“Liquidity, not low bond yields, is fueling this market, and market behavior is so speculative in places like the Russell 2000 that the headline writers are struggling to keep up,” SocGen’s Andrew Lapthorne wrote this week.
It’s true. The headline writers were struggling to keep up as a Reddit-fueled mania played havoc, compelling Bloomberg (and, as of Wednesday, Andrew Ross Sorkin) to spend an inordinate amount of time covering a phenomenon which, at a basic level, just entails a group of people becoming suddenly aware of their collective capacity to shape reality.
“These guys see their collective power and go on stop-hunts,” Nomura’s Charlie McElligott said, adding that “they understand that their grabbing of short-dated, deep out-of-the-money calls in stocks packs a lot of convexity and dealer-hedging sensitivity to a move higher in the underlying stock.”
That realization actually happened last summer, but this week’s action in GameStop (and AMC and Express) marked what I think it’s fair to call “insanity squared.”
On Wednesday morning, a “sticky” chyron appeared on Bloomberg Television touting a special TV event called “The GameStop Phenomenon.”
So, after three days of incessant stories and journalists playing catch up to the latest triple-digit surge, the world’s most trusted financial media outlet finally just decided to go all-in (“YOLO,” after all) and produce an entire television segment dedicated to a message board-fueled mania in shares of a downtrodden, video game retailer. It was set to premier at 5 PM EST.
Goldman’s basket of the most-shorted stocks is having its best month since… well, since “ever,” apparently.
Notably, Michael Burry sought to distance himself from the rally in GameStop which, as Bloomberg reminded folks, he may have helped spark.
“If I put $GME on your radar, and you did well, I’m genuinely happy for you,” he said, in a tweet that was later deleted. “However, what is going on now – there should be legal and regulatory repercussions,” Burry added, calling the rally “unnatural, insane, and dangerous.” He tagged @SEC_Enforcement.
That latter bit will be an issue going forward. The notion that the Reddit crowd can plausibly claim they’re just buying on “fundamentals” is undercut (severely) by the tenor of the cacophony. There’s a risk that some of the braggadocious rhetoric could be construed by overzealous regulators as tantamount to an admission of collusive activity.
I’m not weighing in personally one way or another on the relative merits of that. I’m just saying that it’s never a great idea to engage in activity that could be seen as collusive and then boast about it explicitly in a forum that’s being monitored in real-time by hundreds of thousands (if not millions) of people, from traders to journalists to who knows who else. Full disclosure: I’m likely to buy some puts on some of these names — in my opinion, this is one of the most out-of-hand situations witnessed in decades.
The underlying fundamental case for many of these stocks is flimsy at best, so it would be extremely difficult to argue away one’s bombastic references to manipulative market behavior by way of some rational bull thesis. Indeed, it’s not likely that many of the people involved in this trade know anything about the underlying fundamentals for the names they’re collectively driving higher.
Of course, there’s nothing illegal about taking a contrarian bullish position alongside a bunch of your friends, and as far as I know, there’s no law that prohibits individuals from “knowingly weaponizing gamma” (now I’m laughing).
Still, you get the distinct impression that this isn’t going to end well for someone. It’s just not clear who. On Wednesday, both Melvin Capital and Citron said they closed out their shorts in GameStop.
I also wonder whether it’s occurred to the media that without the help of around-the-clock coverage, this phenomenon likely wouldn’t have manifested as dramatically as it did.
Panning quickly back out to the 30,000-foot view, SocGen’s Lapthorne said that “the assumption is that the new US administration and others, faced with the ongoing COVID-19 pandemic, will sit idly by and let this speculative market build and build without intervention.”
“We’re not so confident,” he added.