The Capital Note

The Return of GameStop

Outside a GameStop store in New York City, January 27, 2021 (Nick Zieminski/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: GameStop, ice-cream cones, sock puppets and other fundamentals, China’s coal, Tesla and Texas, ghost kitchens, and, no, the financial markets are not “rigged.” To sign up for the Capital Note, follow this link.

GameStop!

GameStop Corp. mania was reignited Monday after the video-game retailer tapped Chewy Inc. founder and activist investor Ryan Cohen to helm its e-commerce business shift.

The stock surged 41% to $194.50, the highest in five weeks and its fourth consecutive day of gains. The rally came after the Grapevine, Texas-based company said Cohen would spearhead a new committee to help the transition to e-commerce.

While the latest push from Cohen spurred retail investors to pile into the stock, some skeptics like Wedbush analyst Michael Pachter argued that the update was expected. He said he didn’t “see anything new there at all.”

Instead, the stock’s position as a “Reddit Raider favorite” likely spurred the rally, according to Pachter. “And it appears shorts can’t help themselves, they keep piling on,” he said by email.

The follow-through from Cohen comes after a pair of tweets from the investor spurred a wave of trading in the past two weeks. Most recently, shares spiked on Thursday after Cohen tweeted an apparent screenshot from a Pets.com television ad.

Screenshot here.

That is nothing if not meta. Pets.com was briefly the symbol of dot-com-era excess, and today’s markets increasingly being compared with that mad moment from two decades ago. A key element in Pets.com advertising was a sock puppet (like the one featured in Cohen’s screenshot).

From Wikipedia:

As the puppet’s fame grew through 1999 and 2000, it gained almost cult status and widespread popularity. The puppet made an appearance on ABC’s Good Morning America and NightlineWABC-TV-produced Live with Regis and Kathie Lee, was interviewed in People Magazine, Time Magazine, Entertainment Weekly and Adweek and even had a 36-foot-tall (11 m) “falloon” made in its image for the 1999 Macy’s Thanksgiving Day Parade.

Good times, good times.

Amazon was an early investor in Pets.com, which eventually went public in February 2000 at $11. The stock topped out at over $14, but bad times lay ahead. High spending, low revenues, and the absence of much of a business plan meant that the company ended up in the Pets.com sematary, an extreme example in a nasty collection of horror stories from that time, even if some of the company’s sock puppets are still at large on eBay. A former hedge-fund client of mine used to have the front pages of two research reports written about Pets.com decorating the walls of his office. Both were produced by the same investment bank. The first recommended the stock as a buy, the second announced that, in view of the company’s liquidation, it was abandoning coverage.

“A useful reminder to any visiting salesmen,” he explained.

Quite why Cohen tweeted out that image, which came complete with a sickly emoji, is anyone’s guess (perhaps an indication that lessons had been learned from the past). In any event, it was enough to help revive interest in the GameStop stock, which had passed $480 in late January after closing out at $18.84 at year-end, but sunk as low as $38.50 at one point on February 19. GameStop is, it is fair to say, no stock for the faint-hearted.

There is an argument that this latest round of interest in the stock is driven by the thought that GameStop’s business model is being overhauled.

Then again:

A picture of an ice cream cone tweeted by Cohen on Feb. 25 helped spark a massive rally, with the stock doubling at one point during the session.

The magic ice-cream cone can be seen here.

One thing worth noting:

Monday’s rally came despite short interest being near the lowest level in at least a year. Roughly one-quarter of shares available for trading are currently sold short, according to data compiled by S3 Partners. That compares to a peak of more than 140% in January.

“Shorts will continue to be squeezed out of their positions as GameStop’s stock price continues to trend upwards,” said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

Short sellers are down nearly $6 billion in year-to-date mark-to-market losses, including $609 million in Monday’s trading alone, Dusaniwsky said by email.

The Wall Street Journal came out with a decent analysis of how Redditors might pick out the next GameStop, which is still worth reading even if written an eon ago (mid February).

The sales pitch matters as well. Savvy promoters set conservative goals for returns, pick risky companies that can generate buzz and turn technical details into meme-ready pitches.

Most people on the site “are just gamblers,” said Chris Maresca, a 24-year-old director of compliance with an accounting background who spotted and promoted AMC Entertainment Holdings before anyone else on the forum. He said you can’t go too deep into the details, “you have to make it like this is going up.”

Boredom, ease of access to the market, and the Fed’s contribution to the mispricing of risk have the effect that they do, although I would not denigrate “gamblers.” It is the different viewpoints and attitudes that make a market.

I don’t make calls on individual stocks, but I cannot see how this era will end well. It will be remembered though, so there is that.

Oh yes, from Grant’s Almost Daily:

Enter non-fungible tokens, or crypto-based digital collectibles such as art and music, as well as more contemporary communication forms such as memes or GIFs.  Residing on the blockchain, each NFT is unique and verifiable, conferring on its owner not only bragging rights but also significant price appreciation: The 10 largest NFTs have leapt by between 60% and 900% so far this year, according to crypto data provider Messari. In turn, sales of the tokens footed to more than $60 million in February per Bloomberg, up from $250,000 a year ago.

Boomtime conditions have duly captured the corporate realm’s interest.  Twitter and Square CEO Jack Dorsey announced Friday that he will auction the first ever tweet, containing the text “just setting up my twttr,” from March 21, 2006.  The keepsake is drawing brisk interest, with Sina Estavi, CEO of Bridge Oracle, currently the leading contender with a $2.5 million bid, topping a $2 million ante from crypto magnate Justin Sun.

Major restaurant chains are getting in on the act.  This morning, Taco Bell announced the debut of its eponymous NFT taco art, trumpeting that: “Now fans can own their favorite tacos and hold them in their hearts and digital wallets.”

The sports world is also fertile ground for the souvenirs, as an NFT depicting a LeBron James dunk recently sold for $208,000.  Some see bigger things in store.  Dallas Mavericks owner and former Broadcast.com co-founder Mark Cuban recently predicted that the digital tokens “could turn into a top three revenue source for the National Basketball Association over the next 10 years.”

As I noted in the Capital Note on February 12:

Robb Report (my emphasis added):

The economy may be in a precarious spot, but the collectible card market is apparently booming. The latest proof: Two Michael Jordan rookie cards set records at auction this past weekend.

On Saturday, Goldin Auctions sold two mint condition examples of His Airness’s 1986 Fleer rookie card for $738,000 each. Breaking a record set less than a month prior, the astounding hammer prices mean that the value of Jordan’s first professional basketball card has multiplied by more than 15 times since the start of the Covid-19 pandemic.

Time to start reminiscing about the 1970s scripophily bubble.

No?

Another day then . . .

Around the Web
Nikkei Asia:

China’s inability to crack its dependence on coal power threatens to undermine the country’s pledge to achieve carbon neutrality by 2060.

Last year, China built enough coal-fired power plants to provide 38.4 gigawatts of electricity, data from U.S. think tank Global Energy Monitor shows, far surpassing the 8.6 GW from plants that were retired. This net gain in capacity, the equivalent of 30 nuclear facilities, suggests that coal will remain king in China for the foreseeable future.

Industry group China Electricity Council in a February report called coal-fired energy a cornerstone in maintaining a stable power infrastructure. Despite the growth of renewable energy, coal thermal power “can contribute hugely,” said Yu Chongde, the council’s vice president and secretary general . . .

I am shocked, shocked by this news. Is John Kerry?

Hmm . . .

Bloomberg:

Elon Musk is getting into the Texas power market, with previously unrevealed construction of a gigantic battery connected to an ailing electric grid that nearly collapsed last month. The move marks Tesla Inc.’s first major foray into the epicenter of the U.S. energy economy.

A Tesla subsidiary registered as Gambit Energy Storage LLC is quietly building a more than 100 megawatt energy storage project in Angleton, Texas, a town roughly 40 miles south of Houston. A battery that size could power about 20,000 homes on a hot summer day. Workers at the site kept equipment under cover and discouraged onlookers, but a Tesla logo could be seen on a worker’s hard hat and public documents helped confirm the company’s role . . .

“Ghost Kitchens”: pandemic phenomenon or something longer lasting? A bit of both, if I had to guess.

Grub Street:

What is a ghost kitchen? Like ghosts — in this way, they are well named —the ghost kitchen can take many forms, but the overarching premise is that the ghost kitchen produces food to be delivered elsewhere, usually via app. Because there is no dining room, a ghost kitchen requires less staff and less space than a restaurant, and it can pivot on a dime. If the people do not want hamburgers, the ghost kitchen can rebrand as a taqueria. Perhaps it will do both. One San Francisco operator featured in a pre-pandemic rise-of-ghost-kitchens New York Times piece, runs three disembodied UberEats-specific concepts — fried chicken, burgers and wings, and ice cream — from the kitchen of his physical restaurant, which sells roast beef. It was going well, apparently. And good! Who can begrudge a restaurant for scraping by, especially in times like these?

In theory, the articles will tell you, ghost kitchens are a way for restaurateurs to experiment with new concepts. The lower startup costs could foster experimentation, evangelists say; this should be an exciting time. So far, though, in practice, ghost kitchens are mostly serving uncomplicated comfort foods, largely inspired by what tech platforms say people are searching for on apps. For now, “it’s a lot of chicken wings, a lot of grain bowls, and sandwiches and pastas, things that travel well,” allowed one restaurant strategist to Eater, insisting that the space is still “ripe for innovation.”

What ghost kitchens are not, as should be clear by now, are restaurants. They are food-logistics operations, and you could argue that is fine. Who cares if your fried chicken is from an abstract concept that is also an ice-cream parlor, which also sells roast beef? Are we to understand that fried chicken exudes an aura of pure chickenness only if it is prepared in a customer-facing space dedicated exclusively to poultry?

Obviously, no. But reading about the production of ghost sandwiches does not make me excited for the future of delivery. It makes me ache for restaurants.

Random Walk
Some wise words from the FT’s Robin Wrigglesworth on the perception that American financial markets are somehow “rigged” (this was not a reference to the Fed), a perception both reflected (and, sincerely or not) exploited in the recent congressional hearings principally dedicated to Robinhood/GameStop.

The online brokerage Robinhood emerged as the hearing’s main target, with its co-founder Vlad Tenev peppered with questions and criticisms over its decision to restrict trading in GameStop at the peak of the turmoil. Although forced into doing so for regulatory reasons, many Reddit traders suspected that it was quietly doing the bidding of Wall Street.

However, the unstated defendant at the virtual trial was the integrity of America’s financial markets. Despite several participants paying lip service to them being the “envy of the world”, it appears that an increasing number of Americans think markets are somehow “rigged”. To them, GameStop was not just a stock market gamble but a rebellion . . .

To many in finance, the often amorphous vitriol — and the conspiracy theories it often nurtures — is baffling, frustrating and worrying. They say the complex US market ecosystem is mostly a product of its messy evolution, inertia, myriad often conflicting vested interests and the remorseless march of technology.

Maureen O’Hara, a finance professor at Cornell, expert on stock market microstructure and an author of a book on Wall Street ethics, cautiously agrees. Although markets have always been an inhospitable environment for amateurs, by almost every measure American equities are more transparent, cheaper to trade or invest in, and better-policed than ever before, she argues. Far from perfect, of course, but not the cesspit of dodgy dealings that many think.

O’Hara sees the current distrust of markets as the result of myriad toxic factors, such as low levels of financial literacy; uniformly malignant depictions in popular culture; and the long shadow of the financial crisis and the feeble crackdown on malfeasance in its wake. The fact many ordinary Americans have no savings in the stock market and are unable to reap its benefits doesn’t help.

Should a “fair” market mean that ordinary, individual investors have the same chances to succeed as amply-resourced investment companies stuffed with professionals that have dedicated their entire lives to trading and investing? That would be like saying a pub football team should be able to compete with a Premier League side. What matters is that the rules of the game are the same for all sides. And this may be a controversial view, but it is hard to see concrete, meaningful and malignant examples of where they are not.

But critics and defenders of the current market ecosystem agree on one thing: the vibrancy of the financial system depends on people’s willing faith and participation. The current distrust in markets is now so entrenched and profound it arguably represents a subtle, insidious threat to its overall health.

Wrigglesworth concludes:

Gary Gensler is on course to be confirmed as the new head of the Securities and Exchange Commission. He faces a mammoth inbox. Yet the biggest overarching challenge he will face will be to restore some of the credibility of US financial markets among ordinary Americans. Drastic actions may be necessary.

“Drastic actions.” As I read those words, faint memories of the unfortunate Admiral Byng came to mind.

Sadly, it does seem that Gensler may have an interest in stepping up the SEC’s involvement in the climate wars, citing, as usual, “risk,” a questionable concept in this context, at least on any reasonable short-term time horizon. I am unconvinced that such moves will increase investor confidence, and the same may, in the end (some of the current proposals appear sensible), be true of SEC support for “socially responsible” investing. I touched on this and related topics in the most recent Capital Letter.

— A.S.

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