From: allin
The phenomenon of meme stocks, notably GameStop, has once again captured market attention, driven by the reappearance of key figures and the influence of social media. This resurgence highlights ongoing debates about market regulation, individual investor behavior, and the evolving nature of financial markets [00:33:00].
The Return of Roaring Kitty
Keith Gill, known online as “Roaring Kitty” (and “DeepF***ingValue” on Reddit), who was central to the original GameStop short squeeze in 2021, re-emerged after a three-year silence [00:33:31]. On May 12th, he posted a meme on X (formerly Twitter) that quickly garnered 28 million views [00:33:37]. This “lean forward meme” is understood in gaming culture to signal an intense or “boss level” moment, indicating exciting developments ahead [00:33:44]. Following this post, GameStop’s stock price tripled [00:34:07].
Gill significantly increased his position in GameStop, reportedly from 200,000 shares to 5 million shares, and also held 120,000 call options that, if exercised, could grant him an additional 12 million shares [00:34:13].
Regulatory Scrutiny and Market Manipulation Debate
The sudden surge prompted discussions about market manipulation, with figures like SEC Chair Gary Gensler commenting on the need to prevent misleading or manipulative actions in the markets [00:34:28]. Gensler emphasized that disclosures are a key part of capital markets, ensuring full and fair information for stock buyers [00:35:39].
However, the consensus among some market commentators is that Gill’s actions do not constitute illegal manipulation:
- Posting a meme is not manipulation [00:36:17]. It is simply a picture on the internet [00:36:20].
- Lack of Regulatory Framework The SEC currently lacks a clear framework to address hype generated by social media because existing rules predate the widespread influence of such platforms [00:37:22].
- Individual vs. Regulated Entity Gill is an individual, not a regulated entity like a hedge fund managing other people’s money, which would trigger disclosure obligations [00:36:48]. The only potential issue would be if he was selling his position while actively promoting the stock to manipulate the market [00:37:34].
- Discomfort with Outside Influence The perceived “disconcerting” aspect for the financial establishment is that an individual outside traditional Wall Street structures has amassed significant wealth and influence [00:38:49].
GameStop’s Underlying Fundamentals
Despite the stock’s volatile price action, GameStop’s financial performance remains challenging [00:39:22]:
- Declining Sales For the fiscal year 2023, sales were 5.9 billion the previous year [00:39:43].
- Valuation Discrepancy With an adjusted EBITDA of 13.5 billion (enterprise value of $12.5 billion), GameStop is trading at roughly 192 times its EBITDA [00:39:55]. This is significantly higher than the typical 7 to 12 times EBITDA for a profitable business with stable but limited growth [00:40:27].
The hosts argue that the underlying business performance is irrelevant to those participating in meme stock trading [00:40:47]. Investors are “in on the joke” [00:39:17] and view it as a form of social betting or gambling, aware of the risks involved [00:41:10]. All necessary financial disclosures are publicly available [00:40:56].
Market Implications and the Role of Disclosure
The Impact of retail investors and social media on stock markets is a significant aspect of this phenomenon. The market is not designed for this type of speculative activity, but such events are a “small cul-de-sac” within the broader capital markets, which are primarily intended to allocate capital to good ideas [00:46:27].
There is a discussion about whether short sellers should have more disclosure requirements, especially regarding “synthetic” short positions [00:55:27]. These are derivative contracts with banks that allow massive short exposure beyond the actual available shares, potentially amplifying price behavior and leading to situations where more than 100% of a company’s stock is sold short [00:55:46]. Such lack of transparency for these synthetic positions can lead to systemic risks, as seen in past hedge fund blow-ups [00:56:44]. However, efforts to introduce such disclosure rules have been consistently blocked by lobbying from broker-dealers [00:57:17].
Ultimately, the consensus among the hosts is that while some speculative behavior occurs, robust disclosure requirements for companies suffice to protect investors, provided individuals do their own due diligence [00:45:50]. The argument is against a “nanny state” approach to financial markets, asserting that adults should take responsibility for their own investment decisions [00:54:06].