Tag Archives: Investments

Congress Is Investigating Wallstreetbets Over GameStop, But the Law’s On Their Side

Congress is investigating whether traders on Reddit’s Wallstreetbets colluded to drive up the price of GameStop, possibily illegally. But two major legal precedents are on the side of Wallstreetbets:

In the DRW case, the CFTC argued the defendants’ orders for a swap contract were “inherently manipulative” because the defendants “understood and intended that their bids would affect the settlement price” of that contract. As the court summarized, the CFTC’s position was that the defendants “had intent to affect the prices, and because they had intent to affect the prices, that means [the prices] were illegitimate, which means that the prices were artificial.” The court rejected that logic as “circular,” concluding the government’s “theory, which taken to its logical conclusion would effectively bar market participants with open positions from ever making additional bids to pursue future transactions, finds no basis in law.”

More here.

The way I view this is people saying “You should buy GME!” on an online message board are exercising their free speech. Period.

For more on the Wallstreetbets phenomenon, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

Short Sellers Lost Almost $1 Billion on Rocket Companies Yesterday

As Rocket Companies jumped over 70% yesterday, short sellers are feeling the pain:

A surge in the shares of U.S. mortgage provider Rocket Companies on Tuesday is estimated to have inflicted losses of $813 million on short-sellers, data from financial analytics firm Ortex showed.

More here.

Given that this is one of the most shorted stocks in the market and yet has big profits, I could see short sellers losing even more on this one. How long until they give up and frantically cover their bets to avoid the fate of Melvin Capital?

For more on Rocket Companies and Wallstreetbets, check out these posts:

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Photo: “Key West, Feb 2012 – 08” by Ed Yourdon is licensed under CC BY-NC-SA 2.0

How Bitcoin Could Reach $400,000

I came across an interesting stat today: the estimated value of all the gold in the world is $7.5 trillion. Gold and bitcoin are often compared as stores of value with a limited supply. What if bitcoin became as widely accepted and highly valued as gold?

At the current market cap of $949 billion, bitcoin would have to multiply in value eight fold in order to equal the value of all gold reserves. Bitcoin’s price is already heady at over $50,000, up from under $9,000 a year ago. But this stat makes me think it may have more room to run. If it reached parity with gold, one bitcoin would be worth $400,000.

Bitcoin is much easier to store and exchange than gold. On the other hand, gold has a much longer track record as a store of value and also has some industrial uses.

I prefer cash flowing stocks, bonds and real estate to either one, but for someone like me who is used to dismissing cryptocurrencies, this information did give me pause.

For more on cryptocurrencies and financial markets, check out these posts:

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Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0

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Bitcoin Is Worth More Than Double All US Gold Reserves

When it comes to storing value, what could be more iconic than Fort Knox, where the US keeps a large portion of its gold reserves? It’s heavily guarded and contains gold worth over $290 billion.

But that along with all other US reserves, at $456 billion, are worth less than half of the value of all bitcoin, at $948 billion.

The value of all bitcoin worldwide still pales in comparison to the value of gold, however. Were they to reach parity, bitcoin’s value would have to multiply many times.

(I arrived at the value of all US gold reserves by taking the reserve amount here and multiplying it by the price per metric ton here.)

For more on cryptocurrencies and financial markets, check out these posts:

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Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0

GameStop Tanked, So Wallstreetbets Is Moving to Pot Stocks. They’re Headed for Trouble.

Vice President Kamala Harris introduced a bill to decriminalize marijuana as a senator.

GameStop was the darling of the merry band of traders on Reddit’s Wallstreetbets. Then this happened:

Ouch. Now the community is looking for its next play. I nosed around the message board a little today to see what that might be.

Wallstreetbets users are increasingly enthusiastic about marijuana stocks, in particular two companies called Sundial Growers, Inc and Tilray, Inc. Though both took a hit today, they are up significantly in the last month as the online buzz builds.

Reddit seems to have two main theories on why these stocks will continue to rise: a short squeeze and/or decriminalization of marijuana at the federal level in the United States. (If you’re not familiar with short squeezes, check out this post for a quick explanation.)

But their position here looks much weaker than with their last love, GameStop.

GameStop was much riper for a short squeeze than Sundial or Tilray. As of Dec 31, 2020, 71 million GameStop shares had been sold short. This is more than all the shares in GameStop that exist (70 million)! This can happen because the same share can be borrowed and sold short many times.

Meanwhile, Sundial and Tilray are nowhere near as heavily shorted. Sundial has 5% of shares sold short, and Tilray is at 19%. Compared to over 100% for GameStop, the likelihood of a short squeeze looks much, much lower.

Maybe marijuana gets decriminalized in the US. But maybe not. In any case, the Reddit traders aren’t likely to have any special information on that (nor do I). Everyone buying and selling Tilray and Sundial know about that possibility already. So it’s hard for the Reddit traders to get an edge.

Even if marijuana is legalized in the US tomorrow, Tilray and Sundial may not make a dime on it. Why? Both companies are based in Canada! To say that marijuana may be legal in America is one thing…to say we’re going to let it come across the border rather than favor our own domestic producers is quite another. Remember that we’re in a jobs crisis, so the good move for politicians is to (at least appear) to support jobs in the US.

So these are two possible rational cases to buy into these money losing companies. But what I notice over and over on Wallstreetbets is the lack of any justification at all, with people simply repeating the names of stocks over and over. Maybe Wallstreetbets doesn’t need much of a theory…they just need to get their fellow traders involved. (Or maybe it’s increasingly populated by bots.)

Thing is though, without any real rational basis for holding the stock, that same group of traders will have to get out eventually. What’s supporting the stock then?

Wallstreetbets would be better served buying broad index funds and waiting for corporate America’s money machine to work its predictable magic. But that’s just not as fun, is it?

I find this roving band of Reddit traders a very interesting phenomenon in markets. But I won’t be joining them any time soon.

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Photo: “Kamala Harris” by Gage Skidmore is licensed under CC BY-SA 2.0

A Professional Investor Explains GameStop in a Few Text Messages

This morning, my friend Bill* texted me asking if I knew anything about what’s going on with GameStop, whose share price has skyrocketed recently. I may have told him a bit more than he wanted to know! But I thought this text thread might be useful to others too, so I published it below:

This type of trade is too speculative for me, but I do find it interesting. The link to the post explaining the suspension in GameStop trading is here.

P.S. Since I use Signal for text messaging, I can’t take screenshots, so I recreated this conversation using this interesting tool.

*Not his real name