February 2021 – High Finance Thoughts

Are We About to Have a New Crash in the Stock Market?

Monday, 2/22/21, was a rough day for the stock market. Almost every company in every industry on the tickers were red, from tech to automotive to retail, red EVERYWHERE. An example of the huge changes was Tesla starting Monday’s trading around $771 per share but by the end of the day it would drop to around $650. Many companies, especially in the tech sector, have had a rough week. Throughout the week, the market has started to somewhat settle, but if you look over the past 1-3 months, many companies are on a downward slope coming off record high prices. What is causing this huge downturn in the market?

The post Covid-19 boom is getting people excited about the possibility of being able to live life normally again. This excitement along with the increased availability of the Covid-19 vaccine has made people optimistic about companies being able to open up and operate like normal. This has caused people to invest back into recently forgotten industries such as retailers, airlines, cruise lines, hotels, and casinos which may have driven the market up prematurely. Since most of those industries are still not operating at full potential due to Covid-19 restrictions, this has led to large sell offs.

Another big factor potentially causing the downturn is fears of inflation and rising interest rates. When interest rates rise, people usually spend less and save more. The fact that the government has been giving away multiple stimulus packages and has plans to continue doing so has raised concerns about inflation because so much money has been created and pumped into the system. Raising interest rates is usually how the federal government would keep inflation low, by essentially encouraging saving instead of spending. This fear has caused the Federal Reserve Chairman, Jerome Powell, to come out on Wednesday and tell Congress that the central bank will not raise interest rates until they believe they have reached their goals on maximum employment and inflation.

When Federal Reserve Chairman, Jerome Powell, said they will not raise interest rates, this caused a sigh of relief on the stock market and trading and prices have started to go back up over the past couple days. The question now is how long will interest rates stay low and is it better to buy stocks now during higher volumes of trading or wait for prices to drop when interest rates do actually rise? Let me know your thoughts and leave a comment, are you investing now or waiting?

The End of the GameStop Story?

In this corner! We have Gabe Plotkin, from Melvin Capital (hedge fund that majorly shorted GameStop stocks), Vlad Tenev, CEO of Robinhood (brokerage app) and Ken Griffin, the CEO of Citadel (hedge fund involved with both companies). In the other corner, we have the House Financial Services Committee, with Congresswoman Maxine Waters and Alexandria Ocasio-Cortez, Congressman Patrick McHenry, Reddit’s CEO Steve Huffman, and Keith Gill, known as Deep F***** Value on Reddit (he’s a longtime advocate of GameStop and one of the original people to encourage others to buy their stock). The congressional hearing was addressing last months unprecedented skyrocketing and plummeting of GameStop stocks within one week.

One side of the argument is that Reddit and user Keith Gill had manipulated the stock price by generating excitement around GameStop stock. The argument is that this excitement led to driving the price to a peak of around $483. Reddit CEO Steve Huffman stated that there was an internal investigation and there was no evidence of unscrupulous activities or any signs of artificially generating excitement about GameStop or any other companies mentioned on WallStreetBets.

On the other side of the argument is the thoughts and accusations that the hedge funds, Melvin Capital and Citadel, worked directly with Robinhood to force down the price of the GameStop stocks. A little backstory, Melvin Capital is the hedge fund that engaged in majorly short-selling the GameStop stock. The hedge fund Citadel came to the rescue for Melvin Capital and made a large cash investment, reportedly around $3 billion, to essentially bail Melvin Capital out of this predicament. The problem with this is that Citadel operates and makes money by executing trades on behalf of Robinhood, along with some other retail brokers. The connection has made many people suspicious and has led to theories that Citadel pulled strings to make money on both sides of the fight.

During the height of the GameStop stock price, Robinhood disabled only the “Buy” button, but not the “Sell” button, which is argued to have caused the price of the stock to crash. This action is at the heart of the argument. Suspicions and theories about why purchases were suspended started flying around the internet, including one where Citadel and Melvin Capital pulled strings at Robinhood to disable the “Buy” button. Robinhood CEO Vlad Tenev claimed that was not the case, and that it was necessary to disable the “Buy” button due to liquidity concerns because the clearinghouses (responsible for making sure money is correctly exchanged between buyers and sellers) demanded billions of dollars in collateral from Robinhood to ensure the trades would be settled. This caused Robinhood to suspend purchases while they scrambled to gather capital for the clearinghouses.

In the end, the hearing showed that the suspicions and theories lacked substance. There was no proof of collusion between the hedge funds and Robinhood but this situation has put a spot light on brokerage apps like Robinhood and their relationships with institutional investors. Leave a comment and let me know if you think this was just business as normal or was there some unethical behavior here that needs to be further addressed.

Investing 101: Short Sales and Game Stop

Bull. Bear. Short-selling. Hedge fund. Why is everyone obsessed with Game Stop?

There has been a lot talk about the stock market in the news lately and sometimes it’s hard to understand what everyone is talking about. I wanted to help clear the air and talk about some of the recent big stories in the news. I am not a professional trader or stock analyst, I am an MBA student who is extremely interested in researching and learning more about investing and the stock market and I want to share all the news and knowledge that I can with you.

The big story with Game Stop first started evolving even before late January, 2021 when the stock prices went crazy. It started when hedge funds, investment companies, decided they want to short sell the Game Stop stocks. A short sale is an investment or trading strategy that speculates on the decline in a stock price. This particular short sale happened when institutional investors (hedge funds) thought that Game Stop’s stock was over-valued and that the price was going to drop in the future. They then borrowed Game Stop stocks from brokers and sold them back into the market at what they believed was an over-valued price, intending to buy it back for cheap in the future.

This is when the Reddit group called wallstreetbets noticed that there were more shorted stocks for Game Stop than actual shares of it in existence. This wallstreetbets community spread the word on the shorted Game Stop stocks and encouraged normal retail investors to buy up all of the available Game Stop stocks, which forces the price higher, knowing that the hedge funds MUST pay back the brokers that initially lent them the stocks. This drove up the stock price from around $20 per share up to $300-$400 per share.

During the height of the stock price some trading apps like Robinhood disabled the ability for users to buy Game Stop stocks but they did allow users to sell shares, which helped drive down the stock price. There is a lot of debate about the reasoning and ethics behind halting trading for Game Stop, so much so that there will be a Congressional hearing with the CEO of Robinhood, CEOs of two of the hedge funds involved, the co-founder of Reddit, and the trader who initially spread the story. I will update you all after the hearing.

In the end, the price of Game Stop stock dropped significantly compared to its height of $400, and today is valued around $40, but it keeps dropping everyday. The story of Game Stop has helped expose some of the inefficiencies in the stock market and shed light on some questionable practices.