Blockbuster or Bust
January 29, 2021 by The Q.ai Team
The educational portion of this newsletter focuses on GameStop
Q.ai whenever someone says Wall Street has an edge over the stock market
Do we even need to rent movies anymore? Or is the real entertainment right here in the real world?
This week’s MVP is 100% the people pumping out memes on Instagram and FinTwit. We included our favorites below. And if you’re curious about what is going on with GameStop, those memes are accompanied by a detailed explanation of the reckoning that is currently going on in Wall Street.
This Week’s Biggest Headlines
- Apple reports its most profitable quarter ever. The company surpassed $110 billion in revenue, raking in a profit of $28.7 billion. Despite the pandemic, Apple still managed to blowout its previous Q4 performance by 29%. Read more.
- Johnson & Johnson’s COVID vaccine is less effective than Pfizer and Moderna, but still more effective than the flu shot. As a reminder, the flu shot is typically 50% effective and gets FDA approval every year. J&J’s vaccine is reported to be 66% effective against moderate and severe COVID-19 symptoms. Having a third vaccine available would further simplify distribution, so this should be viewed as a positive. Read more.
- General Motors is going all electric by 2035. This means that it will no longer manufacture vehicles that require gasoline. GM is notorious for its large gas-guzzling SUVs, so this is pivot is significant not just for the company but for the automobile industry as a whole. Read more.
- Coinbase is going public. The company plans to go public by direct listing, which means it is bypassing the IPO process. This means that its shares will be immediately available for trading. So far, the company has raised over $540 million. Read more.
- Walgreens’ latest hire has made history. Rosalind Brewer is about to become the only black female CEO at a company in the S&P 500 Index. Read more.
What on earth is going on with GameStop?
A subreddit of retail investors decided to target a bunch of struggling stocks, which has resulted in hedge funds losing billions of dollars. This has divided people, with most siding with the retail investors.
We’ll keep this brief. If you’re wondering what all of these incredible (and often savage) memes are in reference to, here’s all you need to know. And, by the way, we are in no way offering our opinion on the matter. This is what we all know so far.
The first thing you should know is how a hedge fund works
Hedge funds are an actively managed investment vehicle that uses a variety of strategies to maximize its investment gains.
- Some strategies include shorting a stock, which essentially means you’re lowering risk in your portfolio by borrowing a share of a stock and selling it shortly after with the promise to buy it back at a later date
- You can make money doing this if the price falls after you sell it and you buy the stock back at the lower price
- Essentially, you’re betting against the success of a stock. And shorting allows you to do this without putting much money upfront. But if you bet wrong, you will lose money.
Another thing about hedge funds: it is really expensive to manage and to invest in, so it’s typically reserved for those who have a lot of capital or are very savvy with investing.
It’s a subreddit that has attracted everyday investors who are characterized as misfits to the typical Wall Street mold. They don’t have Harvard MBAs and they have likely never worked on a trading floor. In the words of the Associated Press, “their discussions are full of ideas for the next big trade to jump on, self deprecation and an appreciation of both winning and losing bets, as long as they’re bold.”
Most recently, the sub was encouraging the purchase of GameStop stock, which was $18 per share at the time.
It’s important to note they weren’t buying the stocks outright. Instead, they were options trading, which gives you the right to purchase a stock at a later date. When you buy stocks “on margin,” the money is borrowed meaning you aren’t putting money upfront. Options trading is really risky – there are high gains but also heavy losses. That’s why many equate it to gambling.
Fast forward a few weeks, GameStop’s stock has surged 928% in value.
Is /r/WallStreetBets entirely responsible for this?
No. Remember, hedge funds were aggressively shorting GameStop. Their plan didn’t work out when /r/WallStreetBets decided to buy the stock with the intention of holding it. Like we mentioned earlier, if you bet wrong you could lose money as a result. And that is exactly what happened to hedge funds – and we’re talking billions. According to The Verge, “short-sellers have been trolled out of about $5 billion in 2021, just from their GameStop positions alone.”
/r/WallStreetBets didn’t just stop at GameStop. It targeted other heavily shorted stocks like AMC, Blockbuster, Blackberry and American Airlines.
With most platforms covering the cost of commissions, the massive surge in trading has been costly for these companies. Earlier today Robin Hood raised $1 billion to cover costs. At first, many of the trading platform, such as Robin Hood, removed these stocks from their platforms which led to widespread backlash. Many are accusing trading platforms and Wall Street as a whole for changing the rules of their own game only when they started losing. This has even caught the attention of the U.S. government which is said to begin an investigation.
The Bottom Line
At this time, it’s hard to say what will happen next. These heavily shorted stocks are back on trading platforms. And for the most part, people who are merely spectators have shown very little sympathy for the Wall Street investors who lost money. But if there’s one positive from all this chaos, it’s the incredible treasure trove of memes that have materialized overnight.
Don’t know what options trading is? Not only does this video have stick figure drawings, it explains the basics in layman’s terms. It’s also 8 minutes long – you can thank us later for not linking the 2.5 hour video we came across.