Category: Investing

GME, A Familiar Story

It’s a familiar story. Some millennial sends me a text saying “Hey, I just bought my first LiteCoin on Coinbase!”. My response is “Jeebus, you probably paid a 2% commission, why didn’t you just use GDAX?”. I hate fees and Coinbase charged a 2% “I don’t know what this is, but my friends are doing it” fee. This was December 2017. During 2017 Bitcoin, Ethereum, Ripple, Monero and countless other nameless crypto currencies rose to internet fame increasing in value over 100x. Initial investors didn’t believe the hype, but Reddit coined the term ‘Hodl’ and we held on for dear life as our net worth bounced around 20% daily.

Then came the reckoning:

If you bought at the top, you lost 25% in a few days, 65% within a month and 90% by the end of the year. If you’re still holding today, you’re actually up! The price of ETH is $1,343 today, but that’s a completely different story.

Ok, Let’s Talk About GameStop

To be clear, there has been no news released by the company since January 11th, when it announced that their 9 week holiday net sales were $1.770 billion, a 3.1% decrease compared to 2019 (source). E-commerce sales were up, but as I said in an earlier post, both Playstation and XBox are trying to move to digital sales only for new games. Bears, like myself and a few other badly hurting hedge funds, thought this brick and mortar retailer was a thing of the past and would be swallowed by Covid closures. After my post about selling my short here, I stayed the hell away from GME, ironically, only because shorting was too expensive, meaning I still thought I was right, but not at that price.

Bulls had a good case, however. I’m going to embed this whole Reddit post here; it’s actually brilliant. In effect, u/delaneydi is arguing that given the companies strong cash position (it’s still strong), projected EBITDA, and ridiculously low EV/Sales multiple, the price of the stock doesn’t reflect it’s true value, which is modestly higher. As you can see, no one cared about this post as it generated a whopping 33 up votes. I can’t even link to the comment section, but in short, this user was lit tf up. Even r/WallStreetBets was short this stock in 2019

GameStop Investment Thesis from r/wallstreetbets

However, some major investors agreed. The first one was Michael Burry of Scion Asset Management, but you may remember him as played by Christian Bale in The Big Short. He quietly opened up a long position as shown in a 13F filing, which he bought in Q3 2018 worth about $6.7mm with a basis of $12.61 / share. He added to that position over the course of 2019 and even bought shares for as low as $3.50 mid 2020. However, towards the end of 2020, he liquidated 36% of his position at around $10 / share, which probably represented a measly 40 – 60% gain. According to his latest 13F filing, he still owns 1,703,400 shares, which would be worth $562mm, though that filing is a bit old.

My favorite part about Burry’s investment is that he actually saw the same value as the Reddit user. He issued a press release in August 2019 urging the GameStop board to use $237mm to buy back 80% of the companies stock. His reasoning was that during the month of August 2019, the number of GME shares traded exceeded the total number of outstanding shares. GME could theoretically buyback and retire 80% of the total shares, dramatically improving earnings per share. He then goes on to say that the GME missed lots of opportunities to move into the digital space, so while the company shows no large upside, a bit of financial maneuvering could yield a decent upside for shareholders. Smart guy. I wish I knew all this was going on.

Next up, the Ryan Cohen, the founder of Chewy, Inc announced his hedge fund dumped $5.8mm into GME stock in August 2020 and continued to add to the position, totaling $75mm at a price of $8.43 / share. That’s now worth north of $1.3bn. In the mean time, the shorts continued to pile on, reaching 120% short interest towards the end of 2020. It made sense, the company was burning $100mm per quarter and had no discernable digital strategy to address the new consoles. Bulls said that despite the fact digital was overtaking physical games, the demand for video games continued to go up, and, as they say, a rising tide lifts all boats.

The Big Short Squeeze

So here we are: GME is the most epic short squeeze in all of history. But how could it happen. Informed and successful hedge fund managers had LONG positions. Multiple posts on Reddit called out a the fact there was a 120% short interest (which cost 60% to borrow for the privilege) with a potential basis of $7 while the share price was hovering around $10. If the stock hit $15, that means the shorts were going to be out over 100% of their initial investment.

Side note: I’m never going to short a stock / I haven’t in years (I only did it to see how it worked, but I’m over it). When you short a stock, you effectively borrow the shares from someone (usually your broker), and sell them. Selling the shares creates downward pressure on the price (just think buyers only want to buy something if the deal looks good, and if you think the shares will go down, odds are other people do, but to a point. So they have a price, but it’s lower than what it’s currently at). Ironically, selling shares you don’t own creates downward pressure on the price and is good for the short seller! The catch is that the short seller needs to deliver those shares back to the original owner, basically whenever the original owner wants them. In order to borrow the shares, you pay the original owner interest. If the shares are volatile, the original owner charges a hefty premium. So by simply staying in the trade, you are losing the interest payment. On top of that, if the share price, say, triples, you have to buy the shares back on the open market and return them to the original owner. That means your exposure is literally infinite loss. So imagine borrowing $100 worth of GME at $7 (14 shares) and selling those shares. You owe the person you borrowed those 14 shares from, well, 14 shares of GME. If the price goes down to $3 and you want to give the shares back to the original owner, you buy 14 shares at $3 for $42 and voila, you just made $58. However, if the shares go up to, say, $330, and the original owner wants those shares back, you now have to buy 14 shares on the market for $4,620. You just lost $4,520 on a $100 investment. Great work. Oh, and your upside would have been $100, only if the company went bankrupt.

Main Street Crushes Wall Street

Ok, so back to the main event. In late 2020 and early January this year, Citron Research and Melvin Capital released statements that they are short GME. By January 12 the short interest on GME was 139.67%. That means there are more shares sold short than are floating on the exchanges. The short squeeze is simple, the price goes up, and over 100% of the shares need to be sold in order to return. If you’re wondering, short interest can exceed 100% because shares are borrowed and sold multiple times. It’s an utter disaster. When the price spikes, everyone wants their shares back because they’re afraid the borrower won’t be able to pay. In the case of GME, they should be afraid.

Ok, so Citron Research and Melvin Capital got crushed. Citron tried to live stream an event talking about their short position, but got shut down by hackers. Redditors, especially those on r/WallStreetBets really don’t like Citron Research. Citron, the notorious short sellers, released statements that they thought Palantir and Fubo were easy shorts, sending the price in a downward spiral after a meteoric rise. Now that both Citron and Melvin exposed their short positions on a low market cap stock with incredibly high short interest to begin with, Redditors saw a huge opportunity. Buy, hold, buy some more. If the price goes up, over 100% of the outstanding shares will need to be BOUGHT, forcing the price way up. If there are limited sellers, those sellers can demand a huge premium. That is exactly what happened. Main Street crushed Wall Street.

Somehow This Gets Political And IT NEEDS TO STOP

As of today, Robinhood stopped its customers from buying shares of GME, AMC, NOK and other heavily shorted stocks that experienced a short squeeze over the past week. r/WallStreetBets Discord stopped working – it looks like that was due to unprecedented volume – and its Reddit page went down for a bit. These things are concerning, but happen when growth is hyperbolic. The subreddit has gained over 1mm new users over the past few days. People are downloading RobinHood and buying GME as their first stock purchase ever.

To be clear, this is not Wall Street taking from Main street. It’s Main Street taking from Main Street. That is actually how America should work. I honestly think it’s common sense not to invest in anything you don’t understand, so if you do, I don’t feel sorry for you if you lose money. Nor should the government care. If it’s fraud, or something dishonest, yes, government please step in and enforce reasonable laws. But do not shut this down.

I was very disappointed to see this press release:

“With stocks soaring while millions are out of work and struggling to pay bills, it’s not news that the stock market doesn’t reflect our actual economy. For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price. It’s long past time for the SEC and other financial regulators to wake up and do their jobs – and with a new administration and Democrats running Congress, I intend to make sure they do.”

Elizabeth Warren

The government has no business regulating hundreds of thousands of small investors (she literally doesn’t understand anything). They know the risks; it’s a casino and people just want to play. Hedge funds have been throwing their weight around for years, manipulating the markets in the shadows. It’s time for Main Street to do the manipulation and lay in the proverbial bed we made. Even Citron Research came out with this tweet, basically telling the SEC to stay TF out of this battle.

Put your political leanings aside (hey, I just called out Elizabeth Warren), AOC is dead-on here

The Wealthiest Man in the World Should Stay Out of This

Not cool Elon. If you remember, Tesla used to have a huge debt problem. Citron Research was one of the loudest short sellers of Tesla, forcing it to constantly worry about its ability to pay back its massive debt load. Elon Musk (more than) entertained the idea of taking the company private because short sellers kept pushing the stock price down, making debt obligations more onerous. They were obviously wrong and short sellers lost $40bn shorting Tesla in 2020.

Elon Musk tweeted this out because he knew Citron was getting crushed by shorting GME. He literally tweeted out ‘Use Signal’ in response to a (misinterpreted) WhatsApp privacy policy change and some unknown penny stock Signal Advance Inc shot up from $.60 to $38. So, yes, he knew this tweet would move the market. This kind of behavior shouldn’t be tolerated. If not illegal, it’s highly immoral. Every hedge fund knows whats going on with GME. Main Streeters who don’t own stock have no idea. It’s a known and sad fact that Americans follow Billionaires blindly and it’s likely a lot of people bought GME after this tweet.

As of writing this, GME is down 62% (coming back though). No one should lose half of their investment in an hour unless they are fully aware it can happen. I don’t think we should regulate it, but rich people don’t need to purposefully dupe tens of thousands of people because of a grudge. That said, if I were him, I would have done the exact same thing. If you come at the king, you best not miss.

There’s Chaos Outside the Markets Too?

I keep starting to write something, but end up stopping when some earth-shattering news story hits. We have cave-men occupying the Capitol building, staggering Covid-19 numbers, Bitcoin and Ethereum at $40k and $1.2k respectively, and here I am trying to find some pithy blurb about why some company is 10x undervalued or overvalued. Well, whatever, I can’t wait an eternity to get a word in amongst anarchy and division. Also, aren’t we supposed to be quarantining? Every damn time I decide to see what’s going on in the world I am disappointed and retreat back inside.

Dems and a New Stimulus?

I’ve been focusing a lot recently on stimulus checks. I think they are a good thing, but it doesn’t mean the money distributed by the government came from some kind of reserve or that there’s some kind of plan to pay this money back. In fact, it challenges the basic existence of money and debt. In short, that’s probably why BTC and ETH (along with a whole lot of other coins) have spiked. They are a decentralized store of value. The real commodity is the graphics processors minting BTC, which is why I prefer proof of stake versus proof of work, but that’s another topic.

Financial Product Idea: Someone really needs to create a ‘currency index coin’ that holds in reserve a mix of currencies (Dollar, Euro, etc), decentralized currencies (BTC, ETH, etc) and hard commodities (Gold, Silver, etc). That covers all sorts of doomsday scenarios along with a myriad of other scenarios like business as usual, high inflation, low inflation, hype cycles, recessions, and new innovative stores of value. The index itself should be crypto-based, but actually hold all this basket of stores of value in reserve so it could theoretically be liquidated at any point and distributed according to the basket mix.

Ok, back to the long-term implications of just handing out money. We need a new tax code. Income tax is fine, but tends to unfairly tax salaried workers and favor anyone who makes their money off of ‘capital gains’. Capital gains can come from any business or property venture, but what usually happens is people who make a lot of money in business invest in property. Property, which is literally secured by the Constitution of the United States is taxed at the State level, which makes no sense to me. The US army protects our land, the value of everyone’s property should be taxed appropriately to pay for that privilege. It certainly shouldn’t be completely left up to the states to charge as little or as much as they choose. This is how California ends up with the highest income tax, but lowest property tax for the rich. If California votes for Democrats, how can they let this stand? I mean, I live in CA, but I still think it’s ridiculous (no I’m not leaving, it’s beautiful here).

Next tax to talk about: inheritance tax. If we actually had a significant one, Donald Trump would not exist in our lives. I don’t believe in passing along wealth from generation to generation from the simple economic standpoint in that it hinders innovation. If you believe in trickle down economics (no one should), then you believe the rich deserve to be rich and their innovations will trickle down jobs and wealth to the middle class. Well, if you inherit all your wealth, odds are you spent most of your college years bullying underclassmen, doing a bunch of coke, and coming very close to failing out (our last two Republican presidents people). How is that supposed to foster innovation? If necessity is truly the mother of invention, then we will invent what we need. But if the inventors, and more importantly the capital providers behind the inventors, just need to hold on to power, we’re in for a wild ride mixing extremist populism and fascism. Instead of building a better future, ‘some people’ encourage crazy people in bear suits to storm the Capitol. I understand this argument doesn’t hold up in practice, but it’s something to think about.

So, now that the Dems control the Congressional and Executive branches, what does this mean for taxes and the market? Probably not as much as effectively distributing and delivering the Covid-19 vaccine, but there are some probable events. First, I think we can expect a $2,000 stimulus. Do you think the Democrats will go back for $2,000 in addition to the $600 or an additional $1,400? I think we can also expect big tech to be put under a microscope. They have good lawyers, so my guess is that everything will reach a reasonable conclusion. Also, as I’ve been saying, Biotech should continue to explode. And if you believe the hype, electric vehicles and clean tech will keep blowing up. These are more long-term investment ideas, which the market doesn’t seem to favor right now. It is shocking Elon Musk is the world’s richest man, yet his innovations and products, which are fantastic, affect so few people. We’re not going to live on Mars in our lifetime, so there’s no reason Tesla’s stock price should be living there right now.

Mitch McConnell took a lot of shit for blocking the $2,000 stimulus, but given his situation (like take this literally, be him, trying to accomplish his goals, and the goals of the Republican party), I can’t really fault his decision. It was a solid example of a Prisoner’s Dilemma. If he didn’t block it, he would be signaling to the true Republicans that the budget deficit is not a priority and government handouts are rarity. The Republican base in the next election would have very little to stand on in terms of fiscal policy and aligning their fiscal policy with the Democrats probably favors the Democrats long-term. But, by opposing it, he was a major contributing factor throwing the Georgia senate seats to the Dems. When faced with a classic Prisoner’s Dilemma, shoot the hostage is the answer I guess :).

So, if we increase the stimulus from $600 to $2000 (assuming people get an additional $1,400 sometime soon), it will cost between $465bn and $600bn depending on how many dependents and spouses are included in the calculation. If the government issues $600bn in bonds and decides to pay that back over 30 years at 1.18%, the government basically owes $900bn over the next 30 years, which is $30bn per year (it doesn’t really work like that, but humor me). The US government has annual revenues of $3.5tr. It seems like a drop in the bucket, but it’s really not (I would continue with the math, but it becomes circular because basically the government just needs this money back because it’s spending money it doesn’t have). The US government needs to save an additional $30bn per year for 30 years to make this work. Instead, this year alone, it increased the budget deficit by $3.1 Trillion. So for every $2k the government hands out, it’s going to need that money back. Either tax rates will go up, or we all better start earning more money. Hey, what if we just make everything just cost more so salaries go up without needing to increase actual output efficiency? 🙂

In other news, I’m not sure why we are all so upset. Would you rather be alive today, current wealth and living situation, or live in the 19th century enjoying the wealth of the top .1%? Well if you’re over the age of 40, there’s no point in even answering that question because the average life expectancy in 1860 is 39.4 years. If you’re 30 or over, great, you’ve got another decade with absolutely no Netflix, iPhones, or Ugg comforters (I just got one, it’s fantastic). So, maybe we should all just chill out and rather than trying to be the loudest in the room, try to appeal to reason, because at the end of the day, we live in an insanely advanced world capable of solving world-sized problems.

Stock Picks

BTC: I have to say something about Bitcoin. If you’ve forgotten you bought in 2017 and looked at your account today, you’d be pretty happy. I think the future of Bitcoin is a lot more clear. First, it will never replace any government backed currency. Second, it can work as a store of value, similar to gold. Unlike gold, it has no physical (or digital) use besides the fact it exists. Third, millennials love Bitcoin. Fourth, If Bitcoin was valued like gold by the market value of investor’s positions, it would be worth $146k today. And fifth, BTC moves with the stock market, instead of against it, which is not what traditional investors want for a currency, inflation, volatility or recession hedge. So, while BTC is probably going through another hype cycle, I’d say a reasonable upside in the next 5-10 years is $146k, if not higher because it will probably attract more investors than gold as more teenages race to open Robinhood accounts to gamble their allowance money.

FuboTV: What a wild ride! Kerrisdale Capital published this:

Fubo is not Roku. Fubo is not the next NetFlix. Fubo is not the next DraftKings. Fubo is a streamier version of a pay TV distribution model that is going away, only with far worse underlying economics.

I beg to differ! LiveTV will live on because, sports. If you’re like me, you watch most of them, basically know the rules, but I’m never going to pay for any sport in particular. Enter FuboTV. Also, betting on sports is fun. Enter DraftKings. Add premium content and sponsored events, and boom, you have Netflix + DraftKings + $$$. Silly Kerrisdale. Buy and hold baby!!! K, I’m going to stop talking about this one

PSTH: Price is ~ $27 with a par value of $20. If you buy this stock, you are pay a 35% premium. The fund raised $4bn and are value at $5.47bn. They have done nothing for 5 months and have an additional 19 months to close on a ‘mature unicorn’. You’re supposed to buy this stock because the market is acting irrationally, not because it makes any kind of sense. Ackman is well-known hedge fund name and odds are whatever he buys will make a splash. He can certainly get meetings with any company he wants.

SPACS – In General: SVAC, YSAC, PSTH, IPOC, BTWN (disclaimer, I sold IPOC and BTWN because I went up 15% for absolutely no reason. This is why we buy these things). There’s not much of a point in doing a ton of research, they all seem to rise and fall together and your guess is as good as mine as to what these entities will purchase.

XL Fleet: This is an EV company taken public by a SPAC purchase. They provide vehicle electrification solutions for commercial and municipal fleets. I like that they are relatively still small at a $2.75bn market cap and they have been around since 2009. They have thousands of vehicles on the road and seem to fit into my SPAC and clean energy bets