What's going on on Reddit and TikTok is really fascinating
A little more than a week ago, the short interest in this stock exceeded the number of shares outstanding.
How about GameStop?
Continues to be one of the hottest stocks on Wall Street.
GameStop's rally has really been driven by a frenzy of traders on social media.
An investor does not own GameStop, a speculator owns GameStop.
Let's not confuse speculators with investors.
In late January 2021, retail investors turned Wall Street upside down.
They poured into GameStop, now the most notorious meme stock.
Meme stocks are stocks that have gone viral.
People buy the stock not because of the company's underlying fundamentals, but because of its popularity
online in forums such as Reddit's WallStreetBets.
The term has now entered the public lexicon.
GameStop wasn't the first meme stock and it won't be the last.
And it also isn't the first time a meme has had a hand in real life affairs.
Here's a look at how memes captivated the general public and financial markets.
Memes have been a part of internet culture for a long time, but they predate the World Wide Web by
more than a decade. Most people refer to cultural biologist Richard Dawkins as the creator of
memes. He coined the word in his 1976 book, 'The Selfish Gene'.
Corollary to the gene, he named the meme.
He uses things like fashion, catchphrases, tunes he says.
Little bits of culture get passed around in the process of that propagation, ideas get
transformed, they build on each other.
They get bigger and bigger and bigger as more and more people get in on whatever bit of culture is being passed
around.
When the Internet was made available to everyone in 1993, the meme transitioned from real life
conversations to quick images that anyone scrolling by with little context could understand.
We've seen a really rapid development in not just a variety of, say,
subgenres of memes, but also how they're deployed, how they're activated.
Be it for fun or what I'm most interested in is how they're used in political
communication and strategic messaging.
I view them really as an extension of ideology.
Memes not only set these borders between who we are and who we
aren't, they also allow you to diffuse ideas into the group pretty quickly.
And we see this happen in a lot of different contexts.
WallStreetBets is one. We see this happen with different fan groups, right, fans of K-Pop.
More problematically, this is a tool used by white supremacists and white nationalists
to play with internet culture and get ideas seeded out to different Facebook groups.
So you have a lot of examples of groups with intentional strategic communication aims,
using funny little clips on the internet to persuade and to mobilize the people who are paying
attention to them.
WallStreetBets is a subreddit with more than nine million members, the community description reads
'like 4chan found a Bloomberg Terminal'.
Posts and memes on the subreddit have tongue-in-cheek humor that frame Wall Street as the enemy.
There is a lot of insider lingo.
They call themselves 'apes', right, which is kind of this pejorative label that they're not
fancy, that they aren't affluent, that they're not in hedge funds, they're just
everyday people. But this mob of everyday people can have vast power and vast
influence. Memes were a big part of defining who we are and inspiring
that who we are into collective action.
With retail investors posting their success on these online forums, it makes it tempting for readers to
want to get in on the quick cash that led to the momentum that pushed GameStop shares
higher in late January 2021.
It's extremely compelling.
And you're sitting there and you're thinking, 'I can do this.
If that guy can do it, so can I.
I have to always say this.
It's easy until something comes along in the market and just
stops it halt short and you're caught there in the trade that you can't sell it for love
or money.
WallStreetBet Reddit investors pushed GameStop's valuation up 1784 percent in
January. By the end of January, the company's market valuation was near $23 billion dollars.
Let's compare that to JetBlue.
GameStop's valuation went from being just a quarter of JetBlue to five times the airline company in the
span of a month.
This caused investment strategy conversations to eventually jump from the internet to dinner tables across
America, leading many outside of the community to google shortselling for the first time.
While the stock fell after hedge funds closed out their short positions, GameStop shares are still nine
times higher than their highest price in 2020.
It's not the first time an online community has taken down an institution.
There are examples over and over collectives of people coming together and
amplifying an idea to the point where mainstream media outlets,
institutional forces have to pay more attention can be stuff like the
Occupy Wall Street protests of 2011, which started as grassroots.
Black Lives Matter protests against specific acts of police brutality.
And then you've got the problematic ends of the spectrum from January 6th.
So I think we're going to see examples of this over and over and over again of people getting together
and deciding to do something and that having some massive ramifications.
It's hard to define what a meme stock is.
Some describe meme stocks as overvalued companies that are hyped up by online investing communities like WallStreet
Bets. Other favorites are stocks heavily shorted by Wall Street.
Investors short a stock when they think it's going to decline.
Hedge fund Melvin Capital and Andrew Left's short seller firm Citron Capital bet against brick-and-mortar video
game retailer GameStop because they believed the company was a dying business that it struggled to adapt
as more video games were bought online.
Other meme stocks are companies that once had their heyday but are now past their prime.
Meme stocks GameStop, BlackBerry and AMC share these nostalgic traits,
perhaps reminders of a previous time for Reddit investors.
Once a meme stock is flagged by the community, there's no stopping the momentum of retail investors piling into the
stock to push it higher, despite what it may lack in fundamentals.
It's extraordinarily clever.
Quincy Krosby is the chief market strategist at Prudential Financial.
She warns the phenomenon is similar to the chatrooms of the 1990s, which helped lead to the dotcom
bust.
Go back to 1999.
You had a cult following.
Put a dotcom after the name and you will have seen
traders going in nonstop.
And what that did was it brought in folks having
nothing to do with the market, folks who would see these share prices going up
dramatically in no time at all and wanting to be a part of it.
That is reminiscent of what you have now.
Only obviously in a different form, this is basically going after the companies that are very,
very heavily shorted, buying up these shares, huge amounts of call buying, and then
having the broker dealer being forced to go long the stock.
I'm just looking at it through the participation rate from the retail side.
It's reminiscent of 1999 where folks did not
want to miss out on "this easy money".
It's great and it's fantastic until it isn't.
The gap between retail investors and institutional traders has narrowed.
Thanks to zero commission trading, more retail investors have been able to move in to other parts of the stock
market.
Retail has become increasingly important in the market in terms of volume.
And we could look at Reddit.
We could look at the Wall Street blog.
But you go back, what ETFs?
Passive investing has all been geared toward retail.
The fact is that retail became very powerful
with the advent of less expensive products.
Some hedge fund firms changed their short selling strategy after the GameStop phenomenon.
As of today, Citron Research will no longer be publishing what can be
considered as short selling reports.
The Citron narrative is going to change and have a pivot.
This whole GameStop saga is making the hedge fund community really rethink about
how much risk they should be taking, how levered should they be and is it
smart to have such a massive short position in just one name.
But I think the consensus that it is going to be hard to replicate
a GameStop-style short squeeze going forward, because even on social media, it's
hard to maintain the level of coordination.
Names like Rocket Companies, AMC Entertainment, Koss and Nokia have since joined the
meme list. After GameStop announced the decision to sell more than 3.5 million shares on April
5th. The stock fell by 14 percent at one point, but cut losses to above two percent,
showing $GME continues to be popular.
Capitol Hill is now reviewing the events.
While questions remain what is to come from the hearings, it's clear that Wall Street may be changed as we
know it.
There's always an evolution in investment.
There's always something new that's on the institutional side.
When you look at the retail side, the passive investing was interesting.
That's now many decades ago and that's evolved.
And I think the Internet has enhanced and made it much faster
of the evolution of what you can do as an individual, as a retail
trader or retail investor.