The Big Market Story Yesterday

November: we bought 2 iPhones,
.000002% of Apple's 4Q revenue

Apple, at $2.4 trillion the most valuable company in America, reported record quarterly sales and earnings that handily beat Wall Street estimates.

Apple Inc. finished 2020 with its most profitable quarter ever, fueled by an uptick in higher-end iPhone sales and a pandemic-induced surge in demand for its laptops and tablets.

All together, the Cupertino, Calif., company generated $111.4 billion in quarterly sales, an all-time high and the first time it has topped $100 billion in quarterly revenue...

Profit rose 29% to $28.76 billion in the three months ended in December, its fiscal first quarter.

But Apple's announcement was overshadowed by Gamestop, a company valued at $24 billion (one percent the market cap of Apple), whose stock price increased 16-fold in one month.

Gamestop (GME) is a bricks-and-mortar videogames retailer whose prognosis was dismal. One month ago its shares were trading around $20. Yesterday GME closed at $347.51 after it rose $199.53 in one day. Not even in corporate takeovers, grossly underpriced IPO's, or cancer-cure discoveries have such "parabolic" increases occurred, especially in companies worth over $1 billion (such shenanigans do occur in the "penny stock" market).

Gamestop's action reflects something new: the power of social media to marshal the financial resources of hundreds of thousands of small investors.

The past year has seen a boom in individuals buying stocks through retail online platforms such as Robinhood. More and more, they seem to be coordinating their moves on sites such as Reddit’s WallStreetBets, placing wagers on firms that are under attack by professional speculators like hedge funds. At Tuesday’s close, GameStop, once a popular target for short sellers, was up almost 3,700% over six months.

There are two main causes of big market moves. The healthier one is when new information comes to light about a company, an industry or the economy at large, and financial assets are repriced to reflect it. The other is when market participants buy or sell in a rush, often because they suddenly need to protect their finances—in which case asset prices don’t convey much useful information.

The latter is at play now. Hedge funds’ short bets have been unsettled, forcing them to buy back the stocks to limit their losses. Also, punters have been using options contracts to prop up their targets. Such instruments can amplify even small market moves, because they force banks to take the other side and then hedge the risk by buying the actual underlying stocks. It can create a feedback loop: Those stocks then go up, and the value of the options tied to them increases even more, forcing banks to hedge further, and so on.

Your humble blogger is absolutely convinced that Gamestock will fall below $100 sometime this year. Unfortunately, buying put options or selling short the stock is extremely expensive, and knowing when the fever will break is a hazardous game; the bid-ask is $100 higher this morning before the market opens, and it's easy for a Gamestock bear to lose everything before the stock collapses.

“Markets can remain irrational longer than you can remain solvent.”--John Maynard Keynes