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  • David Alan Carter


Updated: May 9, 2021

Manipulation, in Gamestop and the stock market in general |

If you haven’t heard the word “GameStop” lately, you haven’t turned on a television, a radio, glanced at your smart phone, or gotten out of bed. I envy you. Depending on your age, sure you may recognize the name from your youth. After all, it was a going Jesse of a retailer a few years back, before video games began to move online and the pandemic had people avoiding stores like, well, the plague.

Anyway, suffice it to say that the stock of the company was in the toilet, the only interest in said stock coming from the likes of coiffured hedge fund billionaires who busied themselves placing short positions (selling borrowed shares, betting that the stock will fall even further) whilst sipping bourbon on the veranda and getting their pants pressed in preparation for an appearance on CNBC wherein they would school the unwashed rubes in TV land in the ways of the stock market. All was right with the world.

Then along comes a collection of misfits known by the social media platform they keep, that being Reddit, and more specifically the subgroup r/WallStreetBets. This motley crew, mostly amateur-hour market followers but with a few highly savvy traders leading the charge, decided to actually buy shares in the company (betting the stock will go up). And not just buy with hard-earned dollars, but buy with options so as to magnify their presence in the marketplace.

What came next was much wailing and gnashing of teeth. As the stock price began to rise from more and more buys, the financially endowed spewed their bourbon, called their bankers, and began to close their short positions. Unfortunately, closing a short position means actually buying shares of the company in question, exacerbating the problem for themselves and every other hedge fund billionaire who followed their lead.

Scheduled appearances in the media pivoted from schooling rubes and talking their book to fists hammering tables and demanding that regulators do something. After all, this was manipulation. Plain and simple. And we’re not talking chump change: hedge funds and others who had bet against the company have collectively lost more than $5 billion – and counting.

Hedge fund billionaire Leon Cooperman, who snagged a prime lunchtime spot on the business network CNBC, cried foul. “The reason the market is doing what it’s doing is people are sitting at home getting their checks from the government, okay, and this fair share is a bullshit concept,” Cooperman shouted. “It’s just a way of attacking wealthy people. It’s inappropriate and we all gotta work together and pull together.” As a sidebar, Cooperman was convicted of insider trading in 2016.

Fund manager Michael Burry tweeted that the situation was “unnatural, insane, and dangerous” and said there should be “legal and regulatory repercussions.” Mr. Burry, by the way, was the first investor to recognize the impending subprime mortgage crisis back in 2008 and profited from the crisis by using credit default swaps against subprime mortgages. He was immortalized in the film The Big Short. He also reportedly made a 15-fold return on his own fund’s investment in GameStop.

Activist short seller Andrew Left, called the “Bounty Hunter of Wall Street” by the New York Times, operates Citron Research - whose reports are typically damning in tone and followed up with a targeted social-media push. Left, who unwound a short position in GameStop with “a 100% loss” recently outlined in a video posted to YouTube why shares in GameStop should trade down to $20 (as I write this, they’re trading at $340.60). Shortly thereafter, he vowed to end his bearish commentary on GameStop after he said an "angry mob" of investors harassed him and his family. It may or may not be worth noting that the National Futures Association sanctioned Left in the late nineties, stating that he "made false and misleading statements to cheat, defraud or deceive a customer in violation of NFA compliance rules.”

I for one sure hope the regulators get this “angry mob” thing straightened out. I just want the market to get back to some semblance of normalcy.

Back to where hedge fund operators, institutional traders, and money managers can gather for “idea dinners” or exchange “market thoughts” via emails and private chats without being labeled a cabal when inevitably some stock or commodity spikes or collapses based on their collective actions. Back to where guests on business shows can pump this or that stock to the straight face of complicit interviewers and do so without divulging that their company owns a teetering boatload of the stuff or has a particularly “close relationship” with the company in question. Back to where blackbox algorithms that cost tens of millions of dollars can focus on gleaning fractional advantages over retail traders every second of the day while combing every word of every publication in the world looking for “triggers” that can spark market-wide selloffs – from these very machines themselves. Back to where C-suite corporate insiders can freely share otherwise non-disclosed information to well-heeled allies and political friends so long as they talk in code.

Because the last thing we need right now is any kind of stock market manipulation.

As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection[1 - see below] remains paramount.

Best always, David

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[1] What does protection look like? At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance. Protection can also mean an overweight position in a model built for protection (i.e., Bond Bulls, The 12% Solution). It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown. Finally, protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts that hold up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.

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Patrick Bolt
Patrick Bolt
May 28, 2021

The first buy in the 12% solution is easy, going from cash to purchasing the ETF trending uppermost on the right and side of the chart. But every purchase after that is affected by the 2 day settlement date rule isn't it? In other words, if I sell on the last day of the month, I won't be able to purchase on the following first day of the month, but only two dates later. Is this correct?

Also, I am unable to purchase fractional shares on TD Ameritrade unless driven by DRIP. I can only contribute $100 per month to my 12% solution account. This is ineffective when ETF prices are close to $400 and up. what's the solution? D…

Jun 01, 2021
Replying to

Patrick, Thanks for writing.

But every purchase after that is affected by the 2 day settlement date rule isn't it? In other words, if I sell on the last day of the month, I won't be able to purchase on the following first day of the month, but only two dates later. Is this correct? If you’re trading in a cash account or a retirement account, yes, it’s technically true that funds from the sale of an asset require 2 business days to settle before placing new trades with that money. However, in practice, most if not all brokers offer the following courtesy: If you're holding Asset A in your cash or retirement account, you can sell that and immediatel…

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