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Stop the Madness, GameStop

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It would be almost impossible to be alive and not have heard insane news about GameStop. Here is a brief corporate summary for the possibly anhedonic among us.

Here’s a bit more from the NY Times:

So what in the world does a video game retailer have to do with mortgages? Maybe more than you may think. Or maybe not. 😁

Let’s start with this bizarre little story.  

22-year-old risked parents’ mortgage on GameStop: ‘You only live once’

Yes, reported in the NYTimesPost, Indiana’s 22 year old Jack West decided to live in the moment: 

“... adding that his parents have no clue about his decision to take out a second mortgage on their behalf. West apparently made the move on Monday via a zoom call (without the camera on) with his hometown bank.”

Young Jack invested $70,000 into GameStop and AMC Theatres stocks thanks to mom and dad’s home equity position. Or DID he? Per brobible, “22-Year-Old Dupes NY Post Into Thinking He Risked His Parents’ Mortgage On GameStop And AMC Stocks”.

As you must have seen, GameStop ($GME) has been going literally nuts. One day, for example, it went up to $530 a share and then dropped to $238. Robinhood, Ameritrade and a few others felt forced to halt trading on it. Of course, that setup another brouhaha which extended to the government. 

“Lawmakers announce hearings on GameStop and online trading platforms,” said msn news.  This fracas even extended to sports. The new owner of the NY Mets, Steve Cohen, created his own melee. 

NYPost: “Steve Cohen and Dave Portnoy feud over GameStop on Twitter”

NY Daily News: “Steve Cohen’s enormous GameStop losses are his own fault”

And then sadly …

CNBC: “Hedge fund billionaire Steve Cohen leaves Twitter after family receives threats amid GameStop backlash.”

Let’s get to it. What in the world does GameStop have to do with the mortgage industry (other than our friend Jack West’s 10 minutes of fame)? Let’s see if I can draw some parallels here.

How about this newsflash, posted on Reddit with the headline, “Company that caused massive financial crisis with subprine mortgage bets warns of financial crisis caused by over shorted stock bets?” Yes, I think they meant subprime. 😈

You may recall Goldman’s role in the mortgage crisis. If not, refresh yourself at the Guardian’s site by reading, “Goldman Sachs to pay $5bn for its role in the 2008 financial crisis”. I guess this time they are playing CYA in advance? Courtesy of Talkmarkets,  “A group of retail traders triggered a massive short squeeze on the shares of GameStop (GME), a company heavily shorted by various hedge funds.” 

Time to digress. What is a short squeeze, you ask? In this context, it does not mean a quick hug. It also does not mean giving a height challenged person some love. Here it is, illustrated very clearly at bitcoinwarrior.net!

Just kidding! Let’s see if I can sort of explain this in normal person’s lingo … as I learn more about it myself. 

  • A stock price rises quickly and much higher than normal.
  • Some traders had “bet” this price would have dropped, not risen.
  • So they won’t lose so much money, those traders start buying it up fast and furiously.
  • This crazy effort puts pressure on the stock price, causing it to go up!
  • Now short sellers bail out.
  • Other investors guess this will all happen and buy those stocks.
  • That’s merely an attempt to make money on the part of the investors.
  • The short squeeze is often the result of no stock being available, because the short sellers are buying back the stock at a rapid rate to lessen their losses.  
  • Short sales expire. If a stock unexpectedly goes up in price, the short-sellers may have to act fast to limit their losses.
  • Still unclear? Watch The Big Short for further clarity. 

What a mess! Let’s continue with our possibly-in-my-mind-only parallels between the mortgage crisis and GameStop. Let’s move to marketwatch.

Cheap Money: “In many ways, trading in GameStop highlights the speculative fervor in a market where average investors are emboldened by super-low interest rates and a flood of liquidity pouring into financial markets from the Federal Reserve and the U.S. government to stem the deadly economic impact of COVID-19.” Sound familiar? 

Compare to

Investopedia: “As lower interest rates worked their way into the economy, the real estate market began to work itself into a frenzy as the number of homes sold—and the prices they sold for—increased dramatically beginning in 2002. At the time, the rate on a 30-year fixed-rate mortgage was at the lowest levels seen in nearly 40 years, and people saw a unique opportunity to gain access into just about cheapest source of equity available.”

Easy Money: “On top of that, online trading platforms like Robinhood, Stash and others have made it easier to bet on stocks, while platforms like Reddit have provided a virtual venue for investors to exchange ideas, and sometimes make coordinated bets on companies like GameStop.”

Compare to

Federal Reserve Bank of San Francisco: “The U.S. Financial Crisis Inquiry Commission (2011) emphasized the effects of a self-reinforcing feedback loop in which an influx of new homebuyers with access to easy mortgage credit helped fuel an excessive run-up in house prices.”

Next, check out Motley Fool

Meteoric Rise: “Shares of GameStop were up more than 80% in pre-market trading … Investing legends and Motley Fool Co-founders David and Tom Gardner just revealed what they believe are the 10 best stocks for investors to buy right now... and GameStop Corp. wasn't one of them.

Compare to:

The New Yorker, 2009“Fortune published a story in September, 2003, called “Meet the 23,000% Stock,” which said that Countrywide had “the best stock market performance of any financial services company in the Fortune 500, measured from the start of the Great Bull Market over two decades ago.”

It's completely obvious to me, then, that GameStop will cause the next mortgage meltdown! No, wait. That’s not right. 

Here we go. The rise and fall of GameStop will lead it to be bought by Bank of America, which had to buy Countrywide! 

Hmmm, maybe not. What about this? The low price of GameStop stock (GameStock?) will cause the entire nation to refinance or get home equity loans to buy it!

Probably too late. I think everyone already refinanced (except for Jack West’s parents?), didn’t they? Therefore, it must be this. 

The last time I heard or read words like frenzie, delirium, wild activity, ruckus, etc. describing GameStop was during the mortgage debacle. Fortunately, I don’t work in the video game industry this time. 👍💪💥💁😇

Time for fun!

  • I have started investing in stocks! Chicken, beef, and vegetable.. One day I hope to be a bouillionaire.
  • I've been watching my HTZ stock go down. It really Hertz.
  • Why was Theodore so concerned when the stock price dropped? He was invest-Ted.
  • My friend is an honourable, courteous and chivalrous guy. But he hates the stock market. When I asked him why, he said: Gentlemen prefer bonds.
  • I purchased $1000 in Bose stock today. My accountant said it would be a sound investment.

TWEETS

— Patrick Monahan (@pattymo) January 27, 2021

yea i've monitored the situation around gamestop many times, it was called freakin' high school!!!!!!! https://t.co/hEEbmLk5Bm

— nuanced opinion guy (@charles_kinbote) January 27, 2021

After monitoring the situation, the Biden administration has decided in lieu of $2000 checks, the American people will receive $1400 in GameStop store credit https://t.co/suRXVFHf66

— Lauren Bans (@LaurenBans) January 27, 2021

Just bought a single share of GameStop in keeping with my personality as the person who arrives way too late to the party with a single beer.

— rebecca jennings (@rebexxxxa) January 27, 2021

prayers for girls whose boyfriends just said “should i try to short the gamestop stock” despite not knowing what a 401k is

About Kathleen Heck

Kathleen Heck has worked with hundreds of top sales professionals, authors, corporate executives, educators, and management level professionals. She started her career as a college and high school educator. Later she changed industries and moved to financial services, first as a Mortgage Loan Officer and then rising to lead of team of over 2000 financial professionals. She is the author of "After the Beep" and "Meltdown: I Need a Plan". Currently serving as the President of the Croyance Group, Ms. Heck is a Certified Professional Coach and holds several Masters Degrees and a PhD. See more at Croyancegroup.com

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