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DON’T-STOP GAME STOCKS: Bankrupt Companies As Trillion-Dollar Chips in the Wall Street Casino 

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by Knave Dave
Saturday, Feb 06, 2021 - 12:02

The following article by David Haggith was originally published on The Great Recession Blog:

Elon Musk Portrait Painting Collage by Danor Shtruzman (https://creativecommons.org/licenses/by-sa/4.0)

The faint heartbeat of this week’s jobs report did not keep the stock market from trying to scramble back up to its record heights. The surging and plunging and scrambling for cash and closing of gates at Robinhood did not stop the rise either.

Robinhood became a broken arrow

Let’s just say market mania rose to such heights that stress fractures started to appear even in the most successful parts of the market of late. Robinhood became a victim of its own rapid success just over a week ago and had to limit stock trading due to a cash crisis:

Hours after saying there was “no liquidity problem,” Robinhood (RBNHD) drew on credit lines of $500M-$600M to meet lending requirements and separately raised $1B in emergency funding to avoid having to place further limits on trades, NYT reports … as users take their money elsewhere…. Other brokerages appear to be giving similar reasons for the Thursday halt, attributing growing financial pressure as opposed to the shadowy motivations claimed by the retail bros…. Webull CEO Anthony Denier told Yahoo Finance. “It wasn’t our choice. Our clearing firm gave us a call and said we’re going to have to stop allowing you from opening positions due to high volatility.”

Seeking Alpha

Gamestop stopped up

Much of Robinhood’s market fever heated up around the trading of a little company called Gamestop. The nueveau riche retail speculator crowd on a Reddit trading conversation decided to gang up on the big boys who were shorting the stock and spike the value of little Gametstop’s stock solely because so many big-name investors were shorting it. It was a case of T-Rex facing death by a thousand velociraptors.

The retailers learned they had enough power in numbers to game Gamestock and force a short squeeze upon the mammoth institutional investors who were shorting the stock, forcing them to keep buying more of it to keep their positions open, causing the price to rise more quickly, causing themselves to have to buy even more in a feedback loop until they ran themselves out of ability to run.

The Robinhooders and Reddit vigilantes enjoyed a feeding frenzy. 

Institutional investors are worried. No sooner had Citadel forked over billions of dollars to help staunch the bleeding of Melvin Capital — a relatively obscure hedge fund whose short on video game retailer GameStop was subject to a massive short squeeze — than Wall Street wags started whispering: “This is a contagion event.” And by Wednesday, when a slew of heavily shorted names were still soaring and the Dow ended the day down more than 600 points, one top manager told Institutional Investor that “every long-short hedge fund in the world is getting killed … Retail investors on a now-famous Reddit forum, WallStreetBets, [tried to] orchestrate a short squeeze on the name — which wasn’t hard, given that 140 percent of its shares had been sold short.

Institutional Investor

It’s all fun and games now. The magical market mutated its own mania in COVID 2020 by divorcing itself completely from any thought of economic reality. It came untethered to such extent that there is nothing left but a speculators’ circus as the young investors of the retail crowd learn they can cut their teeth on the old folks and chew them up and make a lot of money before spitting them out. Therefore how much the company they are playing with is making in profits or ever can make is entirely irrelevant. All that matters is how it is being played or can be played as a piece on the game board. In this case it was the Gamestop board where a nearly worthless game piece became worth a fortune for a fleeting maniacal moment in time.

What damage this kind of daydream trading may do to individual companies and, thereby, to the economy, and to the market itself is irrelevant. It’s eat or be eaten. The crowd that is moving the market has learned the market is mostly a rigged game anyway (not a place to actually buy and own) and that, with social media to coordinate their efforts, they are lighter on their feet and more coordinated to where they can out-maneuver the larger dinosaurs.

Shorting stocks is nothing but casino activity anyway, so who can waste time feeling sorry for the primordial giant hedge hogs and others institutions that have been around for a long time when the young crowd finally figures out the game, deploys its own familiar technology and decides to eat dinosaur for dinner?

That, however, doesn’t mean this won’t at some point soon become devastating when the little guys who are large in number discover the dinosaurs still have game and fight back or when the whole market blows up because the feeding frenzy doesn’t care about fundamentals in the slightest but just about who is going to do what next to whom and how to get them to do it faster.

We’ve, thus, market’s end time I said we would soon reach if stocks continued to rise above such basic fundamentals during the COVID era as sales and revenue. At first corporations and their investors agreed upon tricked-up earnings from fancy accounting to lay in their fantasy flight plans. Then they inflated earnings for YEARS by stock buybacks because earnings are quoted “per share,” and buybacks reduce the number of outstanding shares. Finally, the sudden stripping away of corporate taxes in the Trump era made earnings that were again looking weak suddenly look great again, but that wasn’t because business was improving; it was just because the bottom line exploded due to fewer taxes being taken out. So, throughout the past decade earnings were not rising because business (the economy) was thriving but because they were distributed over fewer and fewer shares and calculated by fancier and fancier means.

No one cared. No one cares still.

All that mattered was that the headline numbers kept getting better for years. So, the market soared far above the economy. Eventually, the Robinhood and Reddit crowd said, “Let’s tear all the tethers loose. Real economics haven’t meant diddly squat to this market for a long time now anyway, so let’s not even pretend to care about earnings, let alone sales and revenue or where the COVIDcrash is taking the world economically. Let’s bet this thing to the moon, regardless of the economic reality we are in.”

The Reddit raiders

It works like this: First the call goes out: 

“Want to cause a margin call on Maplelane Capital. All the info you need is here,” it said, adding a screen shot listing all of Maplelane’s put options, which included other names like GSX Techedu, iRobot, and National Beverage Corp — also shorts of Melvin’s.

Then the Reddit readers and raiders all pile in on a coordinated trade. Gaming the market is no big deal with the SEC rules committee because its all games now. It’s no big deal on the ethics side either because …

Maplelane … was a hot, relatively new fund whose founder came out of a prominent firm shut down as a result of the insider trading scandals that rocked the hedge fund world a decade ago.

Garbage in, garbage out, garbage back in again, and now garbage back out again. So, how cares?

“The short squeezes are causing major pain,” said another hedge fund short seller earlier this week. “It will trickle over to the long books soon.”

Well, the hedgehogs, care, but who cares about them? They mostly thrive on the failures of business anyway. So a few hedgehogs go out of business in a matter of weeks. Who will miss these prickly little beasts?

Now, maybe Maplelane’s founder was not one of the inside traders from the previous generation that he emerged from, but just a lucky escapee of an earlier scandalous hedge fund. I don’t really care. It seems to me like half of them are scandalous anyway.

The hedge funds have all been playing their own short trading games that have nothing to do nearly all of the time with owning a business because it’s doing well. They have nothing to do with that quaint idea that the stock market exists in America so that Americans can buy interest in businesses they would like to have a share in because those businesses are profitable. They are just the oldest or near-oldest of the institutional gamers. You can always, of course, go back further; but they are the ones where gaming the market proliferated. Now they are being out-gamed. Who cares?

Does anyone even remember the old-fashioned idea of “buy Coke stock because people will be drinking Coca-Cola for decades to come, and you can own a share of the dividends?” I don’t think so. Maybe Warren Buffett, the oldest of the old. He’s almost quaint now, too, though he may be the last one standing because he’s the last one of size that makes any sense, and the senseless shall ultimately perish of their own foolishness. 

Please! I maka me laugh! So charming is the old idea that a market exists as a place to buy ownership in a strong business to add to your retirement … or to buy a weak business, knowing you can strengthen it, not short it, Buffett style. When fools and their greed run the world, it may be everyone perishes. Whether or not even the likes of Warren Buffett can survive this buffet of gambling games is hard to say. 

End times may be near. The final stage I said earlier this year we would soon enter is where bankrupt companies trade as trillion-dollar chips in the Wall Street casino because business names are nothing anymore but place holders on the trading boards. Their actual businessdoesn’t matter at all. All that matters is what the odds are that the other players are going to bet in a certain direction and whether or not you can game the other players.

We’re there.

Nearly bankrupt Gamestop just won’t stop

We just saw a 3% one-day plunge in the S&P bouncing right back to big gains, and that happened on the day the Federal Reserve said it was going to keep the money stops all the way out for months if not years to come. It happened even though no important economic/business data was released that day because data doesn’t matter any more than the Fed’s promised moves matter anymore. No one is even paying attention.

The market is shuddering but still rising. It shudders because the Reddit raiders are exploiting weak points they can find in a totally flawed, long-rigged system, which is outraging the old riggers as they have to figure out the new rules of the game.

Greed overwhelmed fear…. Market professionals watched drop-jawed, as day-traders more than doubled the price of a moth-eaten video game retailer, Gamestop, during the Thursday session. A $3.5-billion hedge fund, Maplelane Capital, lost a third of its value shorting Gamestop in January.

Asia Times

So, the Reddit raiders took a nearly penniless stock to record highs and tapped energy out of numerous other stocks in the process so the market overall fell off a cliff while nearly worthless Gamestop became the game of the century! It had nothing to do with what Gamestop was worth. It happened because the Reddit crowd said, “Let’s eat the people who are shorting this failing company” and because Elon Musk tweeted, essentially, “I’m in!” Musk is the mania maverick. So, the race was on. 

The day traders liberated from their brick-and-mortar jobs by the Covid-19 pandemic have become a legion of army ants, swarming into whatever stock Elon Musk might have mentioned in a tweet. Gamestop now has a market capitalization of $24 billion, against projected 2021 earnings of negative $126 million. There’s no rational calculation involved.

Nope. All it takes is a Musk mention. Just gaming on Gamestop in a market that has become nothing but hedging fund and games anyway. It was a great day to be an owner of the failing company IF you could sell the stock during that brief point where it teetered near the top of its dizzy trade. You could make bank that day by owning a failing company or by being the person who got it to such dismal business results. It pays to bet on a loser and pays to be the loser!

And it doesn’t pay to bet against [short} a failing company because losers become winners in the casino of trillion-dollar chips that have little or no intrinsic value. The other players will see many are shorting the failing company and put the squeeze play on them. The numbers are on their side. 140% of Gamestop’s stocks were owned during this short squeeze. How is that even allowable? Even possible?

The answer is as this has long been a rigged market. So, who cares if you own more than 100% of what there is to be owned? So long as the players are all having fun and some of are making bank, who cares? It’s all in the matrix, and the market matrix has been rigged for years. It is just that game has now reached maniacal levels — the very levels I said it was going to reach soon if it did not catch down to the economy during the COVID crisis but continued to rise in spite of reality.

This is what that looks like. And it will likely keep rising and spinning further out of control until the system blows apart under its own centrifugal force from years of its gaming itself by design … by greed. With all the shivering in the market today, it’s looking like that day could be close.

“It’s terrible because you’ve got me sitting here, taking short pain caused by these guys, still half-way rooting for them!” one hedge fund manager at a short-biased fund said in a direct message on Twitter. “That’s the state of affairs.”

Institutional Investor

Of course, because how can you not root for the wily young team that is simply out-maneuvering the old bastards? It’s so funny to watch the old farts fall on their fat faces. It’s all just a game anyway.

That’s the state of affairs due to years of pretending business matters by allowing non-GAAP accounting measures, rigging share values via buybacks, pumping in vast quantities of new money from the Fed that serves only the richest of markets, cutting taxes for the rich on corporate income so corporate income can look like it grew again, etc. In the end, you have the fat bastards laughing at how they’re being beaten.

They’re all game stocks now.

It’s flashmob finance

And all of the above does not even get into the whole bots and algos game I’ve long written about, where each algorithm learns how the others work and how to cast bets in order to game the other algos. The article above just talks about human-level gaming. Add the algo’s rhythms, and no one has a clue how to dance to the music. Not a single sole knows what is going on beneath the surface of this mess because even the algo designers don’t know how their own algorithms have reprogrammed themselves!

As with the new human gamers of Gamestop (No, please, stop!), the algos don’t care in the slightest about the real economic (business) value of a company. They care only about how they can game the other machines. They are programmed to analyze what works to jigger up prices or jigger them down and make money by selling at the high and buying back at the low. 

No one who uses the algos cares so long as the wheels are all spinning to make money. It’s all algos underneath, celebrity headlines on top, and flash mobs in the middle:

With celebrities pumping cryptocurrencies, and flash mobs engineering massive coordinated short squeezes … the stock market acts like a penny stock, declining by 14%, then rallying by 28%, then declining by 34%, then rallying by 66%.

Newsletter Collector

Until the day the miserable machine breaks.

Here’s an example of the celebrity cultish silliness that has emerged: During this same timeframe …

Bitcoin’s value jumped more than 20% … on Friday after Elon Musk changed his personal Twitter bio to #bitcoin.

That’s all it took. “Elon’s in, I’m in!” How easy is it for Elon to rig a market. Buy a pocketful of bitcoins one day. Tweet “#bitcoin” at the end of the day. Sell out the next. (Not saying he did that, but it sounds like a sure bet in the crypto casino when star power is all power.)

He did the same thing with Gamestop, by just tweeting “Gamestonk!” Etsy also leaped 9% when Elon merely tweeted that he “likes” it. We probably all heard how Musk sent Signal Advance stocks skyrocketing 1,100% in about a day when he said people should use Signal (an encryption app), and he wasn’t even talking about the electrical components company that his followers ran for! Eleven times gains in stock value just about overnight based on a mere misunderstanding! That is today’s market. Totally, encryptically insane.

So, there are no brains here — just sheep. Just cult followers worshipping at the altar of Musk. Trump or Musk, pick your cult. So long as they are= rich and infamous, we will follow. So, what does any of it matter? 

As if we need further examples of Muck mania, CD Projekt skyrocketed as soon as Musk tweeted that new Teslas will be able to play the game because … after all, everyone needs a car that plays games just like everyone needs a stock market that can’t stop with the games. It’s all games everywhere, and it stonks.

Trillion-dollar trading chips

Speaking of Elon Musk (sounds like a cologne) and Tesla, we come back to those trillion-dollar chips. While Tesla isn’t technically bankrupt (unlike Gamestop), that is only a matter of relativity … relatively speaking. After all Tesla finally managed to post a profit for the first time in 2020 (of $721 million). The previous year it lost more than that much ($862 million). In fact, it lost money in all previous years, going back to 2006. 

There is just one technicality to its supposed rise to profitability during the past year. It only managed its first annual profit due to $1.58 billion in regulatory credits purchased from Tesla by other automakers, meaning those automakers that are actually making profits must offset their own failures to meet government regulatory emission/fuel standards by giving some money to Tesla. They are essentially buying carbon credits. So, Tesla still hasn’t made a dime off of selling cars. It is selling the concept of a minimal ecological footprint.

While Tesla’s new Model S “Plaid” aims to scream off the proaction line as the first production 0-60 MPH-in-under-2-seconds car in history and to become the world’s first fully self-driving car this year, Tesla can’ seem to drive itself to profitability without the government mandating other companies give it money when they don’t do as well at meeting emission and fuel standards as the government demands.

Actual profitability from cars not withstanding, Tesla’s stock has taken off higher and faster than one of Musk’s Space-X rockets from merely becoming America’s most valuable (but least profitable) automaker in January of 2020 (at a market cap of $86 billion) to becoming the most valuable automaker in the world by the middle of the year (at $206 billion) to having a market value at the end of 2020 that is greater than the next nine (profitable) automakers combined.

That’s rational!

With a market cap in January 2021 that reached $880 billion, Tesla is pretty darn close to a trillion-dollar company; but it has, yet, to actually see anything but losses from actual auto sales. It came pretty close to fulfilling my prediction about a year ago that market lunacy, if it continued as it was going at the start of the year, would lift us to where a basically broke company is trading as a trillion-dollar chip in the Wall Street casino. 

With most automakers now aiming for largely-electric or entirely-electric fleets by 2025, we don’t know if Tesla will ever become a profitable automaker because its margins will fall to competition, but it has sure been a profitable stock, having rocketed upward more than a thousand percent since the start of 2020. It pays to be the Robinhood/Reddit guru. Musk may not be able to sell a car at a profit, but he can sure sell the concept of a car as the market’s prophet.

[My next Patron Post will dig deeper into this market mania to show just how deeply disturbing the widening madness is to some of the older or bigger players as they finally see how detached from reality the market they’ve made has become. Like attempts at nuclear fusion reactors, creating trillion-dollar chips on the market boards out of empty place holders may be too unstable in terms of market price reactions to hold together long.]

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