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The Last Breath of the Emoji Era

Tonmy year Previously, the stock market was in the grip of a speculative frenzy. Shares of struggling video game retailer GameStop hit an all-time high of $483 on Jan. 28, 2021, up from around $5 at the start of the month. Retail traders coordinate in Reddit forums and use brokerage apps like Robinhood to snap up shares. Driven by technology, newcomers are flocking to GameStop, ostensibly because the struggling chain is one that Wall Street has heavily shorted (that is, bets that the company’s stock price will fall). Short sellers are villains. They lost their shirts when GameStop soared. What could be better than this?

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The question then was how far this would continue. Mania is as old as the hills, but this time it seems to be different: It’s enabled by new technology, and it’s not going anywhere. For a while, the GameStop crew was unstoppable.They inflate the prices of companies that attract interest from short sellers, such as asset management company, a theater chain, and Bed, Bath & Beyond, a home furnishings retailer. Seasoned short sellers, including Andrew Left of research firm Citron, threw in the towel. Melvin Capital, the company that had shorted GameStop, the cartoon villain hordes on Reddit, decided to close its doors in May 2022.

When interest rates are zero, the price of dreams can be infinite. Higher interest rates change the dynamic. So last year’s meme portfolio was tough, but its fans weren’t resilient even when it lost money.Asset manager Robeco’s Matthias Hanauer tracks the most shorted U.S. stocks Master of Science Developed indices, benchmarks for global equities. Since December 31, 2020, the month before GameStop shares peaked, they have underperformed the market by about 15 percentage points.

If 2022 was a reckoning for professional investors, 2023 will be a reckoning for reality. A slowdown will break the company that many meme stockpilers profess to adore. Monetary tightening slows the economy with a lag. Struggling retailers such as Bed, Bath and Beyond are struggling as conditions worsen. On Jan. 26, the shower curtain supplier received a series of default notices from bankers. Newswire Reuters reported that it could soon file for bankruptcy protection.

The end of more than a decade of rock-bottom interest rates has also begun to expose corporate wrongdoing, sometimes blatant fraud. “Capital was free for 12 years,” says a former Wall Street tycoon. “We don’t know where capital is going where it shouldn’t be.” Some of the initial misallocations have become apparent.The burst of the cryptocurrency market bubble exposed the ftxwhose founders are accused of defrauding investors.

So the stage has been set for a victory for what meme stocks claim to be the most hated: short sellers, who try to sniff out the stuff. Hindenburg Research founder and prominent short-seller Nathan Anderson has spoken out against what he says is widespread fraud and market manipulation at Indian conglomerate Adani Group An investigation was launched, which caused a stir and the Adani Group strongly denied the claims.

So, what’s left of the retail era? Individual traders are more important than ever, even if they are far from the pinnacle of power. In 2019, the share of retail equity trading volume hovered around 15%. Then, in the first quarter of 2021, it peaked at 24%. This number underestimates the true power of retail investors. Excluding market makers, who are in the middle of most trades, retail traders account for about half of the volume, with institutional investors making up the rest. Although retail traders’ share falls to an average of 18% in 2022, or about a third excluding market makers, this is still higher than where things started. When the stock market rallied, it was fashion favorites like GameStop and Tesla that led the way.

Perhaps the most enduring, however, is frivolity. Investing is usually a serious business. But even as those who cling to precious lives abandon their treasures and rethink their feuds, their influence remains. There are already plenty of Hindenburg vs. Adani memes on r/WallStreetBets, and the Reddit forums are where it all started. These echo the Melvin vs. GameStop comparisons made two years ago, but with a twist. This time, Mr. Anderson, the short seller, was the hero.

Learn more from our financial markets columnist Buttonwood:
When Professional Stock Pickers Beat the Algorithms (January 26)
The $300 Billion Problem with Venture Capital (January 18)
The dollar may surprise investors (January 12)

For more expert analysis of breaking economic, financial and market news, sign up for Money Talks, our subscriber-only weekly newsletter.

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