GAME(stop) OF THRONES

We all love a salacious Wall Street story, right??  *taps microphone*… I will take that as a resounding YES.

So, what is all the hype about? And how does this affect currency markets? Lets take a look at what has been going on first, and then explore the wider macro effect on currency markets.

What is GameStop ($GME)?

GameStop is to gamers, what Blockbuster was to movie buffs. A brick and mortar, retail operation that enjoyed massive success in the 90’s and into the first 15 years of the 2000’s. But much like the ultimate undoing of Blockbuster, GameStop was eventually doomed by their own lack of innovation. Video games eventually moved to digital assets (purchased online via gaming consoles) and the need to purchase and trade hard copies of games at a retail shop became very close to obsolete, ultimately rendering their business model extinct. While they did pivot to drive digital revenue growth, they have (for lack of a better word) been in a nosedive since 2016.

In terms of EBITDA, GameStop declined 26% in 2018, 27% in 2019 and a whopping 66% decline in EBITDA in 2020. In those same years, the GME stock price declined from $32 in April of 2016, to $6 in August of 2020, representing an 82% decline in the value of the company. YIKES. This decline resulted in massive short positions being taken by Wall Street funds against the GameStop stock.

What is a short position?

In its simplest form, a short position is betting against a company’s success. This is a very common investment strategy for sophisticated investors and hedge funds. The actual process is a little bit more complicated.

In order to take a short position, an investor borrows a chunk of shares of a company from a broker, immediately sells it at its current market price, and pockets that money (keep in mind they are obligated to give those shares back to the broker eventually). The investor then waits patiently for the price of the stock to drop, at which point they buy it back at a lower price than they sold it, to give the borrowed stock back to the broker. The delta between where they sold the initial stock, and the discount at which they bought it back, is their profit.

The risk here is that if you are in a short position, and the stock happens to go up, you will need to buy that stock back at an even higher price than you sold it, creating significant losses.

You can now start to see the panic of the hedge funds who own (let’s say, a million) shares of GME, which they sold into the market at (let’s say) under $15, when the share price skyrockets to $300. If their contract is up, and they are due to return the borrowed shares, they are forced to buy those million shares back at $300 each (a loss of $285 per share, times a million shares…. OOOF).

Why did GME stock skyrocket?

This is where it gets messy, or triumphant, depending on who you are. An extremely popular reddit thread (r/WallStreetBets) with 2.9m loyal followers began talking about the massive Wall Street short positions against GameStop in December 2020. Most, if not all, of their followers are millennials who are interested in investing, but also just happen to have a nostalgic affinity to GameStop as their childhood gaming mecca.

As chatter and outrage grew within the thread that “Big Money” was shorting their favorite childhood shop, a plan was hatched to launch a concerted effort to save GameStop. Followers agreed to band together and buy GME stock to drive the price up. Not only would it save GameStop, but it would also gravely injure several large Hedge Funds who were betting against them (Occupy Wall Street, anyone?). This effort proved successful, driving the share price of GME to levels not previously experienced by the company. The underdogs were taking down the bullies, so to speak.

Eventually this underdog story started to make noise on twitter, and an even larger audience took note and began to buy the stock, driving it higher. The final piece was the eventual “short-squeeze” that took place. A short squeeze is when hedge funds who are in a short position, are forced to buy back all their stocks at its now inflated price. Those stock buy-backs drive the share price higher, again. All of these factors resulted in GME opening this morning at $468 per share, an increase of 2500% in January (!!).

What is the effect of all this?

The immediate effect is a massive redistribution of wealth, in the billions, from large hedge funds to individuals who now own GME stock. The billions of dollars lost in short positions, now sit with the individual buyers who drove the price up. At least 2 major Wall Street investment firms sit on the brink of bankruptcy (Citron Research and Melvin Capital) one of which has already secured a privately funded bail out. The romantic idea that David has beaten Goliath (for now), cannot be ignored, although there are plenty of opinions circulating about why this is not a healthy outcome for the stock market.

We have also seen this morning (Jan 28) an even larger effect. Many brokerages and trading apps have blocked the purchase of GME stock and others who are in line for a similar set of circumstances (AMC, Blackberry, Bed Bath and Beyond, Nokia). This brings up questions about free market access, market manipulation and countless other long-term considerations that certainly will not be solved this week, month or year.

Has this gone far enough to affect the US Dollar?

In short, maybe. We are seeing significant volatility in the US Dollar. While USDCAD is trading at 1.283 this morning (up over 1% in the last 7 days), there seems to be some unrest around how the stock market will regulate itself in light of these events. It is very difficult to know if the GME activity has had a direct impact on the strength of USD, but the SEC response to the matter almost certainly will. There are also rumblings from congress for an investigation around brokerages limiting free market access, and its potential illegality – When AOC and Ted Cruz agree on something, we should at very least take note! Whatever the outcome in the coming days and weeks, expect some USD volatility to be in play.

If you are looking to mitigate your company’s currency risk, Dunbridge Financial is here to help. Contact us anytime at Hello@dunbridgefinancial.com