TheChek News Flow

GameStop shares leap as day-trading ‘mob’ tussles with short seller

Abuse is hurled at Citron founder on Reddit in dispute over valuation of video games retailer

Shares in GameStop went on a wild ride on Friday, surging nearly 80 per cent after the struggling US video games retailer found itself at the centre of a battle between short-sellers and amateur online traders.

The company, whose stores have struggled for sales in the pandemic, has been a favourite of day traders on the popular message board r/wallstreetbets on the website Reddit, which has helped double the value of the stock since the start of the year.

A tug of war emerged on Thursday after famed short-seller Citron Research said it had placed a bet against the stock, saying the company was “pretty much in terminal decline”. That view drew out traders who collectively pushed the stock higher, aiming to squeeze Citron and others out of their short positions.

As the assault continued on Friday, Andrew Left, the founder of Citron, said he would stop commenting on the stock, saying this was in response to an “angry mob” conducting repeated hacking and intimidation attempts.

The incident will further intensify the debate over the growing influence of retail investors in US markets. Historically their impact has been muted in an equity market in which more than $500bn of deals are executed every day. But, encouraged by brokers’ moves to commission-free trading, their activity has soared in the past year, leaving a deep impression on some individual stocks.

Several companies have watched their stock prices soar and crash in a matter of days, with the activity openly discussed on sites like Reddit.

Mr Left earlier in the week described buyers of GameStop stocks as “suckers at this poker game”. He followed up his remarks on Thursday with a YouTube video saying there was “no short squeeze happening as we speak” with the stock at $40.

“I’ve never seen such an exchange of ideas of people so angry about someone showing the other side of a trade,” he added.

Users on Reddit reacted angrily to the charge. One user posted a video of Mr Left’s face superimposed over R Kelly, the star currently in jail awaiting trial for sex abuse charges, during an interview in which the singer says he is “fighting for my f-u-cking life”. Another called Mr Left a fraud.

A month ago, one Reddit user said Mr Left should be “public enemy #1” of r/wallstreetbets.

Citron could not immediately be reached for comment.

Friday’s rally sent the shares to a high above $76, giving the company a market capitalisation above $4bn, roughly three times the $1.3bn price tag it enjoyed at the end of 2020. They ended the day at $65.

More than $8bn worth of GameStop shares had changed hands by 2pm, a record level, according to Bloomberg. Trading of options contracts tied to the shares also skyrocketed.

GameStop in December reported a 31 per cent year-on-year drop in sales for the first nine months of 2020, adding last week that sales of new gaming consoles had helped staunch the decline over the holiday period.

President takes steps to boost flagging US economy as he faces resistance to Covid relief package

Joe Biden’s administration has taken its first steps to revive the flagging US economy but warned the moves were “not a substitute” for another large stimulus package, as it increased the pressure on Congress to pass a $1.9tn Covid-19 relief bill.

The US president on Friday signed two executive orders to broaden access to food stamps and unemployment benefits, while beginning a process to introduce a mandatory $15 per hour minimum wage for federal contractors.

While the measures are a signal of intent from the president, they underscore the extent to which his ability to boost the economy depends on securing the support of a divided Congress for his stimulus bill.

Brian Deese, the new director of the National Economic Council, said: “I want to be very clear: these actions are not a substitute for comprehensive legislative relief, but they will provide a critical lifeline to millions of families.”

At a press conference on Friday, Mr Deese warned the US risked “an even more serious” economic crisis unless it approved the $1.9tn relief plan, which the administration hopes to follow with even more fiscal support. He said he would be meeting a group of senators to discuss the legislation on Sunday.

The Biden administration has made the relief plan a top priority for his first week in office. It includes more direct cheques to individuals, aid to cash-strapped states and an extension of jobless benefits.

“The bottom line is this: we’re in a national emergency. We’ve got to act like we’re in a national emergency,” Mr Biden said as he signed the executive orders later in the afternoon.

But the stimulus package faces significant obstacles in the Senate, where many lawmakers, especially Republicans, are sceptical of the need for additional fiscal support. Another complicating factor is that the upper chamber of Congress is likely to be consumed by Donald Trump’s impeachment trial, which means Mr Biden’s team may struggle to get a large package approved quickly.

“We’re not gonna get Republican votes for something in that price range,” said John Thune, the Republican senator from South Dakota and a member of his party’s leadership. “It’s not targeted and we said all along we want something . . . targeted, we want to be fiscally responsible and we’re gonna continue to maintain that.”

The executive actions signed by Mr Biden would expand access to food stamps and allow workers who left their jobs for health and safety reasons to receive unemployment benefits.

The Democratic president also moved to start work on an executive order that would require federal contractors to pay a $15 per hour minimum wage, along with emergency paid leave, heralding a big battle over with Republicans and some business groups over pay for low earners.

Mr Biden had already been pushing for passage of an overarching $15 per hour minimum wage within his $1.9tn stimulus, and it was a key plank of his campaign. But given the slim chances that he will be successful in getting it into the legislation, he is trying to take as many steps as he can to lift salaries without congressional approval.

As well as laying the groundwork for a $15 minimum wage to apply to federal contractors, Mr Biden also instructed government agencies to review which of their workers earn less than $15 per hour and offer solutions to boost their pay.

The US federal minimum wage has been stuck at $7.25 per hour since 2009, although many states and cities have been gradually raising their own minimums.

Even as Mr Trump won Florida in the 2020 presidential election, the Republican-governed state approved a ballot initiative gradually raising its own minimum wage to $15 per hour — a measure which had gained widespread bipartisan backing.

Republican lawmakers in Washington are resisting the president on the issue. “Mandating a $15 federal minimum wage would wipe out small businesses hanging by a thread,” Chuck Grassley, the Iowa Republican, said on Friday.

“It would cut into already contracted business income, forcing local retailers and restaurants to stop hiring and forget about reopening or expanding a small business,” he added.

Lagarde defends Philip Lane’s one-to-one meetings, but says practice will be reconsidered

The European Central Bank is to review the format of private calls its chief economist has held with financial market participants, including Goldman Sachs, JPMorgan Chase and BlackRock, to discuss its monetary policy decisions.

Christine Lagarde, the ECB’s president, defended the calls in a letter to a Dutch member of the European parliament that was published on Friday, in which she also said the practice was being reconsidered.

The one-to-one calls were made by Philip Lane, the ECB’s chief economist, to a handful of investors and bankers at large financial institutions in the hours after Ms Lagarde held press conferences to present its latest monetary policy moves.

The calls were disclosed, with a delay of several weeks, in Mr Lane’s diary on the ECB website. But they have raised questions about whether the chief economist could have given sensitive information to a few privileged investors.

Ms Lagarde said in her letter to Derk Jan Eppink, a Dutch MEP, that “the ECB is fully transparent about its interactions with its stakeholders, and with financial market participants in particular”.

“The launch of the calls had been planned well before these were first conducted, in order to facilitate systematic exchanges on newly published information,” she said.

Richard Barwell, head of macro research at BNP Paribas Asset Management, said: “The simple solution is to do what the Bank of England does and have an analyst call — one meeting for everyone — and leave gathering market intelligence to the staff.”

The US Federal Reserve has a 12-day blackout period that runs until a day after its policy decisions, during which its officials do not speak to investors.

The ECB tightened its communication rules in 2015 after one of its executive board members at the time, Benoît Cœuré, told an audience of hedge fund managers, academics and finance officials at an event in London that it planned to front-load its asset purchases. An internal error meant the information was only made public the morning after the event. When the remarks were published, the euro fell sharply. 

Mr Lane’s calls started after a press conference last March when Ms Lagarde contributed to a bond-market sell-off by saying it was not the ECB’s role to “close the spreads”, referring to the difference in funding costs between Italian and German government bonds.

To be on the list of people he called, the ECB said someone had to be an active observer of the institution. Other groups with which Mr Lane has made calls include Deutsche Bank, Axa, UBS, Citigroup and Pimco. The ECB said Mr Lane spent most of the calls asking questions and clarifying details of policy decisions. No investor has indicated he passed on market-sensitive information.

On Friday, the ECB disclosed in Mr Lane’s online diary that he had held teleconferences with eight banks, including Bank of America, Barclays, Société Générale, Credit Suisse and UniCredit, shortly after an online press conference by Ms Lagarde on October 29.

Ms Lagarde said: “For the ECB, as for all central banks, exchanging views with representatives of the private sector — including financial market participants — is important to deliver on its mandate.”

Market turmoil over past year makes it tougher than usual to determine a manager’s skill or luck

Investors are returning to hedge funds after the sector posted its biggest gains in a decade in a topsy-turvy 2020. But picking which managers will do well this year will not be straightforward.

Having fallen out of love with hedge funds’ sluggish returns during the bull market of recent years, some investors are being drawn back by what some commentators claim is one of the sector’s best years. Clients have been impressed that many funds have been unscathed by the Covid-19 pandemic and its market volatility. Some 45 per cent of investors surveyed recently by the Alternative Investment Management Association and research house HFM plan to increase exposure to hedge funds.

The problem, however, comes when investors have to decide which funds to put their money in. Far more than in most years, being in the right place at exactly the right time in 2020 really determined a manager’s fortunes, rather than an ability to dissect a balance sheet and build a pricing model.

In a rollercoaster year, funds had to face the S&P 500’s fastest descent into a bear market and an eye-watering rebound, as well as the outperformance of expensive stocks with faster growth prospects than more lowly valued stocks.

Whether a fund timed those waves precisely or not has gone a long way in determining whether its managers have been celebrating their biggest bonus or watching their painstakingly-built record being torn to shreds. The gap between the top and bottom-performing hedge funds opened up to its biggest since 2009, according to data group HFR.

For instance, buying Tesla in late 2019 — as Boston-based Whale Rock Capital did — clearly looks like a great decision in hindsight, even though all but the most ardent Elon Musk fans may not have predicted a 743 per cent rise in its share price last year. Whale Rock went on to chalk up a 71 per cent gain in its long-short fund. Conversely, if you had focused on buying cheap stocks, even the world’s best stockpicker would have faced the headwind of a 23 per cent underperformance of the Russell 2000 Value index compared with the Russell 2000 Growth index.

“It’s definitely harder to assess skill at the moment,” said Bruce Harington, head of long-short strategies at Stenham Asset Management, which invests in hedge funds.

With markets moving so quickly, the vagaries of market timing mattered. Take London-based Helikon Investments. After leaving Kairos Investment Management at the end of September, founding partner Federico Riggio wanted to launch his fund as soon as his six-month non-compete clause expired. This produced a launch date of April 1, just over a week after the S&P hit a three-year low — surely one of the most fortuitous times to launch a fund in recent memory. While the firm correctly called the revival in stocks, Mr Riggio admits the timing of the launch also helped. “We were lucky,” he said.

And what should investors make of the awful year some of the hedge fund industry’s most experienced figures had? CQS founder Michael Hintze was for years viewed as one of the top credit traders with a record of double-digit gains before suffering a shock $1.4bn loss last year. 

Analysing why managers lost money and whether they can turn it round becomes even tougher for quantitative funds, many of which are viewed as black boxes by investors. Jim Simons’ Renaissance Technologies, possibly the industry’s best brand name, suffered double-digit losses in some funds. Even Winton Group’s David Harding, whose flagship fund suffered its worst year on record, told the Financial Times last year there was “not any single reason we’re doing badly”.

Differentiating between a manager’s skill and luck is an age-old problem. Industry veteran Dixon Boardman is among those who believe genuinely skilful managers will eventually come good, even if they have had a very tough 2020.

“Can clever people become stupid overnight? Obviously not,” says the chief executive of Optima Asset Management. “Will good managers make out in the end? Absolutely.”

Investors who pay funds’ high fees can argue with some justification that it is the manager’s job to navigate markets, whatever the conditions.

But the danger for investors is that picking a manager could easily become more about a call on markets, on value versus growth investing, or even on the future share price of Tesla. More than ever, recent past performance is unlikely to be a reliable indicator of future returns.