Tag Archives: stocks

GameStop Saga Continues: Congressional Hearing on Feb 18

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By January 2021 half a dozen or so short sellers had lost around $13 billion. Retail investors on Reddit’s WallStreetBets forum became catalysts in catapulting the stock price of GameStop from $13.66 on December 9 to $345.83 on January 27. The unfortunate short sellers were betting the stock price of ailing GameStop would fall.

Who knows why any of the retail investors chose to invest in GameStop. Money can be made by purchasing a low-priced stock, pushing the price up by incentivizing lots of other purchasers, and selling before the stock crashes. Also much satisfaction can come from watching short sellers and other dealers in market misery squirm.

Regardless of gain or loss, or impetus for the massive investment in an ailing company, the GameStop saga will most likely have lasting effects.

Congress Wants to “Do Something”

Congresswoman Maxine Waters, Chairwoman of the House Committee on Financial Services, announced a full Committee virtual hearing for February 18, at 12 PM ET. Subpoenas have gone to the CEOs of Reddit, Robbinhood Markets Inc. (on-line investing platform), Melvin Capital Management LP, Citadel LLC (capital management), and Keith Gill (retail investor).

Congresswoman Waters’ statement:

We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price.

Did either the short sellers or the retail investors involved in GameStop do anything illegal or even unethical? They appear to have done what law and practice has allowed since the financialization of the U.S. economy away from manufacturing, the proliferation of financial instruments that facilitate market manipulation, and the abundance of cheap money and debt.

The Misery Makers Might Get a Slap on Their Wrist

Hedge funds who use short selling as one of their many money-making activities and private equity firms who specialize in buying ailing companies are indeed the most visible dealers in market misery today. Private equity firms buy struggling companies with cheap borrowed money, and burden the companies with debt and a downsized workforce. As the companies struggle to pay interest on their debt, hedge funds borrow the companies’ stock from brokers, sell it, and then buy back the stocks at a lower price.

Poor management, inflexible strategies in changing times, and lately government responses to the Covid-19 pandemic contributed to the downfall of companies that were household names: Thomas Cook Travel, J. Crew, Neiman Marcus, Toys R Us. However, the role of the misery makers should not be overlooked.

But they also shared one increasingly common problem for retailers in dire straits: an enormous debt burden — roughly $1.7 billion for J. Crew and almost $5 billion for Neiman Marcus — from leveraged buyouts led by private equity firms. Like many other retailers, J. Crew and Neiman over the past decade paid hundreds of millions of dollars in interest and fees to their new owners, when they needed to spend money to adapt to a shifting retail environment. The Pandemic Helped Topple Two Retailers. So Did Private Equity, NY Times, June 18, 2020

Unsustainable debt is a good indicator of a company in decline that can enrich short sellers. GameStop’s debt was almost 6 times its equity at July 31, 2020.

At February 12, 2021, GameStop’s price was $52.40. Depending on when investors bought GameStop stock, and when they sold it, if they sold it, they either made money or they lost money. That’s how markets work.

Let’s see what Maxine Waters contributes to this saga.

No Sign Congress Wants to Go Back to Work

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If anyone at all harbored any hope that the U.S. Congress would go back to work after Special Counsel Robert Mueller issued his report on “Russian Collusion” stating there was none, those unfortunate hopeful folks need to abandon all optimism and go back to just shelling out tax money.

After nearly two years and approximately $30 million in expenses incurred by the Mueller investigation, Congress and the public got to see a redacted version of the Mueller Report in April 2019 – and a new round of pulling of hair and rending of garments commenced. The Democrat majority in the House of Representatives renewed its cry for more investigations and possible impeachment of the President. They want to look into his tax returns and his private real estate deals. They want to investigate who paid for his inaugural event, and why he is calling for changes in the U.S. Census.

Monopoly OligarchCertainly, we the people want Congress to root out corruption, and the fall from grace of many who Mueller dispatched into the arms of the judicial system might have been worthwhile. But, was this mere collateral damage within a higher agenda? Is it time for every voter and taxpayer to ask whether there is a higher agenda and what that agenda might be? Might such a higher agenda be the innocent belief that Donald Trump threatens the venues that government uses to take care of us? Or might the higher agenda be that of oligarchs who do not wish to relinquish control of government venues in charge of funneling wealth?

The innocents truly believe government can better their lives by providing free stuff. They ignore the fact that there is no such thing as free stuff. Take education that became unaffordable to the average American college aspirant when predictably colleges raised tuition in order to capture the largess offered by taxpayer-funded student loans.

On the other hand, oligarchs know exactly what they are doing by encouraging endless printing of fiat money. Think your rent is so high you barely can keep a roof over your family’s head? Look at all the practically free money created by rock bottom interest rates that end up parked in real estate that remains vacant for decades. Think your city is full of techies that can afford to price you out of purchasing a home? Look again at all the fiat money floating around that needs to be parked somewhere, and tech companies are as good a parking space right now as anything else. By the way, this scenario is not the result of capitalism, but the result of policies such as those established by the Federal Reserve (low interest rates) and your government at work (endless spending on entitlements and forever wars).

Voters and taxpayers might want to consider the invisible strings pulling the visible puppets that are so intent on avoiding change at all cost.

Pick one: Tyler Durden or Paul Krugman

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The news media is having its problems these days. If the media is not being called fake news, it’s being called conspiratorial. Fact checkers have sprouted like crabgrass, and legislators – state, federal, you name it – have rushed to protect consumers from being stripped of all their personal information or being exposed to deviations from the status quo.

So what to do? The macro approach suggests that you read a variety of news sources – established, alternative, left-leaning, right-leaning, and even libertarian if you are really brave. The micro approach is to pick your favorite echo chamber and stick with it. The latter approach might be advisable if you need/want to do things other than look at the news. If you really need/want to narrow your choices even further, pick either Paul Krugman or Tyler Durden. Why those two? Why not.

Helping You to Pick

Fifht Club - CopyAs everybody knows, Paul Krugman is the Nobel Prize winning economist that explains our present and predicts our future on the New York Times. Tyler Durden is a fictional character in the book and movie The Fight Club, but he also lends his name to the writers and editors of the political/financial/life-experience website Zero Hedge. Although Professor Krugman is predictably and consistently left-leaning, “Tyler Durden” of Zero Hedge is, according to reviewers, alt-right, anarchical, doom and gloom, and “extremely influential in the New York, London and global hedge fund community.”  (Pictured:  Tyler Durden, i.e. Brad Pitt, in The Fight Club)

Their track record? Let’s pick what each said on November 9, 2016.

* Paul Krugman on November 9, 2016, regarding the U.S. stock market:

I guess people want an answer: If the question is when markets will recover, a first-pass answer is never.

Under any circumstances, putting an irresponsible, ignorant man who takes his advice from all the wrong people in charge of the nation with the world’s most important economy would be very bad news. What makes it especially bad right now, however, is the fundamentally fragile state much of the world is still in, eight years after the great financial crisis.

Now comes the mother of all adverse effects — and what it brings with it is a regime that will be ignorant of economic policy and hostile to any effort to make it work. Effective fiscal support for the Fed? Not a chance. In fact, you can bet that the Fed will lose its independence, and be bullied by cranks.

…So we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened.

* Tyler Durden on November 9, 2016, regarding the U.S. stock market:

Just like with Brexit, the so-called Wall Street experts scrambled to paint a picture of doom and gloom, warning traders, and markets, that the end of the world is imminent should Trump win, and that stocks could drop by 5%, 10% or more should Donald Trump get elected president. And again, just like in the case of Brexit, they convinced the algos and the momentum chasing traders. Briefly. Because after futures hit the 5% down limit shortly after the market realized it was dead wrong about the presidential election, they have since soared nearly 80 points of the overnight lows and are well above the Friday, pre-Comey close, level.

How come?

Simple: as we have repeatedly said, a Trump victory, coupled with lower taxes, a spike in infrastructure spending, and a surge in debt is precisely what the economy – and a normalized market, one not manipulated daily by central banks – wanted and needed, as it not only will prompt yields to rise, but it will assure even more QE in the near future as foreign buyers of US debt disappear (assuming Trump does not do away with the Fed entirely, which for a man running a real estate empire, he won’t do as he ultimately needs lower rate.)

It’s the Fundamentals

RationalWiki describes Zero Hedge colorfully, and as several other reviewers mentions that ZH follows the Austrian School of Economics — you, know, the non-Keynesian guys.

Zero Hedge is a batshit insane Austrian school finance blog run by two pseudonymous founders who post articles under the name “Tyler Durden..”

Bill Clinton’s rousing campaign slogan “It’s the economy, stupid,” was instrumental in his winning the presidency against incumbent George H.W. Bush. Tyler Durden should adopt a similar slogan about the stock market, “It’s the fundamentals, stupid.”

However, there are plenty of people who prefer ideology over fundamentals, so Just Vote No suggests Paul Krugman.