Last month there was a brief surprising spike in the price of GameStop Corp. stock. The stock traded at ridiculous levels, and individual investors proudly bought at those levels. Now GameStop is down about 90% from its high, and a lot of people have lost money. I have been looking, for a while now, for examples of people who lost money that they needed, people who lost their houses or couldn’t pay their bills because they bet on GameStop and lost. I haven’t really found any. GameStop was the main financial news story for weeks; there was a congressional hearing about it last Thursday. If there were tragic GameStop stories, you’d expect to have heard of them. It seems like there weren’t. People were making self-conscious dumb gambles; they knew what was happening, and mostly had fun.
Last week there was a brief surprising spike in the spot price of electricity in Texas. There was a big snowstorm, increasing demand for power, and many generators went offline as equipment froze, reducing supply. Prices went from something like $20 per megawatt-hour in early February to something like $9,000 last week.
Some individual retail customers had plans that put the risk of variable wholesale electricity prices wholly on them, largely through a company called Griddy Energy; those customers were billed thousands of dollars for electricity last week.
Probably no individual retail customer paid more for electricity in Texas last week than, you know, the worst performer on Reddit’s WallStreetBets forum lost on GameStop. In terms of maximum absolute magnitude of individual monetary losses, GameStop has Texas beat. But in terms of human impact, it’s very easy to find stories of people facing thousands of dollars of electric bills in Texas who are suffering because of them. Here’s the New York Times:
“My savings is gone,” said Scott Willoughby, a 63-year-old Army veteran who lives on Social Security payments in a Dallas suburb. He said he had nearly emptied his savings account so that he would be able to pay the $16,752 electric bill charged to his credit card — 70 times what he usually pays for all of his utilities combined. “There’s nothing I can do about it, but it’s broken me.” …
Katrina Tanner, a Griddy customer who lives in Nevada, Texas, said she had been charged $6,200 already this month, more than five times what she paid in all of 2020. She began using Griddy at a friend’s suggestion a couple of years ago and was pleased at the time with how simple it was to sign up.
As the storm rolled through during the past week, however, she kept opening the company’s app on her phone and seeing her bill “just rising, rising, rising,” Ms. Tanner said. Griddy was able to take the money she owed directly from her bank account, and she now has just $200 left. She suspects that she was only able to keep that much because her bank stopped Griddy from taking more.
Houston resident David Astrein, 36, a human resources director at a manufacturing company, said he’s been charged $2,738.66 for 20 days this month versus $129.85 for the whole of January for a three-bedroom home with a detached garage. He and his wife stopped using their dishwasher, washer and dryer, and turned on as few lights as possible at night. They kept the heat on for their 5-month old son.
The Washington Post:
When Houston resident RonDeLu Robinson, 36, tried to find a new fixed-rate plan, she said, the costs for a contract were higher after the storms, leaving her with no option but to stay with her costly plan. Robinson, a nursing student, tried to conserve power during the storm as much as she could with her 78-year-old father living with her after his bypass surgery. She and her husband, Doug Robinson, 42, used less energy in February than they did the prior month. Still, their bill, typically around $100 a month, was more than $6,500 in 17 days.
Because Griddy is connected to customers’ credit or debit cards to make automatic withdrawals, her credit card bill is now more than $2,500 — which she cannot afford to pay. She canceled her card before she could face more charges.
The Dallas News:
While searching for a new provider, Cosby flipped the breakers connected to her heating units and moved into a small bedroom with an air mattress and her two dogs, Onie and Birkin, and shut off the rest of the house. Her energy use was limited to a space heater, making a cup of coffee in the morning and using the microwave for four or five minutes to heat her meals.
“It’s been 43 degrees in the house since Monday, and I still have a $5,000 bill,” she said.
The people buying GameStop had money to burn, and burnt it, and invited their friends to come over and roast marshmallows in the fire. The people signing contracts to buy Texas electricity at wholesale prices were doing so to economize. In some theoretical sense they accepted higher price volatility in exchange for usually lower prices, but in a much more practical sense they wanted the usually lower prices and couldn’t afford the higher price volatility. And then when prices rose they were wiped out.
I have said a few times that, while the GameStop story is funny and interesting, I don’t think it’s particularly important. A few readers have objected, though, that GameStop is important for what it reveals about retail investor attitudes. Some of the people on WallStreetBets bet a reasonable portion of their fun gambling money on GameStop, and lost, and had a good time. Others, though, might have bet a lot of their savings on GameStop, not because they were deceived about its prospects or whatever but because they viewed their entire savings as “gambling money.” Not necessarily because they are young and high-earning and open to risk, though. Perhaps because they feel like it’s impossible to save for a secure retirement in a slow and steady way, because the system seems rigged against them, because the former structures of middle-class security are gone. You don’t get a pension now; you get a Robinhood app and a WallStreetBets account. Everything is risk and uncertainty; your whole financial life is a gamble; you might as well make it a fun one.
I don’t know how true that is, how much of the GameStop story is about this sort of sad fatalism and how much of it is about having fun with your online friends. But the Griddy stories suggest that there’s something to it. It turns out to be really easy to accidentally engage in risky financial speculation, to somehow make disastrous bets on spot power markets in your monthly utility bill because it’s simple to sign up. If life is a constant series of high-stakes financial gambles anyway, perhaps it is tempting to choose some of your gambles on purpose.
Elsewhere in Texas’s wild week of energy and power, here is a story about margin calls for physical natural gas traders:
Physical gas sales contracts can require the buyer or seller to pledge collateral, such as a letter of credit, a kind of insurance in case bets go awry or if a company has a liquidity issue. Price gains typically mean more collateral, or margin, is needed.
But the spot gas price spikes now being seen were triggering truly outsized demands: According to one trader, a small market participant with a margin requirement of $100,000 saw that balloon to $1 million. Larger companies had to find tens of millions of dollars. Many spot gas trades are conducted via next-day contracts on Intercontinental Exchange Inc., which boosted its margin requirements.
After the market closed Friday, stunned traders scrambled to work out how much additional funds they would need to set aside for the following week. Some trading houses were extremely nervous. An executive at one said he was worried that some counterparties could go bust and leave his firm with positions to fill on the spot market.
And here is a story about “The Two Hours That Nearly Destroyed Texas’s Electric Grid.” And: “How Texas’ Drive for Energy Independence Set It Up for Disaster.” And: “Texas Deep Freeze Delivers Macquarie $210 Million Windfall,” might want to keep quiet about that one. And Griddy didn’t have a windfall; Griddy just buys energy wholesale and passes the price on to consumers; here is its sad blog post defending itself and passing the blame on to the Public Utility Commission of Texas.
SPAC SPAC SPAC
One argument that I have heard for special purpose acquisition companies is that they are a way to do future initial public offerings today. In six months or a year or two, some big private company will want to go public. Maybe economic conditions will be good and public markets will be excited to pay high prices for private companies. Maybe they won’t be; these things do change. But right now, public markets are extremely happy to buy private companies. So if you could somehow pre-load an IPO, if you could raise the money now and give it to the company later, if you could lock in the funding without the annoyances of writing a prospectus and auditing the company’s financials and subjecting it to public-market discipline and actually giving it the money—if you could put the money aside until it’s needed, that would be a good deal. Then in six months or a year the company could just hit the button to go public, and it would get the cash that was raised in the good times, even if in six months or a year times are actually bad.
I don’t think it exactly works like that, for various boring nitpicky reasons,
but surely it kind of works like that. If dozens of SPACs raise billions of dollars in the white-hot first few months of 2021, surely some of that money will be available to take companies public later in 2021 or in 2022, even if investors otherwise lose interest in taking risky companies public at high valuations. You might as well raise as much as you can now. Raise all of the, like, 2021-2024 IPOs this winter, and then spend the next few years leisurely matching pots of money up with private companies.
Michael Dell, activist investor Paul Singer, Facebook Inc. co-founder Eduardo Saverin and former Xerox Corp. chief Ursula Burns have all joined the blank-check parade on a single day.
Singer’s Elliott Management Corp., doubling down, filed for two new special purpose acquisition companies, or SPACs. In all, at least 13 of the blank-check companies filed Friday for U.S. initial public offerings, seeking to raise a combined total of more than $4.5 billion.
SPACs have come to dominate IPOs this year, accounting for 63% of the almost $77 billion raised on U.S. exchanges, according to data compiled by Bloomberg. Including Friday’s newcomers, 146 SPACs that have filed since Jan. 1 are waiting for IPOs to add $40 billion to that total, the data show.
The vehicles, which hold an IPO and then merge with a private company seeking to go public, have become so numerous that serial filers are putting in for two or even three on the same day. On Friday, that included two SPACs backed by Cantor Fitzgerald — its seventh and eighth — in addition to Elliott’s double play.
High-profile investors such as Bill Ackman, whose $4 billion listing by Pershing Square Tontine Holdings Ltd. in July ranks as the biggest-ever SPAC, have helped inspire a phalanx of followers. This month, financier Michael Klein added $1.68 billion with two additions — his sixth and seventh — to his blank-check collection. The following day, Vinod Khosla’s namesake venture capital firm beat Klein on deal count, with three SPACs pricing on one day to raise a total of $1.2 billion.
I suppose there is a tradition of serial SPAC’ing where you raise a SPAC, you announce a deal, people like it, you raise a new SPAC, etc.; your success with each SPAC enables you to raise another, larger and better SPAC. But right now there is no particular reason to sequence it like that. The ducks are quacking now; you might as well raise like eight SPACs today and do the deals whenever you get around to them. Finding good private companies and negotiating to take them public is hard work, but it’s work that will always be there. Taking a SPAC public is very very easy work right now, but it might not always be.
It is a great failing of this column that there is not yet a Money Stuff SPAC, or three of them I guess.
A funny thing for Elon Musk to do would be:
- Tesla Inc. buys some Bitcoin.
- Tesla announces that Bitcoin is good now and that it bought some.
- The price of Bitcoin goes up, because institutional adoption of Bitcoin is good for its price, but also because, by the Elon Markets Hypothesis, anything that Musk buys goes up.
- Tesla sells some Bitcoin, making a profit.
- Musk tweets that the price of Bitcoin is too high.
- Bitcoin prices go down due to the Elon Markets Hypothesis.
- Go to Step 1.
You can’t do this forever; eventually people will notice that you are just cycling this around for your own profit. But you can do it for a while, particularly if you do a bunch of other distracting stuff—space rockets, flamethrowers, satin shorts—in between.
Anyway I am not saying that this is what Musk is actually doing. In particular I have no reason to think that Step 4 happened: Tesla announced that it bought Bitcoin last month but hasn’t said anything about selling it, and Musk seems to be a long-term believer. But Steps 1, 2, 3, 5 and 6 have happened, and I have no doubt that all of this will happen at least one or two more times (Step 7), so, you know. The trade is available to him, and it is funny, and he loves to do funny things, and what more do you need?
Here is an estimate that Tesla is “on a trajectory to make more from its Bitcoin investments than profits from selling its EV (electric vehicle) cars in all of 2020.” I sometimes make fun of Elon Musk for being so easily distracted from his actual business of making and selling cars, but to be fair to him, the distractions available to him are pretty distracting. It is hard to build good cars and sell them for more than it costs to make them; it is relatively easy, for Musk, to make a lot of money by tweeting about financial assets. Honestly it is impressive that Musk doesn’t devote more of his time to manipulating stock and cryptocurrency prices on Twitter. I suppose the relative scarcity of Musk’s approval is what makes it so valuable.
Also I cannot resist pointing out that when Elon Musk tweeted “Tesla stock price is too high imo,” the stock fell 10%; when he tweeted “BTC & ETH do seem high lol,” Bitcoin fell 16%. With respect to Tesla, Musk is the chief executive officer and main visionary and frequent obsessive micromanager; he knows, one hopes, more about Tesla than most people do. With respect to Bitcoin, Musk is just some guy. And yet Bitcoin’s … Elon Market Hypothesis beta? … is higher than Tesla’s? A substance-free “too high” (or “too low”) tweet from Musk has more impact on Bitcoin than on Musk’s own company.
Tesla is a combination of (1) a real company that makes cars and (2) a projection of Elon Musk’s mana. Bitcoin is, uh, not that sort of combination.
At the peak of GameStop mania last month, a basic problem was finding shares to sell. There was lots of demand to buy GameStop shares: from retail traders who flocked to Reddit’s WallStreetBets forum and piled into GameStop, from short sellers who surrendered and bought stock to close their positions, from options market makers who hedged by buying stock as the stock went higher, etc. But who wanted to sell? Big fundamental active investors took a lot of profits on the way up; I suspect not a ton were left at the peak. The WallStreetBets posters had diamond hands and wouldn’t sell, or that was their reputation anyway. Index funds also had diamond hands, as they always do. Insiders, and the company itself, couldn’t sell due to a quarterly earnings blackout. You could put on a new short position—sell stock short, or sell calls or buy puts—near the peak, and some people did, but that took nerves of steel.
So the price roared higher. If you could locate some new source of supply, some GameStop shares gathering dust somewhere, you could make some money:
GameStop mania has spilled over into a popular exchange-traded fund, as the WallStreetBets craze reaches beyond shares favored on social media.
The fund, State Street’s SPDR S&P Retail ETF, was created in 2006 to give investors broad exposure to mall-store firms. Its shares have surged 23% this year, far outstripping a 4% gain in the S&P 500, despite the uncertain outlook for retail. …
On Jan. 28, the fund suffered its largest single-day outflow in more than a decade, according to FactSet. Three-quarters of the money in the fund flowed out, amounting to $506 million in redemptions, driven in part by what some analysts describe as a frantic rush by traders to liquidate the ETF—whose price at times traded at discounts rarely seen in this part of the world—to get their hands on underlying GameStop shares. …
Generally, XRT trades within 0.03% of net asset value, according to FactSet. But on Jan. 28, the ETF traded at a 3.1% discount just after the market opened, as shares of GameStop were halted on the New York Stock Exchange, according to FactSet data. XRT traded at discounts to its net asset value most of the session, with gaps widening during numerous trading halts on GameStop.
“GameStop became such a heavyweight in the fund that it created a disconnect between the value of the ETF and the underlying basket,” said Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital.
Trading volume in XRT shares that day was 10 times the usual level, according to FactSet. Authorized participants ultimately obtained roughly 370,000 shares of GameStop through redemptions of XRT shares, said Matt Bartolini, head of SPDR Americas research for State Street Global Advisors.
You buy the retail ETF (ticker XRT), you crack it open, you extract the rare and delicious GameStop shares, you sell them to desperate Reddit posters, you dispose of the shares of the rest of the retailers in the normal way, and you collect about 3% for your trouble, around 100 times as much as ETF authorized participants normally make for arbitraging prices. The extra money presumably compensates you for the fact that, as you’re doing this, GameStop prices are moving around like crazy.
Well, moving around like crazy or else stopped dead. One reason that XRT sometimes didn’t trade in line with its net asset value is that, for much of Jan. 28, XRT’s net asset value was unknowable: GameStop shares made up some 20% of the value of the (equal-weighted) ETF at the time, and trading in GameStop was halted 19 times on Jan. 28. Here is its horrifying price chart:
During that awful slide from about 10:39 to about 11:24, when GameStop fell vertically, had a five-minute halt, fell vertically, had a five-minute halt, fell vertically, had a five-minute halt, etc., how would you feel about buying XRT to get at its GameStop shares? How would you feel about buying it during those GameStop halts? What was the price of GameStop, three minutes into a five-minute trading halt? The official answer—the one used, for instance, in calculating the net asset value of XRT—is whatever the price was at the start of the halt. The real answer—the one that you might use in determining whether to buy XRT—is more like, whatever the price would be at the end of the halt, a number that was uncertain but surely at least ran the risk of being lower. You could trade GameStop during the GameStop trading halts, sort of, by buying the XRT ETF and cracking it open, but you wouldn’t want to pay full price for GameStop if you were doing that.
We talk a lot around here about bond ETFs and liquidity. When markets go crazy, bond ETFs sometimes trade at a discount to net asset value, and people criticize them, saying that the discounts prove that bond ETFs are broken and that the liquidity they offer is an illusion. I am skeptical of these criticisms; if the ETF is trading and the bonds aren’t, it’s possible that the price of the ETF is a better guide to the actual value of the bonds than the “net asset value” (based on stale bond trades) is.
You see a bit of that here. Part of why XRT traded at an unusually wide discount to net asset value really is that the ETF arbitrage mechanism broke down a little bit: Ordinarily arbitrageurs will pay something very close to the price of the underlying shares for the ETF, but here the discount widened because, essentially, arbitrageurs couldn’t keep up with the crazy market for GameStop. But part of why XRT traded at an unusually wide discount is that regular stock trading broke down a little bit: The discount widened because the stock market couldn’t keep up with the crazy market for GameStop, and halted trading repeatedly. If you wanted to buy GameStop during those halts, XRT was your best option; if you wanted to know the value of GameStop during those halts, XRT provided the best guess.
Elsewhere: “Canada has long been out in front with respect to ETF product development.”
“Among the most vivid recent examples of boredom’s economic influence occurred late last month when amateur traders, many of them followers of the Reddit forum Wall Street Bets, piled into shares of GameStop, a down-for-the-count retailer for gamers.” (Earlier, etc.) Rich List. Bonuses to Disappoint Bankers After Banner Year for Finance. Activist Investors Nominate Nine Directors to Kohl’s Board. McKinsey senior echelons vote in referendum on Sneader leadership. Bloomberg Activism Screening Model. Toil and Trouble, Don’t Get Burned Shorting Bubbles. How Competitive are U.S. Treasury Repo Markets? Central Bank Communication Choices: Adverse Selection, Volatility and Liquidity in a Market With Fast and Slow Traders. Citi Executive Pulls James Bond Stunts to Woo China’s Rich. Historic house rolls down hilly San Fran streets. Two NYC bars are for sale — asking price is 25 bitcoin. Arturo Di Modica, Sculptor of the ‘Charging Bull’, Dies at 80.
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