Friday, January 29, 2021

Long and short of bubbles -- Grumpy podcast with Owen Lamont

The long and short of bubbles. A conversation with Owen Lamont on Gamestop and other matters. See my  last post for background and great papers by Owen. A direct link in case the above embed doesn't work. 

Owen views the current situation more as a classic short squeeze than a replay of 3com/Palm and similar affairs in 1999. These are established companies with short markets, and there is little technological news about them.  We talk a bit about bubbles in general, short sales, supply responses, the puzzling lack of liquidity -- people willing and able to take the other side of crazy stuff, and the state of the market today.  

The review of "Famous First Bubbles" that Owen mentioned is here.  


  1. Sorry, but did not find this very informative as to what has transpired with GME. As to market: Equity Risk Premium forward looking or back does not seem to indicate the overall market in a bubble. A breakdown by sector a different story.
    Now as to bifurcation between growth and value: We are undergoing huge economic change with any number of green field companies or young companies in the public markets that are scaling up. So, what to pay for these names in their early growth phase lends itself to a market discovery process with actually results at any point in time exceeding analyst expectations and the crowd piling in and taking the stock price up. I could go on.
    We are in a low interest rate world and MOMO and FOMO whether rational or not seem to be understandable reactions.
    Short selling makes sense for a market despite views to the contrary. Perhaps going back to the uptick rule and limiting the leverage to no more than 100% of shares outstanding would mitigate the gamestop events and still provide a side to price discovery.

  2. I enjoyed Owen's discussion enormously--he had a series of insights that were lateral to how I thought about things, such as shorts as supply extensions, his description of a "bad equilibrium," and so on.

    John, I was surprised to find that you were "all indexed" and mentioned the vanguard total market index. Perhaps that was hyberbole, but I would have thought of all people you would expose your portfolio to factors that seem to return more (profitability, ROE, book/market equity, momentum, etc.) Even if you might describe it as "discount rates," you surely don't think it's *your* discount rates that are changing over time?

    Maybe I take modern finance too seriously, but each month I get Compustat, press "run" on my file, and rebalance myself based on the (tamed) factor zoo. Is this wildly dumb? It's 20 minutes a month.

    I know the blog isn't investment advice, but your view of *applying* modern finance feels relevant, and shocked me in this interview.

  3. Don't you think the liquidity issue with game stop may have something to do with how heavily the stock was shorted. The short interest earlier this week was 140% of total shares issued. In other words there simply was not enough shares available to close the short positions. The situation was even worse (~400%) if you consider short interest with the shares actively traded and not held by passive institutional investors.

  4. Gamestop Corporation filed a S-3ASR with the S.E.C. on December 8th 2020. The corporation's articles of incorporation allow it to issue up to 300,000,000 Series A common shares and 5,000,000 prefered shares. At the time of filing, Gamestop Corp had 69,746,960 shares of common stock outstanding.

    If the directors of Gamestop had an interest in supplying more shares to the market in January of 2021 it could have done so quickly and relatively easily.

    Had it done so, it is likely that the stock price would have collapsed. That is not something that the directors would have countenanced.

    Supply creation, or the lack thereof, is not the impediment. 'Well-known seasoned issuers' do not face the impediments that were discussed by Owen Lamont, in the interview, today though those impediments may have been there during the period his research focused on in the past.

    As to the question of private individuals' holdings of the stock versus institutional holdings, as of September 29th, 2020, ten institutions held 62.3% of the common shares, insiders held 27.3%, and all institutional holders held 122% of the common shares. The top three institutional holders were: FMC, LLC; Blackrock Inc.; The Vanguard Group, Inc.; these three combined held 33.6% of the common shares. GME closed at $10.35 on 9/29/2020. If the three held onto their share holding in GME through 1/29/2021 and sold at the close on the 29th of January, they would have realized a gain of 3,040% for an annual percentage growth rate (extrapolated) of 9,095%.

    You have to ask yourself, "What sort of 'story' about Gamestop would have attracted those institutions to acquire that size of holding at that point in time?" The company was unprofitable, it was cash-flow negative, and the business sector it is in is the at-home leisure segment. Did the pandemic offer that much upside to the firm?

    Going forward, the stage is set for the firm to offer more common shares to the market, thereby raising the cash it needs to remain solvent. Adding more supply should knock the price of the common shares down. Are the bulls aware? One would think so. Certainly Gill must be aware of it. But the rest? It would be foolish for the regulators to suspend the stock. Let the market adjust of its own accord, and let the chips fall wherever they may.

    Thanks for a most interesting and informative audio session.

  5. In podcast you say that the supply of stocks should be horizontal (perfectly elastic). Why is this?

    My thought was, as shareholder, why do I care if the increased demand for the corporation is met with a rising share price, rather than by issuing new shares, surely my wealth goes up the same in both cases? Is it an assumption that the increased demand is because the corporation has improved investment opportunities and therefore will need more funds to invest, which it can get from issuing shares, but not from letting share price rise?

    (I asked a friend who suggested it was because management thought the corporation was now overvalued and so issuing shares was profitable, but I don't think this was your intention.)


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