The financial world remains largely abuzz over the ongoing furor surrounding Gamestop’s stock (ticker: GME), online brokers like Robinhood, and the hedge funds that may have just made a huge mistake in shorting a favorite “meme stock.” There’s no dearth of analysis related to the market goings-on, certainly, and these are presented both from broad, human-interest angles to very narrowly-focused, technical looks into what’s going on. But one refrain that’s been repeated often is that the “fundamentals” of Gamestock don’t merit the sky-high price of GME, the company’s stock. Of course, another common theme is that the party is over and there’s nothing more to see with Gamestop’s stock. Nothing could possibly be further from the truth.
This is Not About Fundamentals
Claiming that fundamentals have any remaining role in this ongoing saga is foolish. There was a time last calendar year when many theses could have come to the conclusion that Gamestop was undervalued and deserving of some love, especially when the world emerges from the semi-lockdown brought on by the Covid-19 pandemic. Many investors came to the “undervalued” conclusion, with no less a luminary that Wall Street success story Joel Greenblatt picking up shares as recently as June 2020 and still holding on to some number of shares as of year-end 2020.
Greenblatt is a value investor from the old school, focusing on such metrics as earnings yield and return on capital. But, again, the story of GME as a fundamental value play is in the past. The story now is about a much, much simpler principle than that which can be gleaned from the financial statements of Gamestop. This story is now about simple supply and demand, and the unenviable position short sellers have put themselves in that virtually guarantees that they’ll have to buy shares at inflated prices. You won’t hear this on CNBC or read about it on Bloomberg. The details are copious and, frankly, pretty boring by “general public” standards…just like all the talk of sub-prime mortgages and credit default swaps were in 2007.
As it stands, however, institutions (mutual funds, pensions, etc.) own just under 113 million shares of Gamestop, per Fintel, and a little over 76 million according to Nasdaq. So?
There Aren’t 113 Million (or 76 million) Shares of Gamestop
And that’s the big deal. It’s well known that individual (“retail”) investors are also holding shares of Gamestop, though how much is a moving target to an even greater extent than with institutions. Estimates of retail ownership are all over the place, but even if the revolutionaries over on WallStreetBets own zero shares, something isn’t adding up.
At this point, it’s important to note that hedge funds play games with shares all the time, creating “synthetic longs” through a combination of options purchases and sales, “strategically” failing to deliver shares when they don’t have shares to deliver, etc. There is nothing fair about this, and it is greatly advantageous to the banking class, at the expense of regular investors. But it is legal…mostly.
Counterfeit Shares of GME
The best summation of this can actually be found directly on WallStreetBets, not among the mindless (yet endlessly entertaining) chatter and cheerleading that makes up the bulk of that channel’s threads. But there’s also a lot of serious brainpower over on WSB…some REALLY serious brainpower, though they may deny it. Here’s the down-low on what’s likely going on right now. Read that, because it’s better by far than any explanation we can offer.
Supply & Demand
So we’ve said before – this isn’t about fundamentals. It’s about supply and demand. Those who are short GME must buy shares or pay an ongoing interest charge. Every effort is being made to push the share price down to make covering the shorts less painful, and to buy more time in the hope that retail investors get scared and sell (thus further pushing down the price and making covering less expensive). But, again, what this all comes down to is that someone, somewhere, created shares of Gamestop from nothing, and then sold them. And eventually, even if it takes a really, really long time, even the extremely industry-friendly (bought and paid for) U.S. regulators will have to look at what’s actually going on, root out the cause of all this mayhem, and make things right.
Or, as an alternative, those same regulators can make this go away for the hedge funds by ignoring the situation and letting them kick the can down the road forever. Option three would be to take the favored approach of “monitoring the situation” and levying miniscule fines on billionaires once everything shakes out, just like all the “reform” that happened after the global financial crisis in 2008.
It’s not hyperbole to say this may be a “make or break” moment for the existing financial system. If this thing unfolds as it should, according to the real rules of trading, there is going to be hell to pay and prison time, along with massive fines. If it doesn’t….? Well, has there ever been a more obvious reason to “opt out” of the current financial system and switch over to blockchain-driven currency?