What’s Going On With Gamestop?

Jan 28, 2021 | Investing

The volatility in Gamestop over the last several trading sessions has been historic. But, it’s not just Gamestop. Several other stocks are experiencing the same thing. What’s causing it and how does it affect you? Karl Eggerss joined the Trey Ware Show to discuss.

Trey Ware:                         And there’s none bigger today in my view than the GameStop rally that is happening right now on Wall Street. Let’s go to Stevens Roofing Newsmaker Hotline, our guy from creatingricherlives.com, Karl Eggerss is joining me to talk about shorting and… Karl, we got to do this without getting into the weeds, and we really, I think, also want to make this relevant to people who don’t necessarily own stocks, or certainly don’t own a stock in GameStop, but they may be in the market in some shape, form, or fashion. So in easy to understand layman terms, shorting is what?

Karl Eggerss:                      Well we all want to buy low and sell high. So when somebody sees a stock and you think it’s overvalued, it should not be trading where it is, you think it’s going to go down, you can actually go borrow shares and go sell them. So you’re selling something you do not own, and you’re hoping it goes down so you can buy it back later. So you’re buying low and selling high. You’re just doing it in reverse order. And what’s going on with GameStop is there’s a lot of hedge funds, big money that was betting against GameStop. They thought maybe they’d go out of business and they’d go down to zero. So they were short.

What happened was investors get on essentially a chat room and they start saying, “Let’s go buy this stock,” and [crosstalk 00:01:18]. So what forces it, Trey, is that at some level, these big hedge funds had massive losses and they have to buy the stock back. Here’s the thing, Trey, when you are short a stock, you have unlimited losses. If our listeners, most of our listeners haven’t done this, but if you buy a stock, your loss is limited. It’s only what you put into it could you lose. That is not the case when you are short a stock.

Trey Ware:                         If you short a sock, it’s unlimited, so just… And there’s been talk for years that GameStop was hanging on, going the way of Blockbuster, if you will, because most games now are purchased, are played online. It’s very rare, very rare that you go to a brick and mortar store and you buy the disc and play your game that way. You do it online these days. So it was going the way of Blockbuster. For quite some time their stock had been hovering around $5 a share. So these gamers, essentially, when they saw this shorting going on, and correct me wherever I get this wrong, they’re going to Reddit, in a special place in Reddit, and they go, “Hey, let’s boogie on this.”

And the place they’re doing it, they don’t have to pay commissions when they’re buying the stock, so they’re just running it up, running it up, running it up, running it up, running it up. And it goes up almost 1,000% increase in just a few days time. And the issue is, as I understand it, doing all the research that I’ve been doing here on this, Karl is that the big houses that were shorting this, the typical Wall Street guy who was shorting this, has got to cover those 100% percent or more losses somehow. So they’ve got to go to other investments that they have, and now that’s going to affect… This is where it gets real for people who have no GameStop stocks, but they’ve got it in something else, maybe a mutual fund, maybe they got a 401k in there. Well those losses have to be covered. Am I correct?

Karl Eggerss:                      No, you absolutely nailed it, because what happened yesterday, we saw the Dow Jones down 600 points, and there was a lot of stock up on the day. It wasn’t a bloodbath or anything. But the reason, I think, the market was down so much is you’re exactly right. If a big hedge fund is short GameStop, for example, but they own several other stocks long, that means they just own them like you and I do, they’re doing well, they have to sell those to come up with money. Because remember, they borrowed the shares of GameStop. So they have to sell other things. So it had a cascading effect, and it did affect the entire market yesterday, and furthermore affects most of our listeners, whether they own stocks or they’re in a mutual fund that own stocks. It did affect people. And look, here’s what’s interesting. It’s not just GameStop. You go across what’s happening now with these people in these, I’ll call them chat rooms, on social media are essentially saying, “What else out there are big hedge funds betting against? Let’s go buy those and [crosstalk 00:04:07].”

Trey Ware:                         Okay, hold it right there, because there’s a big story out this morning that they’re talking about American Airlines. So they’re looking at American Airlines has been suffering because of the pandemic and they’re going, “Hey baby, we can run that one up too. Let’s get that done.” So basically part of this is, if you’ll excuse the expression, it’s a middle finger to the traders on Wall Street from these guys who are basically online just rocking and rolling and doing their own thing. Now we’re going to go to the next one and the next one and the next one and the next one.

And the issue really boils down to this with the Dow over 30,000, and you and I talk about this almost every week, the overinflated value of some of these companies. So $300 for GameStop right now. Certainly that’s an overvaluation of GameStop. Has to be. There’s no way they could cover that kind of investment at $300 a share, almost 1,000% increase from the $5 that it was. But now you got to ask questions about, say, Tesla. Are they really at $900 a share? Are we looking at the beginnings of the bubble? Are we look at the beginning of 2000?

Karl Eggerss:                      Well look… And by the way, GameStop went over 500 today. You just mentioned 300. It went over 500 this morning. It’s not just them. It’s American airlines, it’s Bed, Bath, and Beyond. I could go… There’s several stocks this is happening to. This is, and I’ll be clear, and I said this the last several weeks on here, that there are pockets of bubbles going on, and it is very reminiscent of the dotcom days. Back then it was literal chat rooms. Now it’s social media. Here’s a funny thing, though, Trey. What are these people really doing? The people that are pushing it up, what are they really doing wrong? It’s a bunch of people. Imagine you’re cruising on your bike to Luckenbach, your motorcycle, and you’re hanging out with your friends and you all say, “Hey, let’s all go by GameStop together.” That’s all they’re doing, except they’re doing it in a community that’s obviously thousands of people chiming in.

Trey Ware:                         It’s not illegal, right? There’s nothing illegal about it.

Karl Eggerss:                      There’s nothing illegal about that. And what’s interesting is that these hedge funds, oftentimes they have access to a lot of information, and I’m not saying it’s illegal or not, but you don’t see regulation when they make billions of dollars sometimes, but when the little guy comes in and says, “Hey, let’s go do this,” regardless of the reason, they may be sticking it to the big guy, but regardless of the reason, they’re not doing anything illegal, they’re talking about what they’re doing, and they’re saying, “Let’s go buy this.” That is no different than you and I having a cocktail together and saying, let’s go buy a stock because we both [crosstalk 00:06:39].

Trey Ware:                         So this was brought up, somebody asked one of those traders on Reddit, “So how long is this going to go on?” And one of them said, “You’re good till Friday,” which would be tomorrow. So they could pull the plug on all this and down at goes as early as tomorrow. Could happen. Now, NASDAQ president and CEO, Adena Friedman is now suggesting that there needs to be additional regulations. So they’re calling on regulators from the federal government to get involved and manage what’s happening with GameStop right now.

Karl Eggerss:                      Well, here’s what needs to be regulated. Not the messaging in the community boards. That doesn’t need to be regulated. What needs to be regulated is when you can go buy call options, when you can go short stocks without the collateral to do so. Some of these rules need to be tightened up where people are taking bets, that they don’t have checks to back, and that’s what needs to be regulated. And by the way, this has nothing to do, at this point, with fundamentals, Trey. This is all about [crosstalk 00:00:07:36].

Trey Ware:                         You know what it sounds like to me? It sounds like 2008 and the housing crisis. That’s what it sounds like to me. That they went out and they traded all this money on this housing debt, and they didn’t have money to cover it. And they were buying and selling housing debt and they didn’t have money to cover, and of course, boom, down it all went. And that’s what it reminds me of. And we were talking about in the 90s, you could put dotcom, you could say karleggerss.com, anybody can put a .com behind their name and boom, it just exploded, but it wasn’t this gigantic value. The value was not real. So it seems to me, eerily, like this is a canary in a coal mine.

Karl Eggerss:                      I mean, you have blockbuster still trading. You have companies like Blackberry that are going up right now. So let’s just go pick the garbage at the bottom of the dumpster and if [crosstalk 00:08:22]-

Trey Ware:                         And run it up.

Karl Eggerss:                      Against it, and we’re going to run it up. And it’s really interesting to watch, and it may not be going away for a while, but I will say this, for our listeners, be very careful. Please do not have FOMO and try to go in there and say, “I could make 20 or 30 or 50% a day on a stock. This is not normal.

Trey Ware:                         I think it’s going to get worse before it gets better. Karl Eggerss, thank you as always for your time, creatingricherlives.com. Back in a minute, Trey Ware, KTSA.

 

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