TERRE HAUTE, IN, February 3, 2021 -
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Wild GameStop ride shows fundamentals still best long-term bet
GameStop mania has produced a rollercoaster ride on Wall Street, but the stock market’s short term financial gains are not sustainable, Wabash Valley and national advisers say.
It started when members of online social groups such as the Reddit forum Wall Street Bets began buying the stock of the video game retailer, causing hedge funds, who bet against the stock’s success, to lose billions of dollars.
Experts say keep a wary eye on hot markets
Tribune-Star/Austen LeakeWatching the markets: Don Edwards is the president and chief investment officer of Wabash Capital in Terre Haute.
The buying mania caused GameStop shares to soar from a low of $2.57 a share to a 52-week high of $483, according to the New York Stock Exchange.
One big firm, Melvin Capital closed its position last week, citing losses of 53 percent in January, ending the month with assets of about $8 billion, down from about $12.5 billion, according to the Wall Street Journal.
However, this week, the rollercoaster headed downward, as GameStop stock lost 70 percent of its value since last week. On Wednesday, it bumped back up shortly to $98 a share before dropping to $95 a share.
“It was a classic short squeeze and, in this case, it actually worked. A short squeeze is when people try to bid up the price of something to hurt people who are betting on that price going down, to try to put them out of that [stock market] position,” said Don Edwards, president of Wabash Capital Inc., a Terre Haute-based firm that oversees $350 million of investments.
“But unfortunately with GameStop, there will be a lot of people who lose money,” Edwards said.
“There is no fundamental reason for [the stock price] to go up, other than people were trying to make it go up. Fundamentally the company is losing money,” Edwards said. “Nothing ends something like this like a bunch of people losing money. I think that will be the end game of GameStop.”
It’s comparable to “day trading” in the 1990s, Edwards said, when it was perceived that nearly anyone with a computer could buy and sell stocks to make a nice living.
“In the late 1990s, many young people were trading and planned to retire when they were 30. A buy and hold strategy was a thing of the past, they said, and they said it was a new way of investing. But they lost all their money and you don’t hear much about day trading anymore,” Edwards said.
“It was a time when the stock market was up, and anyone can make money when the market is up,” he said. “Yet, every real study done on investments shows you can’t make money on the short term doing a lot of trading. You have got to follow the fundamentals,” he said.
Social media forums do add a new element to the stock market and is something the Federal Communications Commission is monitoring, Edwards said.
“Are the online social media forums here to stay? Of course. Will they continue to have outsized impacts like GameStop? I suspect not, but we will see. I am not worried about this, and I think this is more of an aberration. I think if you see this proliferate, the FCC will go in and stop it. At least in the short term, it makes the market inefficient,” he said.
Short squeezes date back to the 1860s, when people such as Jay Gould worked to push up the price of gold to make big profits, before the price fell.
“All the things he [Gould] did would put you in prison today. But he did the classic ‘pump and dump.’ He would talk a stock up and then short it, and the price would crash down, but he would make a fortune. That is illegal today,” Edwards said.
Effects on the market
Financial advisers with Edward Jones say the recent situation involving GameStop stocks is a case of “short-term volatility” but do not expect significant long-term effects on the overall market.
Angelo Kourkafas, a national analyst in investment strategy for Edward Jones, told The News and Tribune, a CHNI Indiana newspaper, that he does not see the recent speculative rush as a “systematic risk” for the broader market, saying it does not threaten the overall financial ecosystem.
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He noted that the trading frenzy was easing as of Tuesday with an unwinding in terms of speculative bets.
Kourkafas said the short squeeze strategy is not new, but what is different this time is the mass involvement of inexperienced retail investors using social media platforms.
He said in the short term, the market can be very volatile, but over the longer term “fundamentals are going to always prevail.”
“One of the most important things investors should understand is that these pockets of speculation, these manic rallies seen in certain securities make up only a tiny fraction of the U.S. market,” Kourkafas said. “It is a narrow piece of the market, and those kind of extreme swings both on the up and down side — they are not representative of what’s going on in the market as a whole.”
Dave Lobeck, a financial adviser at Edward Jones in Jeffersonville, said that in general, investors are “totally confused about the inner workings of this latest ongoing story.”
“They just know it’s in the news every day and is blamed for uncertainty and market volatility,” Lobeck said. “There is always going to be a story out there that can impact the short-term volatility of the markets.”
“Just think of the past year,” he said. “COVID-19, a presidential impeachment, a presidential election, the riots — a lot of things that have caused market volatility. This is true over the history of our economy. There is always something happening.”
Lobeck said that when the markets were struggling in April and May of last year, investors often were advised to stay invested and add to portfolios.
Kourkafas said he does not believe this situation will be the “canary in the coal mine for the stock market bubble.
“Our outlook is positive,” he said. “First of all, you have the expected widespread distribution to help economic activity normalize. You have government spending in terms of fiscal stimulus that continues to bridge the gap … and you have central banks really pledging to continue to aggressively support the economy.”
Kourkafas emphasized the importance for investors to focus on a diversified portfolio, saying that will help “navigate some of the volatility that we’re seeing.”