Tuesday, March 8, 2022

Meme Stocks - Monetizing the Qanon Effect

Convincing people of crazy shit online was just for funsies at first.  Then some folks realized you could create political movements and get people elected doing this.  But then the really smart folks realized you could make a shitload of money this way.  This will not end well.

Note:  This is a posting I worked on in December 2021 and for some reason never posted it.  I have hundreds of such ghost posts!  Maybe more later...

The Internet had such great promise. In the early days, it allowed us computer geeks to find information online and buy things for cheap.  It allowed me to work from home - 20 years before the pandemic made people "discover" this.  But then came Facebook, and suddenly everyone was online, usually on a smart phone (an inaptly named device if there ever was - if you weren't dumb before you started using one, the longer you use it, the dumber you will get!).

Facebook and Twitter gave us conspiracy theories.  At first it was stupid stuff like the pedophile pizza shop.  No one got hurt, right?  Well, except the poor owners of that shop and the duped idiot who ended up in jail after shooting up the place.  Thank God no one was hurt or killed - yet.  But then we had Qanon and Donald Trump, whose presidency could be traced to social media, particularly his Twitter escapades and the hyping of his candidacy on r/the-donald and elsewhere. And let's not forget the Russian bot and troll farms that put him in the White House!

The Democrats didn't see it coming.  They still ran their attack ads on television, which no one watches anymore, or if they do, they skip over the depressing ads using a TiVo-type device.   It was like Hillary's first campaign against Obama - she didn't "get" the Internet and thought you could control what people said online - it drove me to the Obama camp very quickly. Sadly, eight years later, she still didn't understand that one posting on Twitter was more powerful than a million dollars of campaign ads.  Sadly still, Democrats still don't get this.  They need their own troll army.  The far-left, however, is doing a good job of this - just check out r/antiwork - they are tearing Biden apart.

But politics are one thing, real money is another.  And someone figured out that if you can influence people online, you can get them to divert money your way.  The Elio fellow promoted his non-existent car this way, and got 20-somethings and even teenagers to send in "deposits" on cars that were never made.  A decade later and he's still taking "reservations" if you can believe that.  But that's small potatoes.

Suppose  you could manipulate stock prices this way - and make real money?  Well, someone figured out a way to do this.  They noticed that short-sellers, who placed options on stocks, gambling that they would go down in value, had "shorted" a lot of brick-and-mortar kinds of businesses that were either dying slowly or were affected by the pandemic. GameStop is a brick-and-mortar company selling video games, consoles, and accessories. They are losing money and closing stores because "the kids these days" can download games online or order them online, often for far less than at a physical store.  It was the Blockbuster Video of computer gaming, or perhaps the Sears (or Photomat?)  It will linger on for a long while, but the writing is on the wall.  So shorting that stock was a no-brainer.

But suppose you could affect the price of the stock so that these short-sellers get screwed?  If the price goes up, then the short-sellers would have to buy the stock at the higher price (which would in turn drive the price up even further) and thus incur huge losses.  Again, when you buy an option, you put down a small amount as a "bet" unless it is a "naked" option.  If the price goes where you think it will, you cash in an amount that could be ten times your "bet" - but you could also lose ten times as much as you bet as well, if you bet wrong.  That's why options are basically worse than gambling and why they are a bad idea for the small investor.  You go to the track, you can't lose more than you bet.  With options you can lose everything you own!

So... how do you manipulate a share price?  Well, in today's retail investor market, there are a lot of small-time players who will throw $100 or $1000 at a stock.   Many think they will get rich this way, or it satisfies their need to gamble.  The folks running this scheme started hyping GameStop stock on Reddit's r/wallstreetbets (aptly named) and got a few hundred or a few thousand or who knows how many clueless people to buy a little GameStop stock, a few shares at a time.

Now, as I noted before, the share price of a stock is the price the last chump paid in, and not an indication of the real value of the company or the shares.  When a lot of people buy a stock, the price goes up - supply and demand.  Sears, Canada stock, for example, went from $0.01  a share to $0.02 a share recently.  That does not mean the value of Sears Canada doubled overnight, only that some chump decided to buy some shares.  Share prices are volatile and do not reflect the real value of a company.  And this is how some folks make a lot of money on Stocks - if they have the real data and are willing to gamble.

At first, the readers of r/wallstreetbets (called "apes" by their handlers) were encouraged to use the "Robinhood" trading platform, which offered free trading.  Robinhood itself was subject to some controversy - how do they offer free trades and stay in business?  As one reader noted, it was because they sold  the trading data to the big firms, who can trade electronically in nanoseconds.  So you put an order in to buy a stock and it is executed in a matter of minutes or hours.  Meanwhile, the big trading firm has that data and in less than a second, bought shares before you did - and maybe even sold them to you!

But the Robinhood honeymoon died quickly. A number of the "apes" decided to sell their shares at once, and the Robinhood model broke down. They froze sales of "meme" stocks and people were understandably pissed.  A class-action suit ensued and people were given a pittance as a settlement.

Undeterred, the puppet-masters at r/wallstreetbets encouraged the "apes" to buy using systems like Computershare, which is nominally a dividend re-investment platform (which for GameStop, which doesn't pay a dividend, makes no sense).   And once again they primed the pump, this time around for AMC (the movie theater company) stock which was also a target of short-sellers.  Wash. Rinse. Repeat.

Of course, there were ulterior motives in encouraging their followers to use Computershare.  First, as a dividend investment platform, it is not really suited to real-time buying and selling of stocks.  So while the people running this scheme can program computers to buy and sell stock (or options) in nanoseconds, the "apes" with their Computershare registered stocks, can only sell in terms of minutes or hours.

Another aspect is that with Computershare, your shares are in your name, and thus cannot be "lent" out to short-sellers (short sellers have to borrow shares to sell, hence the cost of the short, and then later re-buy them before the end of the option period).  In theory, this would prevent short-sellers from "borrowing" those shares, as they are not on the books of a trading house, which in turn would drive up the price of shorting.  But many retail trading houses have noted that they don't lend shares unless the owner borrowed money to buy them.  And others have noted that the short-sellers usually "borrow" shares from the big trading houses, not the small retail outlets.  Yet others claim that if more shares are taken off the options "lending" sheet, the price of the stock may become more volatile - and volatile stock prices make a lot of money - for other people, not you and me.  Myself, I think the reason they are promoting Computershare is to keep people from readily selling their shares and getting a "free ride" on the pump-n-dump.  The puppet-masters want to make sure the "apes" lose it all.

And of course, they promote holding the stock at these inflated prices.  One fellow, who is either a bot or a useful idiot, posted breathlessly, "I'm keeping my [AMC, GAMESTOP, TESLA, WHATEVER] shares forever!"  Which is a good idea as with a P/E ratio that is negative or over 200, you basically have to wait forever to make your money back.  Pump-n-dump schemes, as the name implies are not about buy-and-hold, but rather the buy and dump, once the price goes up.  Again, if you can convince a few idiots that holding their shares is a good idea, so much the better for you, the scheme operator.

The people running these scams made a lot of money - and continue to make lots of money. They bought options that the price of these shares would go up.  And these options were cheap to buy as no one expected the share prices of failing companies to go up.  AMC theaters were closed for months during the pandemic and the company was hemorrhaging cash. The price went up only because all these small investors - a stock-brigading army - bought shares.

When the options came due, the big trading companies were screwed - they bet the price would go down, and now they were on the hook to buy these shares at a much higher price.  The folks rigging this whole deal were sitting in the catbird seat - they made millions, maybe tens of millions of dollars, maybe more.

But what about the "apes" sucked into this mess?  Maybe a few of the more astute ones made a few dollars. But buying one share of AMC and then selling it for double the price isn't going to make you rich.  Buying an option for a million shares on the other hand.... can make others billionaires (but not you, silly!)..

But for the apes?  Consider this sad story - a fellow lost his shirt on stock options.  You can lose more than you bet - which makes it worse that a casino:

For every gains porn post someone out there is on the other end with a loss. I can still remember when the GME runup began. I was so sure it would blow over in a day, and I picked up 10k in 3 month out puts just as GME crested 40 dollars. I remember as it skyrocketed I even found myself up on my position as the I/V grew. But I wanted more and I was so sure it would be back to 4 dollars in a month or two. Lesson one, don't get too smart, and don't fight the market.

Well, a few months rolled by and the expiration on my options was getting close, they had slashed in value down to a third and even though GME had fallen, they weren't worth what I paid for them. I could have cut my losses and been out about 5k. But this is where I made my second mistake. Trading options on emotion. I couldn't believe my puts were priced correctly so I rolled them out a few more months, and aggressively. My position was now 50k instead of 10k. I couldn't let go of my ego and take the loss.

Well, as fate would have it, a few days later GME would rip back up into the 200s. My freshly rolled position, started collapsing, and fast. I remember sitting at work every day, constantly pulling out my phone and staring at the GME ticker, waiting for any drop, hoping to be saved. But, my salvation never came, and my position got worse and worse. Enter my third mistake, doubling down. At this point I was desperate. I wanted, needed, to make my money back, so I averaged down, and averaged down again. My position was now worth just over 100k.

With each passing day, my position ticked down in value. I remember one day so vividly as I saw my losses pile up into the 80k range I noticed sharp pain in my chest. It had been getting harder and harder every day, and the extreme stress was taking a toll on my body. I held on for a few more days, but the pain was getting worse, and I was literally shaking (tm), from the stress. Finally I called it. I closed my position down a total of just over 100k. It was one of the hardest things I've ever done.

As pathetic as this sounds, I remember actually crying several times thinking about what an idiot I was. When you lose that kind of money, and for me this wasn't play money, it takes you to a dark place. I remember ringing in my head over and over, what was I thinking, how could I make such a mistake. It was one of my lowest points ever, and it felt like I would never feel normal again, anyone who has been in my shoes knows what I'm talking about.
So how do these chumps get sucked in?  Simple - these schemes are promoted the same way Bitcoin is (and that is essentially the same scam - a very few people own most of the Bitcoin, and they hype it on the Internet or get Musk or other "influencers" to hype it, and then cash in when the price goes nuts).  Yong people aren't very astute (although some oldsters get sucked into this - the something-for-nothing mentality is hard to shake!).  The puppet-masters put up bizarre posts with lots of confusing numbers and technical-sounding mumbo-jumbo.  If you question any of it, you are shouted down - and voted down - so your "emperor has no clothes" posting disappears from social media, and the rest of the chumps live in an echo chamber.  Everyone seems to agree this is a swell idea!

Sort of like how everyone on r/the_donald thought Trump was great, too. .Echo chambers are dangerous places - for your soul, your psyche, and your pocketbook.

And of course, our two emotional nemesis, FUD and FOMO come into play.  Everyone is making money at this, I need to get into it before it is too late!  Hate to say it, but it is too late, and never was not too late.  And FUD?  Again, anyone who questions the deal is deemed "too dumb to understand how it works!"  But no one asks the question as to how you can make wealth out of nothing, or if this was such a good deal, why are the people behind this telling us about it?  And the answer to the last question is, they need the chumps to drive up the stock price so they can cash in.  A few thousand chumps, each buying a share or two, can move a stock price considerably!

But I suspect a change is in the air and not a good change.  It is inevitable that these schemes eventually collapse under their own weight.  The puppet-masters are trying to move onto new stocks and new "investments" but people are starting to figure out they are just getting burned.

Just as before the collapse of the housing market in 2008, I am seeing more and more skepticism online about "stonks" and "crypto" and a number of other things - including again, the scary-stupid price of housing these days.  Eventually, something has to give.  In 2007 or so, it started with one person deciding that no, a house that sold for $150,000 five years ago isn't worth $500,000 today.  They walked away.  And then someone else did and so on and so forth.  It is an avalanche effect and I've seen it play out several times in my lifetime.

Leading up to the real estate bubble of 1989, commercial investors discovered that you could put up an office building in Washington DC (and other cities) and have it rented out before you even broke ground.  And rents were high - government was expanding under Reagan and Bush, despite claims to the contrary.  So another building went up, this time half-rented before ground was broke but rented entirely before it was finished.  Then another building, this time half-rented by the time of completion.  Finally, buildings went up with no tenants and no prospect of tenants - "see-through" buildings like we saw in Fr. Lauderdale in 2007 and we are seeing in China today.

A cascade or avalanche effect took place.  The tenants were on five year leases for this office space.  The "see-though" building goes bankrupt and is bought for pennies on the dollar.  The new owner rents it out for cheap.  And those tenants who paid a premium five years ago to be in a "new" building, now realize they can move to another new building and cut their rent in half.  Like giant dominoes, these office buildings went bankrupt, one by one, each one triggering the bankruptcy of the next, as falling rents made these buildings unprofitable, until they went through bankruptcy and came out with their liens stripped.

That's the way these things work - like an orgasm, building, building, building, until BAM! - it's suddenly over.  1929, 1958, 1989, 2008, and maybe 2022 (we'll see - timing is hard to predict).  But one sure sign of imminent collapse is when folks start questioning the premise of the whole deal, whether is tulip bulbs or the South Sea corporation.

And I think - really think - we are due for another one.  And this time around, it will be the usual suspects - dot-com companies and real estate.  Again, we have hyped share prices to the point where they make no sense - companies that are losing money have sky-high valuations.  Other companies that are making some money, have P/E ratios in the hundreds and no clear path to increasing their profitability by a factor of ten or more.  And real estate?  Builders are rushing to put up luxury, high-end housing, because those houses are more profitable.  But there aren't enough people to buy all those houses. Meanwhile, demand for lower-cost housing goes unfulfilled.  We may see an echo of the 1989 residential housing meltdown, where min-mansion ghettos were created in outlying places like Woodbridge, Virginia, when no one in their right mind wanted to pay so much for such a poorly put-together stucco "look at me!" house, two hours from work.