What Happened to GameStop and Why Does it Matter?

Did your financial advisor call you and tell you what happened in the stock market today?

Oh, they didn’t?

Well, I have a lot to share with you, so you know what is going on. 

The stock market declined today due to a lot of craziness.

It seems there is a battle going on between rival gangs, like the Crips and the Bloods, only they say it is between the “suits” and “everyday investors”. 

Seems that a bunch of people following Reddit and WallStreetBets decided to buy stocks that the professional hedge fund managers were heavily shorting. 

When you are short, you are selling shares you don’t own, with the hope of buying them lower and making the difference in profit, such as selling the shares at $20 and hoping to buy them back at $5, making a $15 profit.

Apparently many hedge fund managers shorted GameStop, a gaming merchandise retailer, expecting the price to drop,except the reverse happened. 

Sensing weakness, the Reddit “everyday investors” ganged up and bought GameStop stock, driving the price higher by 700%.

One hedge fund lost $2.75 billion of their $13B under management and had to get a $3B cash infusion from two other big hedge funds.

Multiply this many times and this is what happened in the stock market, with multiple companies and investors.

Movie theater chain, AMC, was also targeted due to the high amount of short sellers. 

They say Nokia is next. Then silver.

This is dangerous speculation and concentration of capital that can end badly for one or both sides. It already has for big hedge funds. We may hear from more in the coming days.

The “everyday investors” say this is a victory for them against the establishment. 

Perhaps, but this is not normal stock trading activity. This is more indicative of a trend of FED stimulus and money creation finding its way into the stock market, potentially leading to a disaster. 

Hedge funds are highly leveraged and big losses can create a domino effect, like when Long Term Capital Management (LTCM) lost billions, collapsed and had to be bailed out in 1998. LTCM’s losing strategy almost brought down the entire stock market. 

Outlier risk like this is much higher than usual. But we also see excessive stock valuations that are off the charts. 

Below, you can see we are way above where the stock market was prior to Covid, and corporate profits are way below normal, yet stock prices are higher than usual:

Now you know why it is important to understand what is happening in the stock market and to be well-informed.

Don’t panic. 

Understand what is happening and why. This could indicate a significant turning point from the “stocks always go up” philosophy. 

Communicate with your financial advisor to make sure your risk tolerance matches the stock market trend. 

It might be time to take some money off of the table.