Sunday Morning Hot Tea - No. 8
In this edition
Topic of the Week – Blame It All On My Roots
Legal Question – GameStop 💎🙌 🚀🌝
TOPIC THIS WEEK: Blame It All On My Roots
“You know they say you can’t be just a little bit pregnant?” I said out loud to 85 of my coworkers during a presentation. “Well, you can be just a little bit incapacitated. It’s not an on-and-off switch.”
I was co-presenting a legal education seminar on how to spot red flags of elder abuse. I hadn’t planned on using such a colorful analogy to discuss capacity. It just popped out.
Aside from capacity issues, another challenge is getting people to open up about being victimized. In order to get someone to share their pain with me, I have to establish a rapport, I explained to the audience.
“I like to turn on my Mesquite charm. It helps them let their guard down,” I joked, bringing out a more-Texan-than-usual accent. This tactic works, too. A casual, “So tell me what’s been going on,” in my native cadence works better than a sterile, “Please explain the extent of your abuse.”
As a kid, I never would have imagined my drawl would be an asset I could use to help clients. Starting in my early teens, I tried to escape my accent. I hated that I didn’t sound like the girls on TV - your Kelly Kapowskis, who cheered in a non-regional dialect, and your Clarissas, who explained it all with no hint of southern tone. I was able to shake the speech impediment of my early years which rendered my Rs and Ls to Ws. Meaning that my dad’s impressive Christmas light display went from “un-bee-weeve-able” to just “unbelievable.”
I may have kicked the impediment but not the accent. Little country-talking Heather was who I was. My family spent many Wednesday nights at a local restaurant called Trail Dust to enjoy the all-you-can-eat steak night. Trail Dust was a wild west themed steakhouse in my hometown, adjacent to the Mesquite Championship Rodeo. That sentence is chock full of Texanness, and for that, you are welcome.
A massive, two-story building, Trail Dust served customers on long lines of tables covered in red and white checkered plastic tablecloths. If you came in wearing a tie, they’d snip it off and staple it to the wall alongside your business card. The restaurant’s second story boasted the facades of an old west town, complete with a jail, bank, and hotel.
But how, you may ask, would you get from the second floor back down to the first? Via stairs or an elevator, like a mere mortal? No, by way of the 30-foot-long metal slide. A skin-tearing behemoth that terminated on a slick wooden dance floor, the two-story slide launched you right into a row of tables seated with customers.
Music blared over the speakers - Reba, Garth, Willie, both Brooks and Dunn. They had it all. After 7PM, a band would take the stage, playing music made for boot-scooting. My family wouldn’t usually stay long past when the band started playing. Dinner time for my family was meant for talking - no distractions, no TV, certainly no cell phones because we weren’t time travelers, and no country music bands.
We would pay our check and head toward the door, greeted by a looped track of Roy Rogers and Dale Evans singing “Happy Trails.” My mom would always stop and listen, at least for a full chorus.
Anytime I try to tell myself I’m “not very country,” I think of even one aspect of going to Trail Dust and remember I am country as HELL. The sizzle of a hot steak. Steam rising off the family-style bowl of beans. Tipping up that Heinz bottle to cover my garlic bread with ketchup.
What? I was 10 years old.
Back then, we kept the family radios tuned to the country stations. I knew all the words to “Heads Carolina, Tails California.” I wanted to find a love like Tim and Faith. I found myself in complete awe of Garth and his hat and his spiffy, tailored cowboy shirts. Garth’s songs have everything you would want in a hit tune. Cursed ghosts who wander in eternal agony. Murder. Accidental deaths borne from the hubris of man. More murder. Double fisting frozen bevs on the beach. Banging cougars on a farm (the ladies, not the animals). Even more murder.
Good lord, Garth. Are you ok, bud?
I watched music videos on CMT and sang along with KSCS. Then, without warning, it all became unbelievably dorky. I can’t pinpoint the exact moment, but I think the shift hit somewhere around middle school. One day it’s Dixie Chicks lyrics, the next day it’s Eminem. The itch inside me that only a steel guitar could scratch went unsatiated. For years.
The tides of coolness had shifted, so I played pretend. I chose to deny myself the auditory miniseries that is a Garth Brooks record because some string bean in basketball shorts who couldn’t even grow pubic hair somehow made me feel ashamed.
When I very first moved to Chicago, I often found myself masking my love for all things country and trying desperately to hide my accent. Anybody who has heard me talk at any point from 1990 until now probably finds the idea of me being able to conceal my accent hilarious. But still, I tried.
Why do we suppress those parts of ourselves that make us who we are? For fear of being truly seen? We can try cowering in the safety of homogeneity as much as we want, but sooner or later, the dam will break. All those things we try and hide will spill out, burning to be seen.
I eventually came to embrace my Texanness once the parts that couldn’t be hidden slipped out. One particularly rainy day on Navy Pier had rivers of water rushing down the stairs beneath the Ferris wheel and toward our small office.
That day, I had the pleasure of teaching my midwestern coworkers the concept of a “turd floater.”
turd float·er | tərd ˈflōdər | noun
When it rains so much that the septic tanks overflow and the turds float away
Classy.
As I’ve grown, I have sloughed off the need to feel “cool.” This is partially due to what I like to believe is maturity, and partially because all the cool youngsters aren’t on Facebook anymore. With that concern for fitting in now disregarded, I am now free to return to what makes me feel good.
I can relish the pure joy of a man in a Stetson admonishing me not to rock the jukebox. Another with a glorious mullet reminding me of the simple pleasures of rice cookin’ in the microwave. I can break free on an open road, my feet hitting the pavement in time, while a butter smooth voice croons to me about showing up in boots and ruining a black tie affair.
My pace quickens. Breathless, I sing along. After all, I can’t help myself. It’s just who I am.
QUESTIONS FROM YOU - What’s the deal with GameStop?
This week’s question comes from @ellebeabea on Instagram.
“Can you please explain this GameStop thing in the same way you explain all financial and legal matters on the podcast? I get it very basically: X Jerky Companies bet against GameStop and X GameStop Patrons said EFF YOU WE ARE GOING TO MAKE YOU PAY FOR BEING A JERK TO OUR FRIEND. I don’t understand the aftermath. Help!!!”
I got you! This past week has been a rollercoaster ride for the financial news programs. I leave CNBC on in the background while I’m working sometimes, and they’ve been UP IN ARMS about what’s going on with GameStop stock. But... wtf IS going on?
[If you don’t want to read all this, skip to the bottom for a three line summary.]
A couple things before we get started: I used to work for a hedge fund. *crowd gasps* I had my investment adviser license and worked with a portfolio manager who traded options - both long and short (we’ll get into what all that means). HOWEVER, much like none of this is usually legal advice, so too, none of this is investment advice.
So... here’s the deal. We’ll start with stuff you need to know, then get into how it applies to the GameStop scenario, then talk what may happen next.
STUFF YOU NEED TO KNOW - Feel free to skip if you know these concepts already.
“Going short” or “Shorting a stock” - If you believe a stock price is going down, one way to make money on it is by “shorting” that stock. This means you borrow the stock from a broker at its current price - say, $10 per share - believing that at a later date, it will be worth less. When it is worth less later, you would be able to pay back those shares for the lower price. Ideally, at that later date, the price will be something like $5, so you can buy it back from the market at that lower price, give back the stock you owe, and pocket the $5 difference.
Sounds pretty lucrative, right?
Well, the danger is a scenario in which the stock price goes up. You’ve borrowed it at $10, saying you’ll deliver it on some later date. But that later date comes, and the price is now at $300 per share. You will have to “cover” the shares you owe by buying them from the market at $300 in order to make good on your promise. Your loss is $290 per share.
GameStop’s Business - Lots of folks feel nostalgia for waiting in lines to buy the newest game at GameStop. Hanging out, browsing games on a Friday night. Heading to your local mall and trading in your old games for pennies. That all used to be really fun. Now, a majority of people buy games online in digital format, meaning for the past 5 years, GameStop’s underlying business has been declining. It’s been bleeding money which drove its stock price way down. It traded at around $30 per share in 2016 then hit about $5 per share in mid-2020. Seems like a safe stock to go short on, right?
Hedge Fund - A hedge fund is a bucket of rich people’s money that is invested by a professional money manager in the stock market. The term “hedge” comes from the idea that they use financial instruments to protect the portfolio from swings in the market - kind of like the phrase “hedging your bets.” It is true that some funds actually hedge. However, other funds trade wildly on really risky endeavors that create huge returns but come with huge risks, without ever really hedging at all.
Reddit / WallStreetBets - Reddit is a social media and news discussion website. Users set up a username (something like TEXAS_POON_TAPPA) and submit content to the site such as links, posts, and images. Other members then vote up or down on the posts, so that the posts can be ranked by the most popular. It is separated into “sub-reddits” or topic-specific forums dedicated to things like fitness, movies, TV, music, or investment ideas. WallStreetBets is a subreddit where folks gather to trade hot stock ideas and even hotter memes.
Robinhood - A supposedly user-friendly online trading app that allows average Joes like you and me to hop on and trade stocks without paying any commission. It’s quick and easy primarily because it is “self-settled,” meaning they’re supposed to keep cash on hand to cover trades made by their users rather than relying on an outside source of money.
Robinhood doesn’t charge its users to make trades, mostly because Robinhood gets paid for routing customer orders to certain trading firms for execution who were willing to pay Robinhood for the privilege. This got them in trouble with the SEC back in December 2020 as they were busted for giving their customers inferior prices for trades because the trades were not routed to the most efficient trading firms, but to the trading firms willing to pay the most to execute the order. (That's a lot of yadda-yadda-yadda stock market speak, but it's important to know they’ve been in trouble before.)
HOW DOES THIS APPLY TO GAMESTOCK?
A large hedge fund called Melvin Capital was known around Wall Street for shorting GameStop’s stock. Melvin Capital was founded by Gabe Plotkin in 2014 with $925 million in seed money. Plotkin is a minority owner in the Charlotte Hornets, and in December 2020, bought a Miami mansion for $44 million. All that to say - he was doing all right. The fund was considered one of Wall Street’s best performers. As of December 2020, Melvin Capital managed $13 billion.
By being “short” GameStop at its 2020 price (somewhere around $15 bucks a share), Melvin Capital was betting that the price would drop below that. When the fund closed out its position on Tuesday, January 25, GameStop traded at $147.98 per share.
Ouch.
After its GameStop trade went sideways, Melvin allegedly lost 30% in the first three weeks of January alone. In response, two other prominent hedge funds “extended a financial lifeline” to Melvin Capital to the tune of $2.75 billion.
As you can imagine, a 30% loss is a very bad return for a hedge fund.
WHY DID GAMESTOP'S STOCK PRICE GO UP?
Short answer - for shits and giggles. Users on the WallStreetBets subreddit decided to buy GameStop. Why? The answer was simple: “WE LIKE THE STOCK!” Users decided Melvin’s bet against GameStop was wrong, inaccurate, unfair, and best of all, an easy target.
This is nothing new. When a big hedge fund player is short a certain company and another fund manager finds out, that second manager can begin buying the underlying stock. When the stock is bought, you cause what is known as a “short squeeze.” The price goes up. The person who bets against it wants to stem the bleeding so they buy the stock to cover their short bet. This causes the stock to go up even more.
People traded so many shares of GameStop on Monday - 175.5 million shares to be exact - that the stock exchange had to halt trading nine different times. The market circuit breakers kick in and halt trading when excessive volatility happens in a name or an index.
GameStop went from $39 per share on Tuesday the 19th to $325 per share on Friday the 29th. You don't have to know anything about the market to know - that's a huge move.
The trading was so frenetic that Robinhood had to stop allowing its users to buy shares on the 28th and has restricted the amount of shares users can buy since then. This has to do with a lot of boring regulatory requirements but shows that Robinhood was NOT prepared for an event like this.
This uproar has completely derailed their prospects of going public, which would have made a lot of money for the company and its owners, which includes hedge funds. It has also subjected Robinhood to at least one class-action lawsuit on behalf of its users. Congress and the SEC are also looking into the company's actions as well.
WHY IS THIS SUCH A BIG DEAL?
Normally, hedge funds are being bet against by other hedge funds or investment professionals. Hedge funds are subject to investment strategies, which are explanations to their investors as to how they invest. They’re required to stick to these self-created rules. Investment professionals also generally adhere to certain norms. For instance, selling out of a position once you've reaped a big enough profit or if the underlying company is losing money.
This situation is different because it is not a case of hedge fund versus hedge fund. This is a case of hedge fund/the market overall versus some very dedicated users on Reddit. The Redditors have no investment thesis except “WE LIKE THE STOCK,” “HOLD,” 💎🙌 (diamond hands - meaning hold the stock no matter what), 🚀🌝 (stock is going to the MOON!), and a couple of others I won’t repeat here.
Where the market, experts, and hedge funds can somewhat predict the moves of another hedge fund - they cannot predict the moves of this WSB crew. Talking heads on CNBC cry that the “fundamentals” of the company - meaning how much it earns, how much it spends, and its long-term prospects for profit - are bad. Based on the fundamentals of GameStop, its stock should trade $10-15 dollar at most. But the WSB crew doesn’t care about fundamentals because “WE LIKE THE STOCK!” There’s no reasoning with the internet.
HOW WILL THIS PLAY OUT?
At this point, no one knows. The WSB crowd wants to see the GameStop stock go “to the moon” - meaning $1000, $4200, $6900, $10,000 or even $42,000.69 per share. Will it ever get there? I doubt it. GameStop itself can profit from this by issuing new shares. Once that happens, the supply of available shares will increase, meaning the price will necessarily go down. When will that happen? It's anyone’s guess.
In the meantime, Melvin Capital announced it got out of its position on Tuesday at a substantial loss. Some Redditors believe this announcement was a lie, but if it really was a lie, Melvin Capital would be in trouble for making misleading statements and get smacked by the Securities and Exchange Commission (the SEC) which regulates the stock market.
There could be others who may be short GameStop, but at this point, there’s not a sure-fire way to know.
Additionally, the SEC stated it was “aware of and actively monitoring” the current markets.
Some legal experts believe this could mean the SEC will halt trading on GameStop or that the SEC will investigate the Reddit posters for market manipulation.
This scenario has some similarities to old “pump and dump” schemes where scammers would make unsolicited phone calls or send emails touting the value of a penny stock in order to artificially inflate the price. They would lie to investors, saying some big announcement was coming or that the company was on the verge of revealing a new product. The scammers would then sell high, pushing the price back down, and the suckers at home would take the losses.
The key difference here is .... nobody was hiding anything. The Redditors weren’t lying and saying there was some big announcement on the horizon that would cause a pop. They didn’t say the stock was undervalued. They simply said, “WE LIKE THE STOCK!” If you like a stock, and you post online that you like the stock, are you committing fraud? I’d say no, but then again, I don’t work for the SEC.
I think if the government attacks individual retail investors for posting their ideas and favorite stocks online, the backlash would be unreal. I also bet that least one Redditor would have Mark-Cuban-money enough to challenge the regulators on an argument of free speech. Perhaps user “DeepFuckingValue” who is allegedly up several million dollars on the trade.
SHOULD I BUY GAMESTOP?
An amateur trader should put the same amount of money into the market as they could afford to lose in a casino gambling or burning up in a furnace. If you can’t afford to lose it, don’t risk it.
I DON’T WANT TO READ ALL THAT. WHAT’S THE SHORT VERSION?
Big rich man bet that a stock would go down. Amateurs from the internet caused the stock to go up because they liked the stock and bought it. This made big rich man lose money, broke trading apps, and disrupted the market. No telling what Congress or the SEC have in store, but there are some changes coming for Wall Street. And it’ll all be because of TEXAS_POON_TAPPA and friends. 💎🙌 🚀🌝
I hope that answers your question, ellebeabea! Thanks for sending.
Got a question? Submit it here. They can be legal what-if questions, questions on current events, or questions about the legality of actions in TV shows or movies you’ve seen. I never ever want to answer your personal legal questions, so don't send those. Love you, but I don’t do that.
Until next week, that's the tea and the third degree according to me, baybeeee.
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Sources and Further Reading: