- Investors tuck into Krispy Kreme, GoPro and Beyond Meat after huge falls in their share prices
- Meme stock hunters also want to squeeze short sellers of Kohl’s and Opendoor Tech
- Loud echoes of 2021’s surges in GameStop and AMC Entertainment
- But only silver, of all the meme stock moves, really proved its worth and even then, holders had to be very patient
“Here we go again. Shares in Kohl’s, Opendoor Technologies, GoPro, Beyond Meat and Krispy Kreme are surging thanks to interest from social media influencers and investors’ latest efforts to stick it to the hedge funds who are short and taking positions against the companies and their stock,” says AJ Bell investment director Russ Mould.
“This is all barely four years after the year GameStop melt-up (and, lest it be forgotten, subsequent melt-down) and frenzied trading across a range of meme stocks, including AMC Entertainment and even silver. The last meme stock surge did not last long and, it could be argued, presaged 2021-22’s nasty correction in risk assets, so it will be interesting to see who gets cut down first this time, the hedgies or the retail crowd that is pushing back against them.
“Despite their very different business models and target industries, Kohl’s, Opendoor Technologies, GoPro, Beyond Meat and Krispy Kreme do have something in common: their share prices stand way below their former highs. In addition, four of them are in loss – with Kohl’s the honourable exception – and some hedge funds seem to think the shares could fall further still, given the challenges they or their addressable markets face.
“This does all sound very reminiscent of GameStop, the subject of feverish commentary and share trading in 2021 and again in the summer of 2024, and AMC Entertainment, to name but two.
“The initial surges there were something to behold, but the momentum did not last and anyone who bought in late will have almost certainly lost money, unlike the early movers. The fun and games were fine to start with, but ultimately someone lost out and so did their money.
Source: LSEG Refinitiv data.
“One Reddit crowd position did actually pay off, and that was silver, which briefly drew attention back in 2021. However, patience was needed here, too. The precious metal lost all of the initial gains and more, for it to find a floor in 2023 and start to forge major gains from there.
Source: LSEG Refinitiv data.
“Silver’s gains show that there is nothing necessarily wrong with taking a contrarian stance, as digging around where no-one else is looking can be a way to find buried treasure, or at least underloved assets that could therefore be undervalued.
“No less an investor than Benjamin Graham, Warren Buffett’s mentor, argued that the best long-term investment returns were reaped by realists who bought from pessimists and sold to optimists.
“In this respect, the meme stock hunters and social media influencers may be on to something. The short squeezers are at least buying from pessimists when it comes to GoPro, Krispy Kreme, Beyond Meat, Kohl’s and Opendoor, but it may be that more than a few optimists are piling in now, hoping to ride the share price momentum to a quick gain.
Source: LSEG Refinitiv data.
Source: LSEG Refinitiv data.
“Such a devil-may-care attitude to risk can lead to trouble and the precedents are clear to see in the overheated markets seen in the late 1920s, late 1990s and (to a lesser degree) the mid part of the first decade of this century. They all ended in tears and big market setbacks which hurt a lot of investors, traders and ultimately did damage to the wider economy, as money was misallocated and squandered.
“Perhaps investors should therefore at least think about the warning of economist (and stock market investor) John Maynard Keynes when he said, ‘When the capital development of a country becomes the by-product of a casino, the job is likely to be ill-done.’
“It remains to be seen what is being formed by the latest round of meme stock buyers, but previous efforts to squeeze short sellers ultimately came unstuck.
“It is hard to push around the price of a security or asset on a sustained basis, for three reasons:
- The best cure for high prices is high prices. In the end some traders somewhere are going to want to take a profit, and someone is going to be left holding the bag.
- All short squeezes or ramps have an element of a pyramid scheme about them as they need new money coming in to maintain the upward price momentum (and also give early movers a chance to book their profits and move on), so ultimately meme stock buyers start to run out of (other people’s) money.
- If none of that works, the regulator can take umbrage and get involved. This is what happened when the Bunker Hunt brothers tried to corner the silver market in the late 1970s, although the authorities only tend to get involved once the bubble has burst, and heavy losses, financial distress or wider market or economic turmoil have resulted.
“The collapse of the South Sea Bubble in 1720 eventually germinated Sir John Barnard’s Act in 1734, which outlawed both short selling and the use of derivative products such as futures and options (and was only repealed over 200 years later). Similar responses followed the 1929 Wall Street Crash, in the form of the Glass-Steagall Act, and the 2007-09 Great Financial Crisis, with the Wall Street Reform and Consumer Protection Act (or Dodd-Frank, as it is more commonly known). The theme across all three acts was limits to use of derivatives and leverage.
“However, the use of margin debt continues to flourish in the USA and has just crossed the $1 trillion mark for the first time.
Source: NYSE data to February 2010, FINRA data from February 2010. LSEG Refinitiv data.
“The ongoing interest in, and widespread use of, zero-day options by traders, may also be helping to fuel markets now, but history shows that confidence soon evaporates if the market stumbles and history suggests the liquidation (forced or voluntary) of positions bought on margin, or via exotic leveraged instruments, may only serve to accentuate any subsequent market decline, or at the very least stoke additional volatility.
Source: NYSE data to February 2010, FINRA data from February 2010. LSEG Refinitiv data.
“It is here that the greatest dangers may lie today, in over-the-counter, lightly regulated, trillion-dollar markets which are funded by leverage. Financial innovation, coupled with central-bank provided liquidity, is potentially creating trouble and eroding the stability of financial markets, which have blundered from one crisis to the next with ever-greater regularity in the last 30 years – from Orange County to the Tequila Sunset to Barings to the Asian currency crisis to the Russian debt crisis and LTCM to the tech bubble to the mortgage securities bubble and the Big Short and beyond.
“Central banks have a very difficult balancing act ahead of them, as they try to do what they feel is right for the real economy without handing out too much rocket fuel to financial markets. It can be argued that fifteen years of zero interest rates and quantitative easing (plus surging house, stock, bond and asset prices) mean the economy is still excessively liquid, even after some tentative interest rate increases and a reduction in central bank balance sheets, thanks to Quantitative Tightening.
“The prospect of the Fed cutting interest rates – perhaps under pressure from a White House which seems keen to get the US economy to run as hot as possible, when there is $7.4 trillion sitting in US money market funds ready to look for a new home – may just have students of stock market bubbles reaching for their history books.”
Source: FRED – St. Louis Federal Reserve database.
