Fun with GameStop shares and adventures with a cannabis ETF
WASHINGTON – As of the noon hour Thursday, we’re finding the Dow is off 14.6 points (-0.05%). The tech-heavy NASDAQ is up 60 odd points (+0.42%), and the S&P 500 is up a measly 4.33 points (+0.11%). Post-record-breaking rally blues, I guess. So let’s turn this column’s attention to some “fun” I’ve personally had playing with GameStop shares (NYSE: GME) and, more recently, the biggest cannabis ETF, MJ (NYSE: MJ).
As readers of this column and most regular investors already know, craziness has gripped stock traders and investors in recent weeks as an intrepid band of rogue Redditors, aka WallStreetBets, blew out a huge short position that hedge funds and big time investors had taken in the shares of bricks-and-mortar game retailer GameStop.
Gambling in GameStop shares
The following excellent recap comes via CNBC, which is a pretty good financial site when it’s not running anti-Trump nonsense from its NBC mothership.
“GameStop, the poster child of a recent speculative retail trading frenzy, tumbled below $50 apiece on Tuesday, as the massive short squeeze took effect and investors booked profits.
“The brick-and-mortar video game retailer fell 20% to $47.81 a share on Tuesday, following an 80% drop last week for its worst weekly performance ever. [It recovered slightly to close today at 50.31, for a loss slightly in excess of $9.69, or -16.15%] At its all-time high on Jan. 28, the stock was going for $483 a share.
“GameStop came into the limelight two weeks ago when an army of retail investors who coordinated trades on Reddit’s WallStreetBets forum pushed the stock up 400% in just a week. The short squeeze induced huge pain on hedge funds who bet against GameStop, while the mania forced several online brokers to limit trading in a slew of highly volatile names.”
Killing GameStop shares
GameStop’s business model had begun failing some time ago. GameStop shares fell along with this. But the Coronavirus pandemic and the shuttering of many retail businesses, including the shopping malls where GME’s stores were located, looked like it would finish this once hot stock off. Permanently.
But, as per usual, the savvy and amoral hedge fund ghouls knew a great short opportunity when they saw one, and shorted the living daylights out of this stock. Adding the outside weight of option plays on the short side, they shorted upwards of 140% of existing GameStop shares. (Don’t worry about this Wall Street math, which truly does enable funds and investors to effectively short more shares than actually exist.)
At any rate, a few instigators and ultimately the WallStreetBets crowd had spotted the opportunity to destroy the shorts relatively early in 2020. A few investors began actually buying GME shares at their low point when the pandemic tanked the entire market horribly in March 2020. More and more small investors got on this moving train and kept buying and buying. By the end of the year, the buying mania had begun to go full throttle. Driving those beleaguered shares up and up and up.
The nightmare for short sellers of GameStop shares begins
And that’s the ultimate nightmare of hedge funds and otherwise wealthy dudes who were massively short GameStop shares. Short sellers make their money when stocks go down. (See my previous article on short sellers.) As opposed to average investors and conservative mutual funds that buy and hold stocks expecting them to go up, which is what most people think investing actually is.
The short sellers wait for the shares they’ve shorted to go down as far as they can, and then they close the transaction by buying them back. Unfortunately, for them, the Redditors’ combined mass buy kept driving the shares up and up, ultimately forcing the Big Shorts to dump shares at a tremendous loss. At which point, the Redditors who’d gotten in early made tremendous profits as GME shares flirted with the $500 per share level, moving up to that point from the single digits.
How to aim silver bullets
Flush with victory, the WallStreetBets Redditors next aimed at clobbering the Big Shorts who’ve very likely been keeping the price of silver in the basement for at least a decade. Or maybe three. Wall Street trembled, as a play like this, based on a precious metal that also has extensive commercial uses, could conceivably bust the world’s already shaky economic situation.
But the Great 2021 Silver Rush never happened. It still could, of course, but somehow it didn’t. The metal did pop up from roughly $25 per ounce to $30 per ounce last Monday (Feb. 1). But it quickly settled back to $25-26 per ounce last Wednesday. It’s remained pretty much in the same place this week. There were a lot of reasons for this outcome, given that there are numerous other ways to play silver (i.e., ETFs, futures contracts, etc.) But it could just be that many Redditors were holding the line on GME and were fresh out of cash for another gamble.
Getting up close and personal with GameStop shares
Just to show readers of this column how nutty the continuing trade in GameStop has been, I punched the shares up on my real time trading screen during the final week of January, putting in a theoretical “buy” 10 shares of GME at $253.93 per share to call up a window where I could watch the trades whiz by.
Unfortunately, I inadvertently hit the send button, transmitting an actual order to my broker, which I hadn’t intended to do, given that the price of these shares is more slippery than a greased pig. To my surprise, I ended up buying 10 shares at approximately $248.99, better than my original order ticket specifying a limit of $250. Which shows you how fast the price of a stock under assault can move.
I hadn’t wanted to play this game, only take a look. The price of the 10 shares I’d bought quickly moved up again and then began to sink. As fast as my arthritic fingers could type, I punched in a sell order for those 10 shares @ $250.00 per share, hoping to get out at cost. Bang. It executed at $251.23.
According to my brokerage, I’d just made a profit of $22.40 dollars (rounded off) on an in-and-out trade of 10 GameStop shares that happened in less than 25 seconds: a profit of nearly 9%. A pretty good save, but I was lucky. I do roll the dice from time to time. But betting the ranch this way, time after time, is just the ticket for living out of a grocery cart for the rest of your life.
Violating personal trading rules with a cannabis ETF
My usual personal rule: When shares are this nuts, stay out. Never enter a market order (which executes on the next trade after entry), and never be surprised when your limit (specific price) order for a volatile stock or ETF can’t catch its moving target.
That said, about 2 weeks ago, I violated my second rule by playing with the biggest cannabis ETF.
I had run into some actual positive buzz coming out of the small, speculative Wall Street marijuana patch, which mostly consists of tiny stocks, many of them Canadian and most of those highly speculative. After an initial flurry a couple years back, this still-iffy investment group had skyrocketed when Canada dropped pretty much all legal sanctions for medical and recreational cannabis use. But speculative cannabis shares and the ETFs that tracked them generally tanked and stayed tanked not long after save for one or two individual companies.
Based on the recent buzz, I ran an article recently on the several cannabis ETFs currently available. In that article, I still advising potential investors to be careful with these investments.
MJ: The cannabis ETF that worked and then didn’t
Nonetheless, in a renewed spirit of fun, I ignored my own advice and acquired 12 shares of the biggest cannabis ETF, MJ (NYSE: MJ) at about $23.50 per share. Just to see what they’d do. To my astonishment within a few short days, the shares jumped $34.58, some $11 per share.
I shoulda sold. The shares wobbled a bit the next day, as shares usually do after a jump like this. But suddenly, this morning, the shares tanked roughly 22%. So I quickly dumped them at $26.18, still netting about 6.5%. Lucky again.
What had happened? I learned after the fact that the Redditor Raiders apparently decided to mess around with purported shorts in the marijuana patch. Focusing on a planned merger between two popular cannabis companies, they’d goosed their respected prices into the stratosphere. And, since both these companies are a significant part of MJ’s holdings, that cannabis ETF was likewise given a shot of adrenalin.
No real reason yet for this morning’s mass exit. At least not yet. Did the Redditors bail? Once again, it’s hard to keep abreast of investments like cannabis shares that come at you from left field.
The moral of the story…
This kind of investing isn’t the sort of thing I usually do any more, given that I’m no longer a spring chicken and can’t take this kind of risk. I don’t want to end up being one of those guys pushing his stuff around in a Safeway shopping cart. Or one of the late Joe Granville’s bagholders.
But this little story gives you some idea about why a horde of disaffected retail investors are launching this kind of insane trading action. You can make massive amounts of money in almost no time at all, at least on a percentage basis.
Or you can lose it.