Hello friends,

This is the normal weekend for my blog post per the manner of spacing them out. While I was pondering what the topic would be, an e-mail arrived this morning from a close friend who lives in my area. After reading the note, the topic was determined. My friend asked that the next post share my thoughts on the GameStop controversy.

What to say?? Has anyone witnessed anything as bizarre in the stock market as what happened with GameStop (GME) stock this week? The stock price started incrementally advancing from the single digits last October. The move gained momentum from January 13, 2021 to present. This week was the wild, wild west though. The price had a big day Friday, a week ago, closing at $65.01. Yesterday (Thursday), it reached $483 a share intraday. It closed today (Friday, January 29, 2021) at $325 a share. This is a company that has seen its business heading south for a long time now. What happened that can explain the monstrous jump in the share price? From its 52 week low of $2.57/share to yesterday’s high of $483/share, again, what can explain this kind of event in the life of this well-known video game specialty retailer?

I’m not going to link a bunch of articles on GME in this post. If you google GameStop, you’ll find plenty to read. While one would be hard-pressed to offer a “rational” explanation for “why” it happened, it’s not too difficult to observe what did happen. Prior to what was witnessed this week, the entire share count of GME had been shorted, plus some.  The “plus some” is regarded as “naked shorting” and is not legal to my knowledge but yet still occurs. Go here to read about naked shorting. Shorting (selling stock short) is the practice of borrowing stock owned by others and selling it in hopes of the share price falling. The plan is to later buy the shares after the predicted price drop and use the purchased shares to repay the lender of the shares.

Let’s look at shorting stock as compared to taking a long position in a stock. If you go long (buy a stock first, then sell) and you pay $1,000 for the investment, you can lose up to $1,000 if the company goes bankrupt but no more. Yet your gain is theoretically unlimited as the price might conceivably go higher and higher. If you short a stock, like GME (sell first, then buy) at say, $30/share, you can make $30/share if it goes to zero. However, your loss is theoretically unlimited because the higher it goes above your shorted price, the more you can lose. Again, if you shorted GME at $30/share and finally gave up on it as it sailed higher and higher and bought the stock to cover your short at, say, $400 a share, you lost $370/share. There’s a bit more to shorting like the concern over receiving margin calls, but I’m keeping it simple so we can focus on GME.

Indeed there were some big names in what’s known as the world of hedge funds who were caught short when GME went to the proverbial moon this week. They were financially wiped out in what will likely become known as the biggest “short squeeze” in history. Who put the squeeze on these hedge fund shorts? The word you’ll read is that social online forums like reddit were employed among individual (retail) investors to organize and target GME (and several other companies with a large percentage of their outstanding shares shorted). That is, a bunch of people from social networks banded together and took on the hedge fund shorts. This organized mob purposely went long, buying and buying the stock ever higher with the sole purpose of thereby forcing the shorts to buy shares to cover their short positions as the losses kept mounting to them with the increasing stock price. So, you had longs buying and shorts buying (covering), driving the price through the roof since there were so many shares shorted (more than the entire GME share count).

I will share one article about the GME matter that tells of the reddit origin with regard to GME. Go here to read the article. The Securities and Exchange Commission is looking into this event over concerns that this GME episode can ripple across the entire market, generating as-of-yet unknown and dangerous effects.

My, my — It seems we’ve become a society of us and them and even a stock event like this points it out, in my view.

As to my thoughts, this GME event probably supports the idea that we are in an epic stock market bubble and greed is manifesting itself now in extreme ways. While my words on balance sheet health may seem amiss while a stock market party rages where it seems one can become rich overnight while completely disregarding the condition of a business or its value proposition, the one who wants to avoid the losses of unchecked risk-taking might do well not to abandon the basic tenets of investing.

Finally, I’ve said many times that bringing the Lord Jesus Christ into the conversation is always fitting, whether the topic is church, family, friendships, money, yes anything we may choose to discuss. Our nation desperately needs Jesus today. He gave His life so we wouldn’t have to pay the debt of our sin against God — so we can have everlasting life. He gave us the Bible, His Word, so we can learn of Him and His ways. He teaches us to love our neighbor as ourselves and to serve one another. Does something even like a GameStop situation point to how much we need to find direction from the only One who can give it?

May God bless each of you. Till next time,

Paul