Welcome to Beating the Odds. Our goal is to create and curate content on investing, strategy, tech, fashion and anything else we find interesting.
🔍 Tickers mentioned: AMC, GME, IDN, IAC
Meme of the week
I have no positions in the Reddit meme stocks, but I’d be lying if I said this short squeeze saga hasn’t been one of the most surreal and fascinating periods in recent market history. Congrats to those who got in early and profited, and best of luck to anyone piling in now.
Robinhood vs Everybody
I’m sure you’ve already heard more than enough about the Gamestop/Robinhood (RH) drama, but the marketplace of ideas is flush with conspiracy theories and baseless accusations so let’s examine what actually happened.
First off, what RH did was not nefarious in nature. Full stop.
If they make money from each executed trade, why would they want to stop Joe Schmo from buying YOLO call options on Gamestop?
Let’s start from the beginning
What began as a very smart trade by Michael Burry and investors on r/wallstreetbets against a few hedge funds’ sloppy short positions in Gamestop snowballed into a movement consisting of anti-Wall Street establishment anger, pump and dump tactics, reflexivity and FOMO.
A handful of hedge funds got squeezed out of their short positions and had to cover. I’m not aware of any funds completely going bust, but a few hedge funders lost substantial money while the early traders who bet against them are sitting on healthy profits.
Meanwhile, several other hedge funds and large institutional investors (high-frequency traders, quants, etc.) smelled blood in the water and have been feasting off this insane volatility, banking billions in profits. Check out how much volume was traded in Gamestop shares last week—I find it hard to believe that it was mostly retail pushing the stock around.
Politicians and pundits latched on to the unfounded but seductive “little guy vs Wall Street” narrative, adding fuel to the fire. Next thing you know, millionaire and billionaire investors and businesspeople hopped on the train and started egging people on while dumping their own Gamestop positions! FOMO kicked into overdrive, which led to unprecedented volatility in the r/wsb stocks.
Multiple brokerages had to pause buys on the aforementioned tickers because of regulations related to increased collateral requirements and central clearing houses. RH was the scapegoat as they were first to freeze buying. They were also the most significantly affected broker since their platform saw the highest proportion of meme stock net buying and call options volume in aggregate.
If you’re wondering, “why didn’t they also freeze selling?”—think about what would’ve happened. Freezing sales is even worse than freezing buys. By restricting sales, investors’ positions would have been held hostage. Also, sales decrease RH’s collateral requirements, which is the opposite of the effect of buys.
Read up on how financial system plumbing and Dodd-Frank regulation—which some of these same politicians implemented following the 2008 Global Financial Crisis—led to brokerages being forced to freeze trades. Here’s an excellent thread detailing the situation:
One of the most popular conspiracy theories is that Citadel Securities, a market maker that processes trades for RH and other brokerage firms, colluded with RH to halt purchases of Gamestop and other meme stocks so that Citadel’s hedge fund buddies (namely Melvin Capital) who were shorting these names could cover and exit their trades, limiting the amount of money lost. This makes for a gripping movie plot, but it’s illegal and highly unlikely.
As Bloomberg’s Matt Levine (the most entertaining finance writer in the game) wrote in his column Friday:
One key consideration for brokers, particularly around high-flying and volatile stocks like GameStop, is in the money they must put up with the DTCC while waiting a few days for stock transactions to settle. Those outlays, which behave like margin in a brokerage account, can create a cash crunch on volatile days, say when GameStop falls from $483 to $112 like it did at one point during Thursday’s session.
“It’s not really Robinhood doing nefarious stuff,” said Bloomberg Intelligence analyst Larry Tabb. “It’s the DTCC saying ‘This stuff is just too risky. We don’t trust that these guys have the cash to be able to withstand settling these things two days from now, because in two days, who knows what the price could be, it could be zero.’”
Could Robinhood have been more transparent about what actually happened? Absolutely. Their PR team did a terrible job communicating the issues. At the same time, imagine the panic that would’ve ensued had they announced they were facing a liquidity crisis.
As fun as it is to imagine, this is not some tale of David versus Goliath. Look, I’m all for retail investors making bank by catching a few hedge funds offsides. Early investors spotted a great setup, took advantage of it, and were handsomely rewarded.
The thing is, the total money held by professional traders and “Wall Street” will be much higher and retail will be left holding the bag when this is over with.
Ignore the faux populist politicians and celebrities who have a rudimentary—or conveniently distorted at best—understanding of the mechanics of the market seizing this opportunity to pedal conspiracy theories and incite rage. As usual, the truth is a lot more nuanced and boring than it seems.
The outrage from retail investors is understandable but directed at the wrong players. If you want to point the finger at someone for this mess, blame the DTCC for doing its job and raising collateral requirements on high volatility stocks to protect investors on both sides of the trade.
As Gamestop shares traded at $325 (up 1,625% year to date) as of Friday, I think @modestproposal1 summed it up best. It’s not what most want to hear, but it is the truth:
📊 Charts of the week
2021: Year of the short squeeze
Shifts in content spend
Marketplaces: China vs the West
📚 Good reads
Benedict Evans — The great unbundling (link)
Covid brought shock and a lot of broken habits to tech, but mostly, it accelerates everything that was already changing. 20 trillion dollars of retail, brands, TV and advertising is being overturned, and software is remaking everything from cars to pharma. Meanwhile, China has more smartphone users than Europe and the USA combined, and India is close behind - technology and innovation will be much more widely spread. For that and lots of other reasons, tech is becoming a regulated industry, but if we step over the slogans, what does that actually mean? Tech is entering its second 50 years.
All Star Charts — The Funniest Part About This Week (link)
Twitter (from @rs3688) — Intellicheck (NASDAQ: IDN) Investment Memo (link)
One of the better investment memos I’ve seen on IDN. IDN is a high growth (and profitable!) small cap SaaS company offering ID authentication services. Disclosure: I own shares and posted my thesis and additional research links here
Wall Street Journal — Keith Gill Drove the GameStop Reddit Mania. He Talked to the Journal (link)
Mr. Gill began investing in GameStop around June 2019, he said, when it was hovering around $5 a share. Earlier that year, the game retailer was hunting for its fifth chief executive in a little over 12 months. Mr. Gill kept buying.
Legend.
🎧 Press play
Chit Chat Money — InterActive Corp (IAC) | Deep Dive
InterActive Corp is a holding company whose main operations include media and internet businesses. IAC holds many companies that you have probably heard of such as Angi's Homeservices, Vimeo, and even Turo the business interrupting the car rental industry. As always enjoy the show!
IAC is one of the most successful conglomerates in existence. They are masters of acquiring and incubating companies then spinning them off to unlock shareholder value. Some of their most prominent spins: Expedia, Ticketmaster and Match Group (parent company of online dating services including Tinder, Hinge and Match.com).
Moar earnings
Disclosure: None of this is investment advice. I own IDN and IAC shares.
Thanks for reading! If you liked this post, give it a heart up above or at the bottom to help others find it, or share it with your friends. Questions, comments and feedback are always appreciated.
If you’re not a subscriber, you can subscribe below to be notified of future posts.