Kim Hyun-seok’s Wall Street Now Game Stop Tsunami sweeps Wall Street

In the New York Stock Market on the 27th (local time), when’super-large events’ such as the Fed governor Jerome Powell’s press conference and Apple and Tesla performance announcements were scheduled, investors’ attention was focused on’Game Stop’.

Some’miscellaneous goods’, where the number of individual investors such as Gamestop, concentrated, surged to hundreds of percent, while major indexes plunged the most since last decade. The Dow fell 2.05%, the S&P 500 fell 2.57%, and the Nasdaq fell 2.61%. The S&P 500 returned all of its gains this year.

GameStop soared more than 100% from after-hours trading before opening, and ended at $344.99, up 133.13%. It was in the 10 dollar range earlier this year. It’s not just Gamestop. AMC Entertainment, the largest theater chain in the United States, once rose 420% and ended with a 30.121% increase. Stocks with a large amount of so-called short selling, such as Express, Fubo TV, and Cos Corporation, all surged to triple digits. The new term’FANGG’ (FUBO, AMC, NOK, GME, GOGO), which collected these stocks, even emerged.

However, this’miscellaneous’ typhoon pulled down the main index. Why?

The gamestop surge is not only due to the purchase of 3,100,000 ants (up from 2.4 million the previous day to 700,000 in one day) who participated in the online community Reddit’s stock discussion room’wallstreetbets. This is because the hedge funds they targeted and the large institutions that sold call options to them all had to join the ranks of gamestop stock purchases with tears.

The reason is simple. Hedge funds such as Melvin Capital, a long-short strategy (making money by buying or selling stocks), have been short selling more than twice the amount of circulating stocks for Game Stock until the end of last year. It was because the stock price was expensive compared to the fundamentals. On the day when the actual GameStop stock price exceeded $300, Bank of America raised the target price of GameStop from $1.6 to $10. Wall Street’s overall view is that it is difficult to exceed 10 dollars, no matter how high it is.

The’smart’ ants gathering at the WSB set up an elaborate campaign to conquer Wall Street. They are well aware that hedge funds will have to buy back stocks and pay them back if stock prices soar because they buy stocks with concentrated short selling at once. It is a so-called’short squeeze’. Then the stock price will rise further.

We have also targeted options here. If you buy a large number of call options on these stocks, the Wall Street financiers who sold them must hed the risk of volatility. They usually buy stock. It is a so-called’delta hedge’. In particular, if the stock price of an underlying asset (stock) surges beyond expectations, it is inevitable to buy the stock in large numbers to reduce the risk. This situation is called’gamma squeeze’.

In other words, the recent surge in stock prices, which started with individual purchases, triggered’Short Squeeze’ +’Gamma Squeeze’ at the same time, leading to an endless increase in stock prices.

The ants discussed this structure at the WSB and rushed to say, “Let’s break the hedge funds that have plagued ant investors.” Earlier last week, ants who bought a call option are posting articles saying that they invested $10,000 and made a profit of $1 million. Chamas Parlihapitiya, CEO of Social Capital, said that he had bought 50 call options for $115 the previous day (estimated to buy $125,000), and said he made $500,000 by liquidating his position in one day.

Hedge funds have been shattered that much. It is reported that Melvin Capital, who urgently raised $2.75 billion in the same hedge fund industry on the 25th, liquidated its short short position on the same day. He surrendered for the loss of billions of dollars. Another hedge fund, Maple Lane Capital, is reported to have lost around 30%.

The problem doesn’t stop there. As all stocks with many short selling of hedge funds surged, many hedge funds were in danger of massive losses. They usually mobilize a lot of leverage (liabilities) to invest in stocks and derivatives, but they faced a margin call (requiring additional margin related to derivative losses) due to the surge in short-selling stocks. Then, you have to sell the lost stock as well as the assets you own to relieve the leverage.

Wall Street realizes that many stocks are available for sale on the market. Actually, on this day, the items were poured out. The New York stock market crashed as some institutions that expected the possibility of adjustment due to this, joined the sale, saying they would take profit.

The Game Stock crisis has even led to observations of whether it is calling for financial authorities to intervene. During an actual White House briefing, White House spokesman Jen Saki said the finance team, including Finance Minister Janet Yellen, was keeping an eye on the situation regarding the GameStop stock. Investor Michael Burry, known as the movie’Big Short’, tweeted, “Gamestop trading is unusual, crazy, and dangerous. It must be regulated.” Some securities companies, such as TD Ameritrade, restricted transactions such as Gamestop and AMC, saying that customer risk is high on this day.

The situation on this day shook the sentiment of preference for risky assets that have dominated Wall Street. Not only did the stock price plunge, but the’safe asset’ dollar was strong. The ICE dollar index rose 0.7% from the previous day to 90.8. And the interest rate fell to 0.998% per year based on the 10-year Treasury bond rate, and for the first time since January 6th, the interest rate has temporarily dropped below 1% per year. A Wall Street official said, “This is due to the strengthening of the preference for safe assets due to the game stop incident, along with the expectation that the Fed’s easing monetary policy will continue.”

This year’s Wall Street has been expecting a rise in stocks, a rise in interest rates, and a fall in the dollar, but on this day the market moved completely differently from these’Wall Street consensus’. That’s why the’Game Stop Tsunami’ had a big impact.

The Wall Street Journal (WSJ) commented that “individual investors are winning tremendous victories (against Wall Street)-at least so far. Gamestop stock prices are showing a shift in Wall Street power dynamics.”

At the press conference held by Chairman Powell after the closing of the Federal Open Markets Committee (FOMC) at 2:30 pm that day, the first question was, as expected, “How do you view the situation like a game stop?” And Chairman Powell gave the expected answer, saying, “I will not comment on individual stocks or market conditions.” “The rise in recent months has been driven by anticipation of vaccine penetration and fiscal stimulus rather than monetary policy,” he said of the rise in overall asset prices, including stocks.

Chairman Powell stressed that the discussion on tapering (reducing asset purchases) is premature. He also reaffirmed his position not to raise interest rates for a while, saying, “Inflation may rise within a few months, but it may be temporary. The Fed will be patient.” “I’m more concerned about low inflation than high inflation. We know how to deal with high inflation,” he added.

FOMC results were as expected. It froze the interest rate at zero and announced that it would continue to purchase assets worth $120 billion a month. “The pace of economic activity and employment recovery has slowed in recent months,” he said, making the economic outlook a little more negative, and the announcement that he would phase out a one-month term repo (repurchase conditional bonds) was a notable change.

Microsoft, which showed far-than-expected fourth-quarter results the previous day, was caught up in the GameStop tsunami on this day and only rose 0.25%. Facebook, which was due to announce its earnings right after the market close, fell 3.51%, Apple fell 0.77% and Tesla 2.14%. Even AMD, which performed far better than Wall Street’s predictions the day before, plunged 6.2%.

The Chicago Options Exchange (CBOE) Volatility Index (VIX) soared 61.64% from the previous day to 37.21. This is the highest level since the end of the courtroom in early November last year.

Another adjustment that everyone has been expecting has begun? Mike Wilson, Chief Investment Officer Morgan Stanley, and others, who have announced that there will be a correction since the end of last year, see the adjustment as around 10%. This is because the economic recovery is expected in the second half of the year. They are insisting that if the stock price is adjusted, the portfolio will be reorganized into economically sensitive stocks to prepare for the next bull market.

However, a Wall Street official said, “The expected correction is not so large, but when it starts with an unexpected event like this time, it can increase considerably.”

Reporter Kim Hyun-seok [email protected]