Not long ago, GameStop was just one of the thousands of retail chains silently decaying as brick-and-mortar operations continue to collapse amid the rise of e-commerce and, of course, the restrictions brought on by the health crisis. Sales have been declining for years, the video game retailer was losing money, and its stocks traded for around $4 a share. But yesterday, GameStop stocks were trading at $339 a share. On Tuesday, they were at $148, and three days earlier, at $38. Which means that shares went up almost ten times in less than a week.
In August 2020, the founder of the online pet store Chewy, Ryan Cohen, sold his business and made a considerable profit. Then, he started buying GameStop shares. Cohen outlined that the company needed to keep up with the modern changes of the digital era, close several branches and make an entrance into the online realm. Several investors followed the move and snapped up the shares of the struggling retailer in hopes of a better future, which tripled their price by the end of November. Conversely, some major hedge funds, most notably Melvin Capital Management, began shorting GameStop, arguing that the idea of a recovery for the video game chain was unrealistic.
On the other hand, a Reddit group named WallStreetBets recently started to talk about GameStop stocks and buying its shares. But they weren’t motivated to do the massive purchases just to make some money, they actually intended to spark chaos amongst investors while bankrupting some hedge funds. Consequently, the share prices of the video game retailer skyrocketed and those who shorted on it like Melvin were forced to cover. Just like that, GameStop has found itself in the middle of one of the greatest stock market bubbles in modern history.
So after discovering that Melvin Capital was shorting not only some of the biggest day trading darlings but also some of the most shorted names, the fund has become the main target of the violent bull raid of WallStreetBets, but some strategists have been arguing that there most certainly will be other casualties, and it seems that the new candidate for a second hedge fund collapse is Maplelane Capital.
Taking a quick look at the company’s latest 13F, we can see that Maplelane not only has the very same shorts that almost led Melvin Capital to total liquidation, as it has even more puts. In other words, all the troubles Melvin Capital is currently facing might also impact Maplelane very soon. That aggravates the situation even further, considering that with an even deeper book of puts, the Reddit community will now have even more stocks to ramp up in an attempt of forcing a short squeeze either at Maplelane or any other hedge fund that follows the same shorting tendencies as the company.
Overall, it seems like WallStreetBets is indeed behind the market right now. By analyzing some of the industry’s favorite longs shows, experts affirmed that they are collapsing while the most shorted names keep soaring. Bubbles like this always end in a crash. In short, this whole situation outlines how the continuous rise in stock prices we have been witnessing since 2009 shows to us how the financial system is completely disconnected with the U.S. economic reality. It’s important to highlight that the main enabler to the formation of this new bubble is the Fed. Trillions in printed money injected into the financial markets have created a biblical flood of money with nowhere to go but speculative assets.
Now, the only thing we know it will certainly happen is that, soon enough, this will all end in tears, no matter if stocks go up or down. And as it appears that we will see one hedge fund blow up after the other, and a market crash is looming, a financial disaster might as well arise to spread the destruction caused by the imminent correction all over the economy.