Can you believe we are at the end of January already?
The Gamestop story blew up this week, and RobinHood’s reputation went up in flames. So what happened, exactly?
The Five Best Things
Brent Donnelly: Off Wall Street and Off-Off Wall Street
If you’re completely new to this story and want to orient yourself to the world and lingo of WallStreetBets, FinTwit, TikTok finance and the ilk, this is a great place to start.
Matt Levine: The GameStop Game Never Stops
The most comprehensive history of how we got here with GameStop, as compiled by Matt Levine. In addition, he talks about the nihilism and ‘boredom markets hypothesis’ - stocks trade these days not on fundamentals but because people are stuck at home due to the pandemic. Why not trade stocks en masse with friendly strangers on Reddit?
Matt also suggests what GameStop should do with a hugely inflated stock price and a passionately dedicated shareholder base HODLing (translation: holding on for dear life-ing) - an at-the-market or ATM offering, making new shares available for sale in open markets at whatever the current price is. It is a delicate maneuver - it can backfire if retail sentiment drops off causing prices to tank, existing shareholders cry foul due to dilution, and opens up the company to charges of fraud - but can provide for a rapid infusion of cash on the balance sheet.
What’s the deal with RobinHood halting trading and needing to raise $1B overnight?!
5/5 'Free' models are really hard to maintain. Requires balancing a pile of expenses that are completely disconnected from revenue. When it breaks, transparency is really the best policy or conspiracy theories will abound: https://t.co/FvJROHpczB
Are they shilling for the big Wall Street Man now? My former boss Aziz Gilani explains what put RobinHood in a really tough spot. Reminder that RobinHood allows you to trade stocks and options for ‘free’ - it can afford to do so by selling your trading data to clearinghouses (the large exchanges that facilitate buying and selling of stocks). These same clearinghouses take 2 days to settle a stock trade (for no good reason - other countries’ do this much faster) and require trading firms to maintain deposits in proportion with the volatility of trades. Much like the GME shorting hedge funds, RobinHood simply couldn’t keep up with the cash crunch. Of course, they didn’t help their case by vague and dishonest public statements that destroyed goodwill.1/ I'm intrigued by 's reluctance to admit that they can't keep up with their clearinghouse requirements.
Sheel Mohnot @pitdesiI suck at writing but think I could have done a much better job than Robinhood. What they wrote vs. what I would write: https://t.co/GsYXnAr1hA2/ Worth noting that it's because doesn't get paid per trade that they can't keep up with the clearinghouse requirements. They monetize by selling their data....
Bill Gurley @bgurleySuper-helpful. Agree w/ @andrewrsorkin - this is technically liquidity crunch. If RH had ample cash, this wouldn't happen. Disagree w/ CEO definition of "customer." Customer is someone that pays you for a good or service. For RH, that is the trading firm RH sells order flow to. https://t.co/LdcPvTqgRH3/ ...But those data sales aren't keeping up with the trading volumes from their users. That's a really tough situation if the platform wants to keep trading free.
Bill Gurley @bgurley@m_farda @andrewrsorkin Their customer refused to buy their order flow on those names. The clearing house is the customer. And the customer stopped buying.
The WSJ profiled Keith Gill aka DeepF***ingValue aka RoaringKitty, the poster on reddit’s WallStreetBets forum that started this all. Is he a degenerate gambler internet nerd dwelling in his parents basement? Turns out he’s a 34-year old suburban dad in Massachusetts (who did start working in his basement after the pandemic hit, to avoid waking up his 2-year old kid). He’s also a thoughtful value investor, who saw a stock being unfairly beaten down in June of 2019, when it was trading at $5. He bought call options and posted regular updates on Reddit and YouTube, the most recent one showing him with $13.8M in cash and $20M remaining. Enough to put his kid on a 🚀 to the moon!
Also, something tells me the WSJ didn’t realize they were being trolled when he gave them this profile picture.
Nick Maggiuli: The story of the Piggly Wiggly short squeeze
This week on the stock market was pretty wild, but pales in comparison to the corner pulled off by the owner of the Piggly Wiggly chain of stores. Faced with short sellers, Saunders borrowed $10M in 1923 and accumulated enough stock in his own company and forced the price to climb from $55 to $250 in a single day. Unfortunately, The Man stepped in again to halt trading and providing the short sellers time to cover their shorts by buying from other shareholders across the country (such as widows and orphans).
This story and many other great ones are covered in the book Business Adventures, which was published in 1969 and is a favorite of both Bill Gates and Warren Buffett. Reading this book is what put me on the path to Business school!
I’ve had a soft spot for GameStop since doing a class project on a strategy for turning around the business. It certainly seems like a Rubicon has been crossed in the wars between ‘professional’ investors and retail investors, and boomers and millennials. The sentiment is captured best by Fred Wilson’s post this week.
The generational aspect of this is important. Boomer hedgies getting crushed by young folks self-organizing in social media. It feels like a moment where you realize that the power structure has shifted and things won’t be the same.
The financial system in the US, and in other developed countries, is a rigged system and has been for a very long time. Only big institutions can get into hot IPOs. Only rich people can invest in startups. Many of these rules are designed to protect “widows and orphans” but all they really do is make the rich richer and keep those without money out of the game.
I can’t verify the authenticity of this story posted on the Reddit, but it does a good job of capturing the sentiment towards Wall Street, which has been brewing since ‘08.
MarketWatch: The ETF space race heats up with one giant leap from a star manager profiles an ETF called UFO that tracks stocks in the space travel and exploration industry. ARK investments recently filed for a similar ETF, which validated UFO’s thesis and saw enormous $ pouring in.
WSJ: Chilly This Winter? Cozy Up to the Computer That’s Mining Bitcoin - Videogamers and cryptocurrency miners find their souped-up machines make dandy warmers for rooms, greenhouses, chicken coops
The Atlantic: The Pandemic Has Erased Entire Categories of Friendship - We’ve lost the ‘weak ties’ that often hold societies together. Can’t wait to have small talk with someone again - and I HATE small talk.
Dot.LA: Famous Birthdays’ Wish for Cultural Relevance Is Coming True - For those who are over the hill, such as myself, FamousBirthdays.com is Influencer Wikipedia. Handy bookmark when you are back to having small talk!
NBC News: In quest to find birth family, woman makes 'life-altering' discovery: She's a princess The life of Sarah Culberson, a Sierra Leone princess, changed forever when she learned of her royal status. But her story isn’t exactly a fairy tale.
WSJ: 100 years of robots. Super cool photo history feature.
My husband is bored and made a SPAC meme
Disclaimer: The views and opinions expressed in this post are my own and do not represent my employer.