameStop Resurgence
WallStreetBets is back baby.
Yes, the enigmatic, dogmatic, and dramatic motley crew of internet traders is at it again. Once again targeting GameStop Corp [NYSE:GME] stock.
Well, I say ‘once again’, but honestly some of them never left. At least, that’s what the numerous posts across reddit would suggest.
The difference though is that now GameStop shares are moving again, and fast.
After rising from around US$40 per share to US$50 last week, things really took off Wednesday afternoon (Thursday morning AEDT). With the shares closing at US$91.70 and still climbing after hours. Eventually opening on Thursday morning (last night AEDT) at US$170 each!
And although the rest of the trading day was fairly volatile, GameStop has closed at US$108.73 per share. Up roughly 104% in a single day. Causing headaches for short sellers once again.
After all, just like round one, this ‘meme stock’ is all about the short interest.
Reddit’s goal (if you can call it that) seems to be burning short sellers for every penny they’ve got. Whether or not they’ll be successful though, is the ultimate question.
But one thing is for certain, this army of retail investors aren’t going to give up easily.
Cryptic tweets whip up a frenzy
Now, I don’t want to get bogged down in the ideological reasons for this GameStop fiasco. I’ve already talked at length about how this portrays the hedge funds, brokers, and broader market actors when this all unravelled the first time.
Instead, what I do want to discuss is the catalyst for this latest GameStop resurgence. Because more than just a ‘meme’, it is a fascinating insight into what modern market news has become.
Here is (by most accounts), the reason for the sudden GME rally:
Don’t worry, you’re not alone.
Let me break down what this tweet is probably referring to…
First of all, let’s start with Ryan Cohen. If you’re unaware of who he is, well he’s basically just a young entrepreneur. A man who created an online pet food and products company called Chewy. Which, back in 2017, he sold to PetSmart for US$3.35 billion.
Suffice to say, he’s rich, outspoken, and young enough to understand how reddit works.
More importantly though, back in September, he acquired a 10% stake in GameStop. A holding that has since grown to 12.9% — making him the largest individual investor in the company. And just like WallStreetBets, he’s been betting big on burning the short sellers.
On top of all this though, Cohen has been quite clear in his desire to play a more active role. Back on 11 January — just prior to the initial surge in share price — he was appointed as a board director. And earlier this week, on Tuesday, it is clear that he helped push CFO Jim Bell to resign. As Cohen announced:
‘Through our private conversations, we have explained to Mr. Sherman and the Board that GameStop has the ability to pivot toward becoming a technology-driven business that excels in the gaming and digital experience worlds,
‘But this pivot requires the type of strategic vision that has not yet taken hold in the c-suite or boardroom.’
So, what the hell does all this have to do with a McDonald’s ice cream and a frog emoji?
Social trading’s social dilemma
Truth be told, no one but Cohen genuinely knows for sure what his tweet was about. But there is plenty of speculation.
One of the more prominent theories is that it is a reference to the notorious McDonald’s ice cream machines. A machine that is known for consistently breaking down and needing fixing. Perhaps suggesting that Cohen has ‘fixed’ GameStop.
Whether or not this is what Cohen was going for, I don’t know. But it is hilarious seeing reddit and the legions of retail traders try to decipher it.
More importantly though, it is a sign of where markets may be headed.
In many ways, Cohen is a lot like Elon Musk. A CEO of a publicly-traded company that corresponds more often than not through twitter than official market filings. Some of which has proved very costly in the past.
Musk’s infamous ‘am considering taking Tesla private at $420. Funding secured’ tweet is perhaps the most well-known. A nine-word message that personally cost him US$40 million.
But then again, that’s practically pocket change for Musk.
Cohen’s actions are drawing closer to a similar situation though, showcasing a new way for managers and businesses to cultivate a relationship with investors over social media. Even dropping hints or direct news outside of traditional market channels.
Between Tesla and GameStop, it is clear that it can be highly effective too. As long as you’ve got someone with the charisma to appeal to these young and brash ‘investors’.
As for the ethics of it all, well that’s a lot trickier to dissect. Because as Musk and now Cohen have shown, these tweets can move markets. Something that is bound to have the SEC at least a little worried.
Because unless they start cracking down on this sort of thing soon, I expect we’ll start to see a lot more of it. Especially as groups like WallStreetBets flourish. Attracting young and somewhat naïve investors into the market.
Again, whether or not this is a bad thing is in the eye of the beholder. After all, it could ensure this new generation actually learns about the markets while they are young. Meaning that even if they do have to endure a harsh lesson in the near future, at least they have plenty of time to learn from it.
Whether or not it’s good for one tweet to distort markets though, is an entirely different kettle of fish. A predicament that we’re seeing unfold before our very eyes once more.
So, let’s see what lessons there are to learn this time around…
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.