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"Who would imagine GameStop would be the pivot of one of the most frenetic stock market rallies and spark the blow-up of a major hedge fund? Until last summer, the video game retailer was quietly fading at the brick-and-mortar background and it suddenly saw its stocks sent to astronomical highs as a Reddit group named WallStreetBets started to massively buy them, putting Melvin Capital Management - a hedge fund that shorted GameStop stocks - in big trouble. But, apparently, the hedge fund was only the first to explode and another target is already on the line. That's what we're going to expose in this video.
Not long ago, GameStop was just one of the thousands of retail chains silently decaying as brick-and-mortar operations continue to collapse amid the rise of e-commerce and, of course, the restrictions brought on by the health crisis. Sales have been declining for years, the video game retailer was losing money, and its stocks traded for around $4 a share. But yesterday, GameStop stocks were trading at $339 a share. On Tuesday, they were at $148, and three days earlier, at $38. Which means that shares went up almost ten times in less than a week.
In August 2020, the founder of the online pet store Chewy, Ryan Cohen, sold his business and made a considerable profit. Then, he started buying GameStop shares. Cohen outlined that the company needed to keep up with the modern changes of the digital era, close several branches and make an entrance into the online realm. Several investors followed the move and snapped up the shares of the struggling retailer in hopes of a better future, which tripled their price by the end of November. Conversely, some major hedge funds, most notably Melvin Capital Management, began shorting GameStop, arguing that the idea of a recovery for the video game chain was unrealistic.
On the other hand, a Reddit group named WallStreetBets recently started to talk about GameStop stocks and buying its shares. But they weren't motivated to do the massive purchases just to make some money, they actually intended to spark chaos amongst investors while bankrupting some hedge funds. Consequently, the share prices of the video game retailer skyrocketed and those who shorted on it like Melvin were forced to cover. Just like that, GameStop has found itself in the middle of one of the greatest stock market bubbles in modern history.
So after discovering that Melvin Capital was shorting not only some of the biggest day trading darlings but also some of the most shorted names, the fund has become the main target of the violent bull raid of WallStreetBets, but some strategists have been arguing that there most certainly will be other casualties, and it seems that the new candidate for a second hedge fund collapse is Maplelane Capital.
Taking a quick look at the company's latest 13F, we can see that Maplelane not only has the very same shorts that almost led Melvin Capital to total liquidation, as it has even more puts. In other words, all the troubles Melvin Capital is currently facing might also impact Maplelane very soon. That aggravates the situation even further, considering that with an even deeper book of puts, the Reddit community will now have even more stocks to ramp up in an attempt of forcing a short squeeze either at Maplelane or any other hedge fund that follows the same shorting tendencies as the company.
Overall, it seems like WallStreetBets is indeed behind the market right now. By analyzing some of the industry's favorite longs shows, experts affirmed that they are collapsing while the most shorted names keep soaring. Bubbles like this always end in a crash. In short, this whole situation outlines how the continuous rise in stock prices we have been witnessing since 2009 shows to us how the financial system is completely disconnected with the U.S. economic reality. It's important to highlight that the main enabler to the formation of this new bubble is the Fed. Trillions in printed money injected into the financial markets have created a biblical flood of money with nowhere to go but speculative assets.
"In 1880, Theodore Roosevelt wrote to his brother, “My happiness is so great that it makes me almost afraid.” In October of that year, life got even better. As he wrote in his diary the night of his wedding to Alice Hathaway Lee, “Our intense happiness is too sacred to be written about.” He would consider it to be one of the best years of his life: he got married, wrote a book, attended law school, and won his first election for public office.The streak continued. In 1883, he wrote “I can imagine nothing more happy in life than an evening spent in the cozy little sitting room, before a bright fire of soft coal, my books all around me, and playing backgammon with my own dainty mistress.” And that’s how he and Alice spent that cold winter as it crawled into the new year. He wrote in late January that he felt he was fully coming into his own. “I feel now as though I have the reins in my hand.” On February 12th, 1884 his first daughter was born.Two days later, his wife would be dead of Bright’s disease (now known as kidney failure). His mother had died only hours earlier in the same house, of typhoid fever. Roosevelt marked the day in his diary with a large “X.” Next to it, he wrote, “The light has gone out of my life.”As they say, life comes at you fast. Have the last 12 months not been an example of that? In December of 2019, the Dow was at 28,701.66. Things were good enough that people were complaining about the “war on Christmas” and debating the skin color of Santa Claus. In January, the Dow was at 29,348.10 and people were outraged about the recent Oscar nominations. In February 2020, when the Dow reached a staggering 29,568.57, Delta Airlines stock fell nearly 25% in less than a week, as people argued intensely over a message from Delta’s CEO about passengers reclining their seats. Even in early March, there were news stories about Wendy’s entering the “breakfast wars” and a free stock-trading app outage that caused people to miss a big market rally.And that was just in the news. Think about what you busied yourself with at home during that same period. Maybe you and your wife were looking at plans to remodel your kitchen. Maybe you were finally going to pull the trigger on that Tesla Model S for yourself - the $150,000 one, with the ludicrous speed package. Maybe you were fuming that Amazon took an extra day to deliver a package. Maybe you were frustrated that your kid’s room was a mess.And now? How quaint and stupid does that all seem? As of January 27, 2021 77 million people have been added to the unemployment rolls in the US. The coronavirus pandemic has sickened more than 100,579,200 people, according to official counts, including 25,564,952 Americans. Globally at least 2,165,600 have died. There have been runs on supplies. Hospitals are maxing out ventilators. The global economy has essentially ground to a halt.Life comes at us fast, don’t it? It can change in an instant. Everything you built, everyone you hold dear, can be taken from you. For absolutely no reason. Just as easily, you can be taken from them. This is why the Stoics say we need to be prepared, constantly, for the twists and turns of Fortune. It’s why Seneca said that nothing happens to the wise man contrary to his expectation, because the wise man has considered every possibility-even the cruel and heartbreaking ones.And yet even Seneca was blindsided by a health scare in his early twenties that forced him to spend nearly a decade in Egypt to recover. He lost his father less than a year before he lost his first-born son, and twenty days after burying his son he was exiled by the emperor Caligula. He lived through the destruction of one city by a fire and another by an earthquake, before being exiled two more times.One needs only to read his letters and essays, written on a rock off the coast of Italy, to get a sense that even a philosopher can get knocked on their ass and feel sorry for themselves from time to time.What do we do? Well, first, knowing that life comes at us fast, we should be always prepared. Seneca wrote that the fighter who has “seen his own blood, who has felt his teeth rattle beneath his opponent’s fist… who has been downed in body but not in spirit…” - only they can go into the ring confident of their chances of winning. They know they can take getting bloodied and bruised. They know what the darkness before the proverbial dawn feels like. They have a true and accurate sense for the rhythms of a fight and what winning requires. That sense only comes from getting knocked around. That sense is only possible because of their training.In his own life, Seneca bloodied and bruised himself through a practice called premeditatio malorum (“the premeditation of evils”). Rehearsing his plans, say to take a trip, he would go over the things that could go wrong or prevent the trip from happening - a storm could spring up, the captain could fall ill, the ship could be attacked by pirates, he could be banished to the island of Corsica the morning of the trip. By doing what he called a premeditatio malorum, Seneca was always prepared for disruption and always working that disruption into his plans. He was fitted for defeat or victory. He stepped into the ring confident he could take any blow. Nothing happened contrary to his expectations.Second, we should always be careful not to tempt fate. In 2016 General Michael Flynn stood on the stage at the Republican National Convention and led some 20,000 people (and a good many more at home) in an impromptu chant of “Lock Her Up! Lock Her Up!” about his enemy Hillary Clinton. When Trump won, he was swept into office in a whirlwind of success and power. Then, just 24 days into his new job, Flynn was fired for lying to the Vice President about conversations he’d had with Sergey Kislyak, the Russian ambassador to the United States. He would be brought up on charges and convicted of lying to the FBI, and eventually pardoned by President Trump.Life comes at us fast… but that doesn’t mean we should be stupid. We also shouldn’t be arrogant.Third, we have to hang on. Remember, that in the depths of both of Seneca’s darkest moments, he was unexpectedly saved. From exile, he was suddenly recalled to be the emperor’s tutor. In the words of the historian Richard M. Gummere, “Fortune, whom Seneca as a Stoic often ridicules, came to his rescue.” But Churchill, as always, put it better: “Sometimes when Fortune scowls most spitefully, she is preparing her most dazzling gifts.”Life is like this. It gives us bad breaks - heartbreakingly bad breaks - and it also gives us incredible lucky breaks. Sometimes the ball that should have gone in, bounces out. Sometimes the ball that had no business going in surprises both the athlete and the crowd when it eventually, after several bounces, somehow manages to pass through the net.When we’re going through a bad break, we should never forget Fortune’s power to redeem us. When we’re walking through the roses, we should never forget how easily the thorns can tear us upon, how quickly we can be humbled. Sometimes life goes your way, sometimes it doesn’t.This is what Theodore Roosevelt learned, too. Despite what he wrote in his diary that day in 1884, the light did not completely go out of Roosevelt’s life. Sure, it flickered. It looked like the flame might have been cruelly extinguished. But with time and incredible energy and force of will, he came back from those tragedies. He became a great father, a great husband, and a great leader. He came back and the world was better for it. He was better for it.Life comes at us fast. Today. Tomorrow. When we least expect it. Be ready. Be strong. Don’t let your light be snuffed out.