MEME Stock, the buzz word last year
If there is one word that has marked the financial markets in 2021, it is the term “meme”. Indeed, we can remember the saga around the stock listed in New York, GAMESTOP and what followed. From history, we must remember that the markets are not always right, but the masses are and that technical elements can appear secondary in a world of social networks, of absolute mimicry, of influencers “dictating” the rules (even for investments) and that sometimes David can constrain Goliath. The fact remains that markets will have to react differently, and that “classic” and historical investors may encounter powerful and devastating headwinds.
Buzz word of 2021
If you were to pick THE financial word of the past year, “MEME” might qualify as the best one. You may remember the GAMESTOP saga when frenzied retail buying and social media pushed the stock price up 2.700 percent in 20 days, in early January, and forced 900k people to trade on a single day. We even faced a similar story with AMC, film group. No one could dare to claim they were solid companies in a booming sector with high expectations and huge potential growth. It is the same with PELOTON, a fitness equipment maker, which was more promising.
Some stocks, for unknown reasons or because they were traded “short”, have captured the attention of stock-exchanges, traders, regulators, supervisors, and lawmakers, as a band of amateur traders on Reddit forum teamed up in an effort to squeeze big-money short sellers. Imagine a struggling video game retailer chain – experience wild volatility as members of the subreddit ganged up against hedge funds holding short positions in the stock. Here, we faced professional short sellers (e.g., Melvin Capital) in front of a herd of individual “small” investors. The latter use the forum to discuss trades and follow pieces of advice. We should keep in mind that these short sellers have long been labeled as unethical since they profit when most people are losing money and when stock prices drop. “Meme stock” is a slang used in trading world to refer to stocks with heavy-short interest that can be artificially manipulated to prove a point. Such stocks are often mentioned often in trading-related posts on social media platforms, online discussion forums and news articles. They are popular among younger “Y gen” traders, volatile, and their value is based on potential instead of financial performances. Of course, generally, these stocks are overpriced, all because of market speculation, resulting in huge changes in their valuations and peaks of rapid moves within a short period of time. However, this is not to say that meme stocks are bad stocks. At the end of the day, whatever the value of the underlying company, the most important thing is to make money (but not being manipulated). Most of them have acceptable fundamentals but sometimes they are overvalued, and some traders tend to panic sell when it drops and have a fear-of-missing-out when the stock rises. These stocks gain in popularity when their prices soared significantly. KODAK or HERTZ, as examples, saw their prices surged when they became REDDIT darlings. The meme stock trading mania accelerated in early 2021 when some traders poured money into stocks such as GameStop. It all started as an internet meme by a handful of pranksters on investor forums, and it suddenly turned into something far bigger than anyone could have imagined. Small traders on REDDIT, for example, were frustrated because more than 100% of GameStop shares available for trading had been borrowed by Hedge Funds to bet against the company. They decided in sort of reaction to buy stock in a concerted effort to oppose these funds. It became a massive trend that saw millions of traders to try to cash in on GameStop volatility. It became a battle, a war, a crusade. As a result, hedge funds who had taken out “short” bets in GameStop lost a total $12.5 billion in a month time. The meme stock craziness has forced hedge funds to start paying much more attention to what smaller traders are doing and what they discuss on social media sites and pitch ideas for stocks to target.
Frenzy of social media masters
It reveals how our collective dash into cyber space is reshaping the financial markets. The digital tribalism and tunnel vision can make the difference and change the rules. The power of social investment media is undoubtedly. The TRUMP SPAC saga also illustrated this shift in market behaviors and rules. It seems that new entrants can play the lottery stocks. The nature of lottery stocks has long been a topic of debate in the behavioral finance community. Journalists loved this David against Goliath story. But the new investors are gamblers, and some like with crypto-currencies view it as a game, convinced they can make a lot of money and potentially a job out of it. We see the strengths of these waves ad it requires attention because it may be irrational, not based on fundamentals and risky. Being rational may be a handicap in such a world where investors follow guru’s and trends. This cyber-tribalism is a new concept we must accept and monitor. It is difficult for policy makers to react properly. Only when people will have fingers burnt, will they be more cautious. The conclusion of these crazy stories is that in finance, we need to study patterns in cyber space as much as economic fundamentals to grasp where markets can move to in the short term, at least. I am convinced we will see in the coming years similar stories as investors often learn slowly and because the new generations will grow and better balance “classic” Wall Street” type of investors. It will come to Europe sooner or later, be sure of that!
François Masquelier – Simply Treasury – Luxembourg 2022
Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).