We Couldn’t Resist Talking About GameStop

In the latest IBKR Podcast, Andrew Wilkinson, director of education, chats with Steve Sosnick, chief strategist, to recap the multitude of conversations that Steve had about GameStop and the latest round of meme stock madness.  Is this something from the activists’ playbook, or something much more cynical?

Summary – IBKR Podcasts Ep. 164

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to this episode of IBKR Podcast. I’m Andrew Wilkinson. I’m joined today online by my chief strategist, Steve Sosnick. Welcome Steve, how are you?

Steve Sosnick

Thanks so much, Andrew. I’m doing great. Thank you.

Andrew Wilkinson

And I hear it’s been me, me, me, me, me all week long for you ever since the weekend, or is that meme, meme? I don’t know. You’ve been inundated with media calls ever since about the impact of “Roaring Kitty’s” position in GameStop, Steve. What different angles are the media interested in covering? Tell us about your journey.

Steve Sosnick

Yeah, it’s been it’s been pretty much an endless topic of discussion. The only the only break I got was when the New York Stock Exchange had some bad prints, and I got some calls discussing the impact of those — which is also not exactly my favorite thing to discuss. But so be it. That turned out to be a fleeting issue.

Of the angles that are being discussed with GameStop, number one is, “what are they up to here?”  It’s obvious in the superficial sense. They’re trying to goose the stock higher. But what specifically are they trying to achieve?  I’ve gotten a lot of calls because of my options background about how these people were able to accumulate 120,000 calls on a line that has an open interest of 145,000, meaning they own over 80 percent of the calls on that one line.  By the way, one of the things I was looking for today was to see if that open interest declined, meaning that “Roaring Kitty” would have exercised some of their calls.  They didn’t, which is understandable why they wouldn’t. A lot of people were curious about the different strategies of how they might monetize it. Those involved gamma hedging.  The simplest way would be to sell the stock, and whether you sell a hundred percent of the stock or whether you delta hedge about 85 or 87 percent of the stock, either way, if they did that, that would be good for them — although they purported not to sell stock or sell options yesterday.

So, another big topic of conversation is, is this indeed Keith Gill? Is “Roaring Kitty” actually who we think “Roaring Kitty” is? And there are some real questions about how much money they’re controlling, and the tactics that they’re using.

For example, Keith Gill was very visible. You could see the picture of him with his headband on and in his T-shirt talking away and he was very public, but here it’s been very, very, mysterious as to who’s behind it. The theme that I’m really trying to express a lot is the original meme stock craze was very much organic. It was “us versus them” and the “them” were the short sellers whom they portrayed as nefarious.  I don’t take that view about the short sellers. Short sellers are literally just trying to sell high and buy low, as opposed to buy low, sell high, but there was this groundswell of, “How dare these fat cats bet against our favorite companies of our youth?” It was very much millennial driven.

It’s the kind of stocks that millennials would have identified with. So really, you were able to get a lot more traction among a bunch of people who were not necessarily connected in any real-world sense, except through social media in a period of time where we were all disconnected because of covid, where stimulus checks were coming in, where interest rates were zero, and that created this huge groundswell. Now it’s not clear who’s the “them”.  I do suspect that it’s a lot more cynical in the sense that I think that the faithful, or those at least who are inclined to follow the postings, are the ones being used for liquidity purposes, rather than, “Hey, let’s rally around the flag boys.”

Andrew Wilkinson

Let’s think about this, Steve, the purported position is 5 million shares and 120,000 call options expiring June 21^st, potentially worth, I think, $260 million dollars. If it is “Roaring Kitty” bragging about this position, is that the best way to say it bragging about a position? What impact does he expect to have that? That people will literally jump on the bandwagon and do the same thing and help drive it up? I mean, what’s the end game here? We can see very clearly now that there are no earnings at GameStop at this point.

Steve Sosnick

Oh, that’s it. I mean, GameStop earned 5 cents last fiscal year and that’s good because it was the first profit they made in three years. So, they got that going for him, I guess, which is nice, but it’s not a steadily profitable company. In the last four years they basically burned through over $900 million dollars in cash. Now on the plus side, a couple of weeks ago, they sold $900 million dollars’ worth of stock, about $933 million to be exact. I will argue that they leaned into the meme stock phenomenon and took advantage of it. My caveat there, of course, being companies don’t typically sell stock when they believe that it’s undervalued, so take that with a grain of salt.

What’s the endgame?  This is where I think it’s kind of cynical. I think the end game is to get people to push the stock higher. The problem is that it’s more about testing the faith of the already faithful and getting some aggressive traders who are just inclined to jump in and hop on situations, rather than some sort of expression of why the company is a bargain at this price. And again, I will give credit to the original Keith Gill. And I’m going to actually refer to Keith Gill as distinct from “Roaring Kitty” because it’s not clear they’re one and the same at this point. He did lay out a fundamental argument for GameStop in the initial phase.

I didn’t agree with it. I didn’t agree with it then and I don’t agree with it now, but part of his fundamental argument at least was there was a huge short interest and if you can get a stock moving you could create a short squeeze which creates demand.  Again, short squeezes have been around about as long as short selling has been around.

Andrew Wilkinson

That’s potentially the best thing it has on its side.

Steve Sosnick

But you don’t have the same degree of short interest that you had before. It’s just not the same and those who are short are not going to be dug in saying, “you know what, this stock is going to zero and I’m going to fight this thing.” They’re going to get out of the way pretty quickly, which is why over time, the half-life of each of these meme stock moves has tended to shrink.

Think about the one that we saw, I guess, what is it now, three weeks ago? Where we had the first leaning in “Roaring Kitty” meme and anybody who bought on Monday to Thursday of that week was down by Friday if they were still long. We’ve since bounced back, but this is where I believe it’s just sort of cynical. Let me leave it at that.

Andrew Wilkinson

If I’ve got my math right here, GameStop’s market cap is $8.5 billion and with the options position, I reckon Keith Gill potentially owns about 3 percent of the company. So, this is a long way from being anywhere, even near 50%. Does the size of the position matter at this point?

Steve Sosnick

No, because the one thing is something I wrote this in a piece yesterday. At some level, it’s taking a page from the activist investor playbook and when activist investors take positions, they don’t always do it something reportable. You know, 5% is usually considered reportable. They typically don’t even do it with that much, and the example I gave yesterday was Nelson Peltz’s Trian Management and, you know, vis a vis Disney and he took a one point something percent stake. I don’t remember the exact number, which is an enormous position considering how huge Disney is, but not typically enough to influence things.

His reputation was strong enough to get people excited, but the difference there — and I’m going to include Carl Icahn or insert the name of your favorite activist investor here — they’re doing it in stocks that where you could debate what the right fundamental value is, but I think they go in with a pretty good assurance that what they’re paying is about fundamental value. Buying a position that big, it’s not like if you buy 1000 shares of GameStop and you can put in a stop loss order or a trailing stop and get stopped out when the volume is huge. They don’t have that opportunity, so it’s got to be worth something. And that’s where again I differ with the GameStop situation.

So, the playbook is about the same, you know. Somebody who was known to get investors excited, takes a position, does it loudly. We saw this today on the flip side with Axos Financial and Hindenburg. Hindenburg takes this short position, writes this scathing report. The market is conditioned to move in response to that report. And they score a big paper win on day one.

What “Roaring Kitty” is doing is right out of that playbook. It’s not necessarily wrong, but the difference I have here is the only thing that would make this work is other investors coming in and bailing out their position, as opposed to, let’s say, agitating for some change at Disney where you can talk about cost cutting at ESPN, the theme parks, et cetera, et cetera. But ultimately that’s a business that just mints money. It’s just a question about whether the market is rewarding them sufficiently for it and are they minting enough of it?

GameStop is very different and in that situation and then and that’s where I wrote the piece a couple weeks ago, which I encourage people to read is when does momentum investing sort of fall into the greater fool theory. In both cases you hope somebody’s going to pay you more for the stock you buy now at some point in the future. In the first case it’s because you have an investment thesis. Take Nvidia.  It’s the ultimate momentum stock, but they keep making money, they keep raising estimates, so be it. At some point, every stock hits its limits, but they haven’t hit them yet. And so, by all means, if you’re just buying it because it’s on an uptrend, that’s momentum investing. If you’re buying something that you know is basically worthless and you’re just hoping that someone else is going to take it out from under you that’s the greater fool theory because you don’t necessarily have a reason to be investing in it and that’s scary to me.

Andrew Wilkinson

Steve, let’s change gears a little bit. Earlier in the week, the Wall Street Journal reported that they were thinking about closing down Keith Gill’s account because he might be seen to be manipulating the stock. What validity is there to this?

Steve Sosnick

You know, it involves another firm. So, I think you and I are really in no position to comment on it. It does tell you that this is a very visible issue. I mean, think of the groundswell, think of the fact that Keith Gill had to be dragged in front of Congress, or think of the uproar that happened regarding other brokerage firms and other trading firms in the clearing house with the margin.

So, while I think it behooves neither of us to comment specifically on what another firm may or may not do, the fact that this is being discussed in that way tells you how socially or politically sensitive GameStop has become in many corners. We leave it at that.

Andrew Wilkinson

What do you think the outcome is? What’s the end game?

Steve Sosnick

The end game is, can they keep the music playing long enough to entice enough people in? I’m very sort of skeptical and cynical about what’s going on here.

The tweet that they posted at the end of the day that showed they hadn’t changed their positions, we don’t know that they have the positions. We don’t know if they still have the positions. There’s a lot of mystery here and ultimately, it really depends on how long can they sustain this thing? Because it is trying to sustain a stock at a level that doesn’t support fundamental investing.

In the case of, let’s say, Disney, Nelson Peltz could get institutions rallying to his side because he could point out the case for how much the company makes, what its potential is, and how much it earns. It’s hard to see a lot of institutions — other than those who are just trading oriented institutions of which there are hedge funds and, and other accounts like that – it’s hard to imagine, say, a pension fund moving heavily into GameStop because of its valuation. So, I don’t know where that next wave of buying comes from and that will determine the end game.

Andrew Wilkinson

Brilliant. Let’s leave it there. Steve Sosnick, Chief Strategist at Interactive Brokers. Thank you very much for joining us and you’ll stop by soon.

Steve Sosnick

Will do. Thanks, Andrew. Take care.

Andrew Wilkinson

And to the audience, don’t forget if you like this podcast, don’t forget to subscribe wherever you download your podcasts from. Bye for now.

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