WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

One of the craziest weeks explained…

Hedge Fund nearly bankrupt as day traders attack wall street

In case you have been wondering why you have been seeing Gamestop (GME) and AMC in the news a lot this week, it’s due to the fact that these two failing companies nearly took out one of Wall Street’s biggest hedge fund managers in a span of three days. That’s just part of the story that also includes Reddit Users, Twitter Wars,  Elon Musk, Chamath Palihapitiya, Memes, and what may ultimately be an ugly ending for stock holders, even if you weren’t involved. 

Full disclosure, I did not buy into the $GME craze. In these cases if you’re initiating this type of pump, or you’re not already in it, it’s too dangerous to just “hop on” – while there were a few millionaires, and reportedly one billionaire made this week, the truth is someone will be left holding the bag at the end, and it won’t be pretty. 

I was however in $BB, and $NOK BEFORE all this started. Both of those stocks got sucked into the frenzy. So I did benefit and sold yesterday.  I was in these stocks for my own separate reasons. When they spiked, I took my profits and will look for future entries when all this subsides.

How is started…

It’s not entirely clear to me exactly how this started, but apparently an intrepid Reddit user discovered that Melvin Capital had a huge short position on $GME. This was key, since hedge funds are not mandated to report their short positions. As this information became publicly available, a user named WallStreetBets on Reddit, started using his forum to let people know he was buying the stock, and buying it big. People followed. Both regular stock and call options were purchased in great size. This caused two types of squeezes, the short squeeze, which causes anyone who bet short to buy back their shares. It also called what’s known as a convexity squeeze. Money makers need to keep a certain amount of stock on hand as it rises. Since money makers (the middle men in the stock market) had to join in the buying, it caused an endless feedback loop.

Retail investors bought shares/calls –> shorts had to cover –> money makers had to buy shares to have on hand to remain “delta neutral” – a lot of this was knew lingo to me as I do not short stocks and I am not really well versed in that section of the market. Matthew Kratter has a good video explaining what happened below.

While all this was happening, Melvin Capital, was in real financial trouble. Two other hedge funds had to come in to save them by investing billions in Melvin. Those other hedge funds were Citadel, and Point72. Citadel also happens to be one of Robinhood’s biggest clients, if not the biggest. So when Robinhood banned these stocks from trading this morning, there was quite an uproar from the trading community.

If the point of this whole exercise was to bring the Wall Street establishment to its knees, WallStreetBets and his followers definitely succeeded. If the goal was to bring about some sort of systematic change, they may also succeed in the long run, but maybe not in their favor. It’s too soon to tell at this point. 

 

How it’s going…

This story is evolving quickly. As of writing this article $GME has fallen about 50%, $AMC, $BB, and $NOK also faded hard from yesterday’s highs. 

Brokers Get Involved

This morning Robinhood, a popular investing app with millenials, along with several other large brokerage houses either restricted the buying and/or selling of all these stocks, or they were down completely for a period of time, thus reducing the volume of buying and selling and in some cases only allowing people to sell. This was market manipulation at the highest level! 

The exact thing that the hedge funds were accusing WallStreetBets of doing, they did to the little guys today. A class action lawsuit was already filed against RH today. We’ll see how this goes. 

Billionaires Cry Foul

It’s not surprising that most of the billionaires that went on CNBC today or yesterday were there to demonize the retail investor.  Billionaire, Leon Cooperman, saying it was an “…attack on the wealthy”. The CEO of Nasdaq tweeting that maybe brokerages should stop trading all together to allow huge firms to reposition themselves and quote “stop the spread of profits outside of wall street.” In other words, you don’t want the little guy to make money at the expense of the big guy. EXCUSE ME?!

So when my stocks take a nose dive can I ask a brokerage to halt trading for a couple of weeks while I reposition myself?  They would laugh me off their customer service line. A hedge fund can short a stock %140 percent (meaning shorted more than the available amount of shares) and completely wreck a company, but when the little guys does it to them, they’re calling it a crime. 

 

What happens now…

Unfortunately, nothing in my opinion. What’s done it done. The few lucky ones that got rich…congrats. The few that will be left holding this stock all the way back down…my condolences. Hopefully you cut your losses as quickly as you can. The report is that the hedge funds have already rebought their short positions now that $GME will almost certainly return to normal levels.

One big issue that became clear to retail investors this week was how blatant the game is rigged against us. If companies can randomly stop trading in an asset (other than normal trading halts) and completely remove them from being available at the whim of hedge fund who come crying to them, then what are we doing here? It clearly isn’t the “free market” economy that so many of these billionaires want to champion. It’s a rigged economy in their favor.

Hedge funds will likely look at ways of preventing this from happening again. By one estimate hedge funds lost $90 billion dollars this week trying to cover their short positions. The effect of that was them having to sell their long positions and causing the markets to drop (see 1/27) – a lot of good deals this morning if you were hunting for entry points.

Moving forward and learning from this week’s events.

I have learned to sit back, relax, and watch these events like a reality TV show. Not participating, sticking to your plan, and not getting caught up in stories like these are your best bet to keep your money safe. Unless you were lucky like I was with $BB and $NOK to already be in those stocks when it happened, I would avoid these types of moves in the future.

If you are itching for that excitement, in which case I would avoid the stock market altogether if I were you, you could hop on with a small amount to scratch that itch. Just don’t invest more than you are willing to lose. Way too much risk for me.

 

Nasdaq CEO Tweet
Humorous meme
My History With Money and Investing

My History With Money and Investing

I haven’t been great with money…

That could be the main theme of my 20’s and early 30’s. Money was never important to me in the sense of building wealth and saving for the future. Part of the reason was that I never had a mentor to guide me on how money worked. As you can see on my “about me” page, I grew up with a single mom who did her best to keep food on the table. While the succeeded in doing so, money, was never her specialty. Budgeting…yes. Saving…a little. But investing and using your money to make money was not on her radar, and rightfully so.

 

My first money mistake

Looking back, I think the first major mistake I made was not understanding how to save money. Making money was never a problem. Not saving money was the problem. I was always more of a “live for the moment” type of person. I would worry about the future when it got here. I would spend money on things I wanted. I would buy things for friends. I even bought sports car that I probably shouldn’t have, although, that was fun. I suppose that may be true of most kids in their late teens and early 20’s.

If you are young and starting to get into the workforce, hopefully my life story will help you avoid the same pitfalls. If I had set aside a small percentage of my paychecks, say 5%, from when I started working full time until today — I would likely have bought a house by now…IN THE BAY AREA. No small feat, I can assure you. I’ll talk more about savings accounts and how to use them in future posts.

 

Not understanding credit cards or credit scores.

This one really came back to burn me in my first years of adulthood. I think the saving grace was that I screwed up when I was 19-20, so I had time to recover from my mistake. As soon as I turned 18, I started getting offers for credit cards. By the time I was about 19 I had two cards in my name. They didn’t have large credit lines, but it was enough to get me in trouble. One card had a max of $1000. I think the other had roughly the same, maybe $1500. I can’t remember anymore.

I know what you’re thinking. Did I think I really had $1000 to spend? Typically that’s the problem young people run into with their first credit cards. They think they actually have that money. That wasn’t my issue. I think in theory I understood that I didn’t have that money and I needed to pay it back. In practice however…well, I failed. I maxed out one card on a weekend getaway with a girl I was trying to impress. I maxed out the second one on what was probably needless purchases. I was making minimum payments and I thought it was fine. Then…bam! A mistake at work cost me my job, and I fell behind on payments. Worse yet, I wasn’t very organized with my finances, so even keep track of what was happening was a mess. I fell behind on payments, the fees piled up, and I couldn’t afford to make the payments.

Eventually, I settled with the card companies and paid them back a portion of what was due. My credit was ruined for years. It was about the time I settled with the card companies that I found out about credit scores, what they were, and how they worked. At one point my credit score was down in the 500’s. It took my 7 years to get my score above 700. Today my score is excellent and I have ZERO debt. I pay my cards off every month and collect the rewards. 

If you are unfamiliar with how credit scores work,  you should read this

In retrospect the most frustrating part was how I let myself get into so much financial trouble over such a small amount. You live, you learn. I’ll talk more about how to use credit card properly in future posts.

 

Investing…or lack thereof

This might be my biggest sin of all. Growing up I never heard about investing, stocks, bonds, markets, charts, etc. It wasn’t even a foreign language, it just didn’t exist in my house. I did like to watch the news, so by my teen years I was aware of the stock market, but outside of knowing it existed, I had no idea how it worked. I thought it was something rich people did. Knowing what I know now…HURTS…it just hurts. lol. But I can’t let that stop me from moving forward and doing the right thing.

In my late 20’s I took a job as a professor at a local community college. It was the first job I had that offered a retirement plan where they matched my contribution. I signed up for it because it sounded like the right thing to do, and then I forgot about it. I spent a couple of years at that job, and in that short amount of time I had built up a little under $2000 in a Calstrs account. Calstrs is the retirement plan for teachers in the state of CA. I quit my job in 2011 to join my wife working full time on growing our business. That ended up being a great move, but with the business we didn’t have any investments or 401k options setup. We were just reinvesting everything into the business in those first years.

After making that move I started to think more about investing, retirement, and how I would achieve it. We had two young boys, and a thriving business. With most of my focus on those two aspects of my life, I still didn’t take the time to focus on investing. Luckily I had that small nest egg from Calstrs just sitting there, growing, without me doing a thing.

In late 2018 I finally took the time to research investments. Our CPA had been asking us why we hadn’t been putting away money for years. I finally listened. I went back to look at my Calstrs account. I figured I could just keep adding to it now that I was able to. When I called to set that up, I learned that I couldn’t contribute to it since I was no longer employed by the state. I looked at my options and decided to move my money to an IRA with Schwab. (I’ll get into different brokerage accounts and companies in future posts). It was a small account by most standards, but it was mine, and I could now do something with it. In December of 2018 I opened my IRA with about $2500.

Now, 18 months later, I have my IRA, my day trading account, and some money in Bitcoin. All together my investments went from $2500 to just over $20,000 in just 18 months. I am KICKING MYSELF for not doing this sooner, but it’s time to focus on the future. My journey is just beginning. Don’t wait to start yours.

Carlos Chapeton

NOTE: My blog is not investment advice. I am not affiliated with or get paid from any business I mention in my posts. These are merely a record of my investment journey as told by me. Before investing you should do your own research and decide which investment options are right for you.