Today, Explained - GameStock

Episode Date: January 29, 2021

Vox’s Emily Stewart explains how GameStop’s stock jumped by 1,700 percent this month. Bloomberg’s Matt Levine ponders the purpose of the stock market. Transcript at vox.com/todayexplained. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Visit connectsontario.ca. It's Today Explained. I'm Sean Ramos for a maybe you heard that GameStop stock had skyrocketed something like 1700% this month. Probably you're wondering how wondering if the stock market is just an elaborate lie. Definitely that's the subject of the show today. Emily Stewart is here to explain. She covers business and politics at Vox, and she's going to start with what exactly a GameStop is, in case you've been shopping exclusively on Amazon your entire life. So GameStop is a store. Sweet moolah.

If you've ever been to the mall, you've probably seen one. So it's a game store, right, where people buy games. Oh, s***. You can sell back games, rent games, things like that. Upgrading rocks. Video games, not like Connect Four. Correct, video games. GameStop, power to the players.

And so it is headquartered in Texas, and there are still more than 5,000 stores. You might not know because you probably haven't been to the mall in a while. Malls were dying before the pandemic. And during the pandemic, the situation for malls has gotten worse. That is sort of part of why GameStop is at the center of the stock story right now. How come? What's going on? GameStop, because it's not doing well, is popular among short sellers.

Short sellers. Short sellers. Basically short sellers are people, hedge funds, big investors who bet against a stock. They basically think that a company is not doing well, the stock is not doing well. So it's popular among that group. Hedge fund. Big funds that make big bets.

Think like Bill Ackman type people. I don't know if people have heard of him or like Carl Icahn, David Tepper. Warren Buffett, also kind of hedge fund, but Berkshire Hathaway is very big. Got it. Okay. So you've got GameStop and you've got a bunch of rich guys betting that it's going to die along with a lot of like big box retail stores you find in malls. Yes. So there is this kind of separate trend that is apart from GameStop. And then there is GameStop specific here. But basically, like a lot of people you've probably heard, you've probably noticed, heck, you might have been doing it yourself.

A lot of people have been playing the stock market during the pandemic. Retail trading, which basically means like individual investing, has really been on the rise for a variety of reasons. A lot of people are bored at home. A lot of people got a stimulus check. And there are also apps out there like Robinhood where people can trade for free. You lose a barrier to entry. So that's kind of the broader context here. So to get specific to GameStop, it has become popular on this Reddit forum called WallStreetBets. WallStreetBets. WallStreetBets. At the beginning of this week, it had about 2 million people. Now it has more than 3 million in it. And it's a place where people kind of talk about their investments. They have sort of like this weird insider language, but it's kind of a place where like people kind of pile on to certain investments.

There's quite a bit of misogyny there. Their users, they call degenerates. They use some pretty offensive language. When I've spoken to the moderators before, generally, we leave with a little bit of misogyny before I can, like, speak to them as a regular human being. So that's Wall Street Bets. And basically, it's been growing for quite some time. And we've seen in the past, like, certain stocks get popular there. And, like, people there sometimes are talking about, like, whether a company is a good or bad investment. But a lot of the time, it's just like a random ticker starts to pop up.

And so about two years ago, GameStop, off and on, would bubble up. Little by little, it started to take off on WallStreetBets. And then some things outside of WallStreetBets kind of made people take more interest in the stock. The guy who co-founded this e-commerce pet company called Chewy disclosed last August that he had a stake in the company, which like gives people like some sense that maybe it will do better because GameStop has not been doing well. And some other big names started to kind of get into it. But so like you can say there's a business case for this. But basically, last week, this short seller named Citron Research, which is run by a guy named Andrew Left, came out with some statements about their short position against GameStop.

This is a failing mall-based retailer. So the amount of people who are so passionate about putting GameStop higher, not based on any fundamentals, it just shows the natural state of the market right now. Or as Seth Klarman said today, a bunch of frogs in a pot of boiling water. Basically being like, this stock is going to go to $20. And Wall Street vets took notice. And then for a whole host of reasons that none of which make sense, they decided to really pile into GameStop. And so what we have seen is that at the beginning of the year, the stock was under $20.

And it has just gone through the roof. Take a look at this wild intraday chart. GameStop stock is looking like, yeah, it's the Six Flags rollercoaster theme today. Up as much as 144% to the upside, then it turned negative. And now it's back up by about 22% as we approach the closing bell.

Game stock shares have now risen some 700% year to date. Shares this year up 1,800%. The stock has exploded. Huge volume. It's like a David versus Goliath story, or it's a storyline in the TV show Billions, or it's a Michael Lewis story. The New York Stock Exchange has had to pause trading on it because it's so volatile. It's bouncing all over the place. It's been about like $300, $400, which is huge for a company that like ostensibly nothing has actually changed for GameStop itself as a business. This is wild.

Like you, for a long time, there's kind of been this question of, like, do the retail traders matter? Like, at least the answer on this is, like, they really do. What exactly are the finance bros of WallStreetBets on Reddit doing? Are they just buying a ton of stock? They are buying stocks. They're also buying options, which... Options.

Yes. So basically, like an option is kind of a riskier way to get in on an investment where you buy a call option, which is basically you're gambling that the stock is going to go up. And so we've seen a lot of people trading in stock options over the past year and people have been piling into options. And so a couple of things have happened like beyond these guys just buying stocks that drives it up. So basically when you short a stock,

you are speculating that the price of something will go down. But to do it, like if I'm a hedge fund, I borrow whatever stock from a broker dealer at, you know, like $10 and then I sell it at $10. My hope is that the stock will go down, and so I can buy the stock back at like $1, pocket the $9, and return the stock to the person who lent it to me.

When you do a short squeeze, let's say I'm the hedge fund. I borrowed the stock at $10, I sold it at $10. So like, as the price starts to go up to 20, 30, 40, 50, I'm like, I got to return this stock at some point. And so what happens with the short squeeze is that as the shorted stock starts to climb, the traders who were shorting the stock just have to buy it back at some point.

Like they have to start to close out their positions. And so that drives up the stock price even higher. So, like, it's not just the Wall Street Bets guys, like, piling into this stock. They're also, like, forcing the people who are shorting it to also, like, force the stock higher. When you talk to experts on this, what they will say is that the Wall Street Bets crowd has figured out a play that they can run again. You can look for heavily shorted stocks. And we've seen this in the last few days with companies like AMC, the movie theater, where they can look at a heavily shorted stock and be like, oh, wait, we can do this here, too. I'm looking at these gains, 333% for AMC.

So these are companies that were once thought dead, but they have popular brand names. They're usually a smaller market cap. Tootsie Roll, which, like, who the heck knew that was even a company all on its own, to be honest? How often do we talk about this company? We don't, because it's so small. But again, this could be the potential next GameStop if there is, again, this brigade and retail trading army that buys into it to kill the Shords. American Airlines I saw this morning was really taking off like blockbuster. But again, like some of these just don't make sense. Like in what world is blockbuster making a comeback? Not to be rude, but like, that's the truth of the situation.

Okay, so what I'm getting is that the stock market is a convoluted mess in which finance bros are betting against companies that are just out there trying to survive. They're short selling. They do it by borrowing shares from other investors, immediately selling them off, hoping they tank so they can buy them back at a much lower price and give back the stock they borrowed. Wall Street bet bros, this group of self-classified degenerates on Reddit, are raining on the hedge fund bros parade by driving up the stock prices of companies the hedge fund bros are trying to short sell, forcing them to buy back the borrowed shares at a much higher price, which has at least for a time been even better for the stock price of companies

like GameStop, but also AMC, Tootsie Roll, others. There's a bit of a cold war going on here between the stock bro elite and the stock bros from Reddit. Yeah, I mean, there's certainly a strain of that. So kind of the mantra among a lot of these retail traders is like stocks only go up, which yes and no, not really. But like basically, they don't like the idea of somebody betting against them. And I do think there is also this real sense that especially with like Robinhood and these apps, like, why shouldn't regular people be allowed to kind of take these risks and like, you know, try their hand at the market. And we've kind of seen over the past year, like as,

you know, day trading has taken off, like there has been a lot of like finger wagging from Wall Street. You guys shouldn't be doing this. You're being really irresponsible. And this does really feel like from like the retail traders, like a big screw you. And they are really hurting some of these hedge funds, which is really, I think, like to me has been the most surprising thing. One of the funds betting against GameStop is a fund called Melvin. Melvin. Melvin Capital. They lost so much money that they kind of had to get like bailed out from some other big funds. Like they had to get investments from some other funds and just in percentages, like you were seeing like 15, 20, 20 percent, 25 percent.

Like that's a huge amount of money. And it's only January. Like they're looking at their books for the rest of the year. Like what do you say to investors? A lot of them are having to like close out of their positions. And you saw like on Wednesday, the broader stock market was down, even though like these meteoric stocks were up, but like the broader market was down. And some people have suggested, and I think it's fair to say that part of what happened

was there are so many funds that were short stocks like GameStop, like AMC, that they started to have to sell out of some of their long positions to cover the losses and then actually drag down some of the broader market. Wow. So a bunch of guys on a Reddit thread managed to drag down the entire stock market on Wednesday? Yeah. And it's important to point out that at this point, it's much more than the Reddit people. I've had friends who literally never in their lives

have talked to me about the stock market be like, should I get AMC stock? So many people are piling in right now. I mean, I imagine also some of the funds are piling in as well. But this isn't just some guys on Reddit anymore. This is your college roommate who's like, wait a minute, I should open a Robinhood account. But maybe not. As we found out later today,

Robinhood stepped in and like put an end to people buying GameStop stock on their app. Is that right? Yeah. What Robinhood is doing is they're kind of clamping down on GameStop and on some of the other high-flying stocks here. So AMC, Bed Bath & Beyond, Express, the clothing company that you also probably remember from the mall. So they've been restricting some transactions and are raising some requirements around certain securities. So they're kind of putting up some guardrails. And this obviously has a lot

of traders upset. And it's making it harder for people to get out of positions as well. You know, we don't really know exactly yet why they're doing this or when this will stop. And this isn't the first time that Robinhood has had issues with users either. Last time, it was a little bit different. But back in March March when stocks were crashing, so did their app. And there were repercussions from that as well. What is Robinhood trying to say by stopping trades of GameStop stock? Are they saying something untoward happened here? Are they changing the rules in the middle of the game because they don't like that people are having a lot of fun and upsetting the more established sort of norms of the stock market? So we don't know yet exactly what's going on here, if it is really some sort of mechanism in their product or

who they're trading with, anything like that. But what they're saying right now is that things are really nuts. There are some stocks that are really volatile and that they are kind of trying to protect their users. Like I got an email from them today saying like, here's investing 101, which is like, you know, kind of too late guys here. If I'm in as deep as some of these people are. But yeah, it does feel like they're changing the rules kind of midway through. So it's not really fair if I'm someone who has a Robinhood account, I've been using it for months or even for a day. And suddenly the reason that I got in, you're taking away from me because of whatever reason, you know, that's not fair. But it's also a good reminder to read

the terms of service. This is a private company, and we don't know yet exactly, but if I had to take a guess, a lot of this is probably in the terms of service that nobody read. Emily Stewart. You can read much more from her on this at box.com. Quick break, and then I'll talk to Bloomberg's Matt Levine about whether this is how the stock market's supposed to work, or not, or what. Support for Today Explained comes from Aura. Aura believes that sharing pictures is a great way to keep up with family, and Aura says it's never been easier thanks to their digital picture frames. They were named the number one digital photo frame by Wirecutter. Aura frames make it

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For a lot of people who don't pay much attention to the stock market, this GameStop story has been head-scratchy. But for the people whose job it is to follow the stock market day in and day out, GameStop's rise has been sort of supernatural. It's pretty weird. It feels like people have discovered some magic ability to influence stock prices in a way that no one really anticipated a week ago.

Matt Levine has a newsletter called Money Stuff at Bloomberg Opinion. I would have said a week ago that stocks can move up and down in ways that don't reflect anything fundamental, but there's some limit to that. They can go up, but not forever. At some point, a stock has something to do with the company whose name is on the stock, and whether that company is good or bad and how that company's business is doing has to matter to the stock price. And that brings me to GameStop. GameStop is one of the most compelling asymmetric opportunities in the market today. Really, I don't understand how you could disagree

with that. Even as late as last Friday when GameStop was roaring up, I thought, well, there's some fundamental case here. It may not be very good, but they're talking about pivoting. Its reboot plan is well underway and it's comprised of two main components. They've got a new board member. A highly acclaimed activist investor, Ryan Cohen, joined the board of directors. He's got a good track record. He's the guy who founded Chewy. They're trying to move into the sort of 21st century and stop being a retailer of video games at the mall.

GameStop's modernizing stores, partnering with vendors, and offering experiential products. This is the potential upside, and it's enormous. This week, all of that has been left behind, and it's just like a crazy gambling casino. GameStop has been continuing its extraordinary surge. Where the stock goes higher every day. Well we were up above $500 a piece

just a few hours ago, up 400% on the week, 1700% on the year and this upward surge. For no particular fundamental reason and And yeah, I wouldn't have expected that. I would have expected it to stop at some point. This unprecedented event has a lot of people asking fundamental questions about how the stock market works. From the looks of it, there'll be a lot more questions being asked in the coming weeks. So allow me to ask a very fundamental question of you right now, Matt. How is the stock market supposed to work? You know, companies issue stock. Stock is a share of ownership in a company. Companies have businesses, and the better the business does, the better the stock usually does. In theory,

a stock is sort of an ownership interest in the underlying cash flows of the business. So the better the business does, the more cash you're sort of entitled to. That's pretty theoretical. Most companies don't actually give you back any of that cash. But there's a close enough tie between the earnings of the business and the price of a stock that for the most part people think of a stock as being a prediction of the future earnings of a business. Everyone knows that's not perfect, right? So people buy and sell shares of stock

based on what they expect the future will be like for a business. They can disagree on that. They can be misinformed. But in the long run, you sort of expect it to average out to be that a share of stock reflects some ownership of some business. I suppose in the long run, you can still expect that here. But it's been like a week of just people having fun with a stock with no one really thinking that it reflects the underlying economics anymore.

So is this like a total violation of that idea, or is this a version of it? Is this a bunch of people being excited about a company's future? It's not that. It is not. For a while, it was a little bit that. Definitely there are some of these people on the Reddit board sort of pumping the stock who were excited about this company's future. And when the stock was trading at like $6,

they thought it was better than that. Now that it's trading in like the $300s, nobody really thinks that, or almost nobody really thinks that this reflects the company's future. What's going on here is some combination of really technical factors, but also just sort of like this gang of Reddit bandits deciding to all pile in to try to move the stock and finding out that it works and they can move the stock.

So I don't think that what's happening here is a bunch of people who think the stock is worth more than $300 buying it. I think it's people who have hypothesized that they could make the stock trade for more than $300. And then we're sort of surprised and thrilled to find out that they could, and then jumped in to see how high it could go. Yeah. Have we ever seen something like this, like a joke basically take off in any direction on the stock market? I mean, basically everything Elon Musk does on Twitter is kind of like this. Like he's a guy who tweets jokes about stocks

and then those stocks go up. I mean, he notably tweeted something like use Signal, like suggesting that people use the encrypted messaging app Signal. There's a tiny company, basically doesn't really have a business anymore, called Signal Advance. It's like a medical device company,

nothing to do with Signal the app. That stock went up 5,000% after Elon Musk tweeted. And the interesting thing there is like it went up a little bit when he tweeted it, it went up a little bit the next day. People started writing articles saying he's not talking about that signal. The stock kept going up more. So clearly like no one was confused. It was just like fun. You know, it was just like, oh, Elon's tweeting this word. We can buy the stock of that word. So it didn't make a lot of sense. But it happened anyway. And that's kind of become a theme in the stock market recently. I love how your example here just comes from like the richest man in the world just having fun on Twitter.

Yeah, I mean, Elon Musk tweeted about GameStop on Tuesday, too. And the stock doubled after he did that. A few years ago, when Warren Buffett was the richest or one of the richest people in the world, if Warren Buffett announced that he liked a stock and was buying it, that stock would go up. But this is a whole different thing, where Elon Musk could just tweet a word for fun, have no financial case, no interest in buying the company, and the stock will double immediately. I guess there's this feeling that it's all fun and games thus far because it's mostly hedge fund bros who are, you know, betting that GameStop would go down taking the hit. Yeah, the people who've been hurt so far are largely hedge funds. There's a couple of big hedge funds who, as you said, were short selling the stock. They were betting it would go down because, you know, they looked at the company and they said, this is a mall retailer in a pandemic.

It's not doing very well. So they sold the stock, betting it would go down. And they've gotten killed. They've lost billions of dollars. You don't have to feel particularly sorry for them. I mean, it was a trade and they lost. The people who you might worry about are just the people on the other side, the people who have bought this stock. It was know, it was trading at above $300.

I don't know what it's even at now. People who buy it at those prices, like, someone's buying. Like, someone's buying it at a price that is 100 times where it was, you know, a few months ago. And maybe they're right, and it'll just keep going up. But I think most people think they're not. And so some of those people are going to lose money. My sense of what's happening on the WallStreetBets Reddit board is that most of these people know they're playing a game and are playing with their fun money

and are not going to lose their homes because of the money that they're gambling on GameStop. But I don't know, it's a lot of money changing hands, and somebody's going to get hurt. I think there's a lot of people, especially maybe younger people, who look at the stock market and they've been traumatized by a couple of crashes now potentially, and they just go, you know, it's not for me. It just feels like a more acceptable, more sanctioned sort of casino. Is this just a confirmation of that viewpoint? Well, it's interesting. I mean, some of the people who are on Wall Street Bets and who are doing

these trades really think that and are angry at the system. And part of what's motivating them is that they're taking down these short-selling hedge funds. They're saying the system is rigged against us. There are these big hedge funds that are betting on companies to fail, and we can mess with them. And it turns out they really can, and can cause real damage to these hedge funds. And so they are excited to do that. I mean, what's motivating them is specifically feeling like the stock market is a meaningless casino, but we can get some revenge on it. Everyone else who writes about finance, I'm a boring investor.

I buy index funds. I think it is very risky to gamble on individual stocks based on something you read on a message board. I can't argue too strongly against it because it worked out really, really well for these guys, but the reason we're talking about it is it's not a representative story. It doesn't happen this way all the time. Like a lot of people, I am skeptical of individual investors on the internet trading stocks for their own account and hoping that they're going to beat the professionals. But, you know, it's been a humbling week for that theory because they've beaten the professionals.

All right. Matt, thanks so much for your time. All right. Thank you. Was there anything I didn't ask you about that you think would, you know, help people understand this story a bit more? Nobody understands this story.