The Saturday - 1/30/21 Edition
Volume 2, Issue 3
Good morning everyone,
What a week! Let’s jump right in.
It’s Saturday January 30, 2021.
That Escalated Quickly
We began last week’s edition by discussing the rise of WallStreetBets and its role in taking GameStop stock to an all-time high of $76.76.
Things didn’t exactly calm down this week. Quite the contrary: over the last five days, GameStop continued to furiously trade up, reaching a high of $550, for a 3,000%+ YTD gain.
On Thursday, with individual investors sharing in billion dollar gains at the expense of institutional shorts, Robinhood - the supposed champion of retail investors - took one of history’s greatest heel turns, pulled the plug on its investors, and halted trading in GME.
Despite the brokerage’s tone-deaf CEO Vlad Tenev claiming over and again that investors could still sell their positions, individuals were barred from buying any new equity or call options in GME (and a dozen other companies). The stock price reacted as expected, crashing from its $550 pre-market high to a session low of $126.
As this Twitter user explains in more technical detail, the impetus for the highly controversial move may have been Dodd-Frank rules requiring brokerages (like Robinhood) to post greater collateral with clearing houses in times of high volatility. This hypothesis is further supported by reports that Robinhood drew down on $600M credit lines this week and raised another $1B in an emergency equity issuance on Thursday.
The problem with this theory? Tenev continues to insist that the company didn’t have liquidity issues. Despite repeated opportunities to do so, Robinhood has yet to offer coherent reasons for its actions, leaving retail investors with a different explanation: Robinhood sold out the townspeople at the Sheriff of Nottingham’s behest.
As a commission-free platform, Robinhood derives a significant chunk of its revenue (40% in 2018) by selling data, and the right to execute investors’ trades, to Citadel Securities. That arrangement has been known for a long time and, frankly, shouldn’t be all that controversial.
On Monday, however, Citadel (and Point72) injected $2.75B in embattled GameStop short-seller Melvin Capital Management. By Tuesday, the Robinhood partner’s cash infusion had already been wiped out, so when the brokerage (and a few of its competitors) rewrote the rules on Thursday morning, with GME at all-time highs…
I mean, it’s a compelling theory!
Despite Tenev’s claim to have acted in the investors’ best interest, what inevitably (if not deliberately) happened is that investors suffered staggering double digit losses, while shorts were allowed to reposition.
The decision sent shock-waves through Wall Street, Silicon Valley, and social media. Business thought-leaders like Elon Musk, Chamath Palihapitiya, and Mark Cuban lashed out against Robinhood, while Google stepped in to protect its fellow Silicon Valley company by erasing over 100,000 1-Star reviews on its app store.
Even unlikely alliances were made:
Joe Biden promised to unite America. GameStop did.
On Friday, with some restrictions lifted, retail fought back with a vengeance and sent GME over $300 again. Meanwhile, numerous lawsuits have been filed against Robinhood and class action attorneys are welcoming inbound communications from affected clients.
Football
In eight short days, the Kansas City Chiefs and the Tampa Bay Buccaneers will duke it out for the Super Bowl, while their rivals go back to the drawing board and rework their rosters ahead of the 2021 season.
In Santa Clara, the San Francisco 49ers are using a… different approach. On Monday, the Red and Gold announced their latest blockbuster transaction: Leeds United.
Three years ago, 49ers Enterprises acquired a 15% stake in the then-second division football (read: soccer) team. With Leeds now competing in the top-level English Premier League, the 49ers have doubled down on their investment, increasing their stake to 37% and taking a more active role in day-to-day management.
That’s one way to diversify your football portfolio!
It’s (Almost) Here!
I can’t believe this wasn’t our lead story this weekend, but here we go. After months of speculation, the SPAC-to-end-all-SPACs might be coming soon. According to the WSJ, WeWork might be public by year end.
Even in the post-COVID era, WeWork’s epic, failed 2019 IPO remains captivating. Once the world’s most valuable startup - it had raised money from SoftBank at a $47B valuation and had an initial IPO target valuation of $80B - the co-working company’s prior plans to list on public markets crashed spectacularly as its S-1 revealed a deeply troubled organization that had plundered billions with no reasonable path to profitability.
There was also the issue of the company’s founder, Adam Neumann, who some might argue was somewhat disconnected from reality. I recommend reading this and this for more on the failed IPO.
Since the dark days of 2019, WeWork has completely overhauled its management team and the turnaround narrative has been picking up steam. In the wake of its failed IPO, the company raised emergency funds at a lowly $2.7B valuation. Eighteen months later, WeWork is rumored to be valued at $10B.
The public listing is no sure thing yet, but SPACs are a great vehicle for embattled companies to hit the market quickly and with less-public diligence. SPACs were made for WeWork.
Plus, the rumored SPAC sponsor (Bow Capital Management) is run by Sacramento Kings owner Vivek Ranadive and features Shaquille O’Neal as an adviser.
I can’t think of a better ending to the WeWork saga than a Shaq-led SPAC. These are the times we live in and I’m totally OK with it!
Citron Research
After two decades in the short-selling industry, Andrew Left and Citron Research are taking a step back. On Friday, still reeling from the GameStop beatdown they suffered at the hands of WallStreetBets, Citron announced that they would no longer issue reports on stock shorting.
While Citron started as anti-establishment, Left said, it has now become part of the establishment. Going forward, the firm will focus on providing long recommendations.
Although casualties happen and short sellers (or anyone, really) don’t deserve any special protection, this remains an unfortunate development.
Too frequently vilified, short sellers serve important functions in today’s financial markets, continually scrutinizing companies, buying when no one else does, and helping expose fraud. Citron’s reports alone have helped expose 50 companies that later became the subjects of regulatory intervention.
What is unclear, however, is if Citron is done shorting or done reporting on its shorts. Unlike long positions, traditional short positions do not have to be reported, so Citron could continue shorting in the shadows, away from Reddit’s watchful eyes.
So maybe it’s not the end; Citron could just go less Iron Man and more Batman. The latter’s brooding ways may feel more relatable these days anyways.
Have a great weekend!