Clay Travis
Videos by OutKick
Rejoice, it’s Friday.
Okay, here we go with your mailbag questions.
The most common question I got all week long was “What do you think about the GameStop stock market battle between Reddit posters and hedge fund managers?”
It’s a fascinating story with a ton of different angles worthy of examination.
But let me start here for those of you who aren’t familiar with what’s going on. The easiest way to describe this is a legion of small investors are conspiring to create a short squeeze on GameStop stock. Big hedge funds have bet that GameStop stock is overvalued. They expect the price to fall, so they have been selling the stock short. If they’re right, and the stock declines, they reap the profits — their profit is the difference between when they sold the stock short and how much it falls. When you sell a stock short, you’re doing the opposite of betting for it to rise, which is the traditional way most people purchase stocks. Again, some of you know these basics, but many do not. If these short sellers are wrong and the price increases, then the short sellers have to cover their purchase. That requires them to buy the stock, creating a wild frenzy of surging prices because the herd is all moving in the same direction at the exact same time.
So the general perspective here is you have a legion of small investors battling big hedge funds over the direction of GameStop stock.
Okay, now what issues arise here?
The first one, to me, is the big tech angle. Robinhood, the individual investor app, wouldn’t allow its investors to trade in GameStop stock yesterday. (This means Robinhood had essentially taken the side of the Sheriff of Nottingham.) And I analogize that to Twitter deciding to ban or shadow ban accounts for violating their terms of service. That is, these big tech companies have an incredible amount of power, and they can use their terms of service — which almost no one reads or understands — to justify almost any decision they make, even if it strikes at many issues of fundamental fairness to the individual.
I was troubled by the coordinated decision of all the big tech companies to ban Donald Trump from their services and to take a step beyond that and effectively shut down Parler. What Amazon did with Parler’s cloud hosting services was essentially the largest book burning of the 21st century. Apple and Google also effectively made the Parler app impossible to download. Essentially big tech companies, in unison, decided to destroy a competing service. That’s the very essence of monopolistic and anti-trust practices.
Now we’re seeing a version of that in the financial markets. What happens if a popular stock market investing app suddenly decides people can’t invest their money as they see fit? Well, you essentially have a trade ban, which is similar to what happened to Trump. So what happens when you won’t allow investors to invest their money as they see fit? Well, that’s a direct suppression of the investing marketplace. And I see that decision as being connected to the suppression of the marketplace of ideas on social media. Both of these decisions should be chilling, and both are directly connected to the power of big tech to block out individual choice.
My second thought is that Reddit message board forums are effectively creating mob-like behavior in the world of stocks. In the same way social media has mobilized woke mobs to be upset about everything, this is a mob of investors who are purchasing stocks with no real understanding or comprehension of basic market economics. It reminds me of the speculative frenzy in the waning days of the dotcom boom. If you announced that you were selling anything on the Internet back in those days, your stock price skyrocketed.
Interestingly, investors were actually correct about the transformative power of the Internet for many companies. The prices being paid for that transformative power, however, had gotten totally out of whack with underlying market realities. They were years ahead of the profits becoming realities. And there were far more companies being highly priced than could have ever competed in an online marketplace. Essentially, there was no connection to rational thought in the dotcom boom. It was a pure mania.
Regardless of your present position on GameStop, there is no rational basis upon which the company could be valued at $24 billion and be up another $10 billion in value today as I am writing this. At some point in time, regardless of the frenzy that exists right now, a rational marketplace value will exist in this stock. Now when will that be? I don’t know. Manias aren’t logical in the short term. But in the long term, they are. So many of these GameStop investors are going to end up losing a ton of money as the stock price plummets in the months ahead.
The biggest losers, not surprisingly, will be the people who bought into the mania the latest.
My third thought is that I’m not sure existing SEC infrastructure — the Securities and Exchange Commission, not the Southeastern Conference — has been built for situations like these. A classic pump and dump scheme in the stock market is predicated on stockbrokers convincing individual investors to buy mostly worthless stocks and selling their holdings, acquired at a lower price, as they pump up the later buyers. Eventually there are no new buyers, and the stock price collapses. But in the short term, a ton of money is made. But that isn’t really occurring here. What happens if everyone just simultaneously agrees to buy the same stock? Well, the price skyrockets. But here’s the thing. At some point, people will decide to exit the stock. And as that exit happens, the fall will probably be just as rapid as the rise. We know how this will end — the stock will return to a rational valuation — we just don’t know when it will end.
One thing I wonder is this: is there some sort of market planning here? In other words, does the mob have leaders? And what are the mob leaders, if they exist, doing with their holdings? Are they selling as they lead the charge for everyone else to buy and hold? That could very well be happening. In other words, there may be more in common here with a classic pump and dump scheme than we’ve uncovered so far.
So what’s the SEC’s role here? Can they try to stop these situations from occurring using the existing regulatory infrastructure? Do they have to implement new rules? Will this kind of aggressive action spread to many other companies with high short interests? I don’t know.
Finally, no matter which “side” you choose on a trade like this — the hedge fund or the individual investors — it’s worth noting that the hedge fund perspective is based on a logical investment thesis. You may disagree with the thesis on any individual stock decision made by a hedge fund, but, for instance, their theory on GameStop is that video game sales are increasingly occurring on a digital basis, often directly from the company making the games themselves. So retail based stores are less valuable than they have been in the past. Eventually, this retail store overhead will make it difficult for GameStop to compete on price, and they may have to file bankruptcy in the years ahead. That’s the short hedge fund thesis in a couple of sentences.
Now, it may be incorrect, but it’s a logical thesis that’s motivating the decision to short the stock.
But the counter to this position from individual investors isn’t as logical. It’s essentially, “We are going to catch the short sellers in a trap and drive up the price of GameStop to a level where they lose all their money shorting the stock.” That is, the investment thesis of the individual investor isn’t based on a sound, long-term forecast justifying a $25 billion market cap for GameStop. It’s based on crushing the hedge fund thesis. That’s the danger of selling short. The hedge funds could be right about GameStop, but their timing might be off by a year or two. If you buy a stock and hold long-term with a thesis that the stock is undervalued, you can always sit on your money or even add to your position because markets are rational in the long run. But if you short a stock and the price surges in the short term, you have to cover to keep your thesis alive. (This is also the danger of options, by the way. Your thesis can be right, but just mistimed by a month or less.)
If you bought GameStop before the huge price increase and sell now, congrats, but eventually in order to extract your paper profits from the market, you have to be able to sell at a higher price than you bought the stock to lock in the value. Right now, we’re focusing on how high the plane is in the sky. But at some point, the plane has to land because the fuel to keep it aloft will be exhausted.
So how does the plane land without crashing?
I have no idea. And neither do most of these individual investors, many of whom will be left holding the bag on a stock that isn’t worth anywhere near what they’ve paid.
The second most common question I got: “What do you think about Tennessee’s hire of Josh Heupel?”
I’m frustrated by it.
Primarily for two reasons. First, let’s just look at this purely from a market based perspective. The top coaches in college football are underpaid, and the middle coaches are wildly overpaid. In other words, Nick Saban, who makes $9 or $10 million a year, is probably worth $50 million a year to Alabama. But state institutions are afraid to pay someone that much money. So they keep Saban’s salary high, but not too high. The result is instead of, let’s say, the top ten coaches in college football making far more than everyone else, the middle tier coaches all make far more than they deserve.
This makes no sense.
There isn’t a salary cap in college football coaching, but there may as well be. Because the stratification in income that should exist — based on rewarding the top coaches — is broken. Nick Saban should make $50 million a year, but someone like Sam Pittman at Arkansas should probably make $1 million a year. Instead the floor on average coaches — and I’m not trying to pick on Pittman — is way higher than it should be, and the ceiling for exceptional coaches is way lower than it should be. This happens in the NBA, for instance, because LeBron is probably worth $100 million a year, but instead of him receiving his entire worth in salary, the salary cap puts a ceiling on his compensation while raising the floor for everyone else. That makes sense in a players union world — indeed raising the median wage for workers is the express purpose of a union — but why should a system like that exist in college football, where Nick Saban is, effectively, the LeBron of college football, where there’s no salary cap?
In other words, why are college coaches paid like they are subject to a salary cap when there is no salary cap at all? Nick Saban could probably win a national championship within five years almost anywhere in the top 25 jobs in college football. So why doesn’t he get paid like Howard Stern does in radio? No one else makes close to $100 million in radio. Stern is the best, and he’s compensated better than anyone else.
To the victor, in theory, should go the spoils.
But since that isn’t occurring, there is an inefficiency in the college football coaching marketplace right now. There are top coaches who can be signed for salaries way below what their market value actually is. In theory, that would mean a school like Tennessee, which has top ten financial resources, could exploit this inefficiency and go sign a top coach for, let’s say, $9 or $10 million a year, a sum they could easily afford, but which would be far less than the top coach is actually worth.
The key is identifying a top coach who is willing to move and then giving him that salary.
For me, James Franklin was that guy. I believe Tennessee could have 100% gotten James Franklin to Knoxville for $9 million a year. If they’d done so, I believe he would have immediately paid for his salary by locking up a top five recruiting class and sending season ticket sales soaring.
But it wasn’t just Franklin. Tennessee could have achieved a similar result with Lane Kiffin, whom I believe they could have gotten, or with Hugh Freeze. Now you may not like the idea of hiring any of these three guys, but they would have paid for themselves almost immediately with the enthusiasm they would have generated.
And you would have significantly reduced the chance of total failure. That is, you know based on their history that these coaches, especially Franklin, aren’t going to pull a Jeremy Pruitt and fall flat on their face in three years.
To their credit, this is what Texas A&M did with Jimbo Fisher. They went and grabbed a national championship winning coach, and he has the Aggies poised to contend for a national championship for the next several years. What A&M paid for Jimbo — $7.5 million a year — they will make back many times by winning more games, selling more tickets, and probably increasing the overall number of kids applying to the school based on the positive attention raining down on the football program.
Essentially, it is my belief that you can’t allow money to be the reason you don’t hire a top coach. The coaching salaries, while high for top coaches, are still way below what these guys are worth on the open market. In theory the biggest programs should be able to hire all the top talent while blowing out the little guys when it comes to salary offers.
Sure, there are some guys who would refuse to move, no matter what the offer is, but those guys are an extreme minority. Most people will change jobs if you pay them enough money. That’s how capitalism works.
Some of you out there have mosquito dick world views, and you’re out there thinking, “Well, those other schools will just match your offer.” Okay, so what? If that happens, you can raise your offer until they won’t match or you can acknowledge the coach isn’t moving and move on to your next top candidate.
Let me put this coaching search in the context of a bar pick up scene. If I’m a single guy at the bar, I want to try to pick up the best looking girl at the bar. So do a ton of other guys. But most of the guys at the bar won’t talk to the best looking girl because they’re afraid of rejection. So they sit in the corners by themselves and wait for a less desirable girl to hit on. This is what Tennessee does for virtually every coaching search. They sit in the shadows and are afraid to actually make a move on a truly desirable candidate.
But my thing is this, who cares if you get rejected by the hottest girl in the bar? She rejects most people. Sure, she’ll probably reject you too. But what if she doesn’t? Then you get to go home with the hottest girl in the bar. So the pay off is worth the risk here. Plus, if she rejects you, how does that hurt you? The less hot girls in the bar aren’t going to be upset that you hit on the hot girl at the bar. If anything, they’re going to respect the fact that you were willing to hit on the hottest girl, and they might be interested when you hit on them too because they’ll respect your balls.
Tennessee is a ten program that keeps trying to take home fours right as the light comes on in the bar.
Tennessee hired Josh Heupel, the four in the bar as the lights come on, for a six year $24 million deal. They put a ring on it to the tune of an average of $4 million a year.
Maybe Heupel will win at Tennessee. I hope he does. But his teams at Central Florida have gotten worse every year he’s been there, and he’s never proven he can recruit at an elite level. He’s not a guy who is going to rally the fan base or excite anyone. I bet Tennessee hasn’t sold many season tickets based on the excitement of the Heupel hire.
And if he doesn’t work out, guess what? YOU STILL END UP PAYING HIM THE SAME THING YOU WOULD HAVE PAID A TOP CANDIDATE.
How so? Let me explain.
If Tennessee fires Heupel after three years, they’ll owe him $24 million as long as they don’t fire him for cause. That’s an average of $8 million a year, which is just about what you would have to pay a truly top candidate to take the job in the first place.
So you aren’t even saving any money by putting a ring on the four!
Add in the six million in buyouts for the AD and the coach and the million you have to pay Kevin Steele not to coach at Tennessee any longer and you’re already paying Heupel what a top ten coach would have cost. Except you aren’t benefitting from the massive increase in season ticket sales or increased revenue that a top coach would have brought.
Not to mention you’re continuing to drive down the overall value of the brand itself.
As a guy who runs a business, it’s just infuriating to me that a program like Tennessee can’t take advantage of a broken and inefficient coaching marketplace. Top coaches are wildly underpaid, and only top programs can afford to pay them what they are truly worth.
Yet instead of doing that and exploiting this market inefficiency to their favor, Tennessee keeps taking home fours from the bar and putting rings on their fingers.
Dude writes:
“Best fit for Deshaun Watson?”
The Texans.
Look, this entire story feels strange to me. Deshaun Watson has been in the NFL three years as a full-time starting quarterback, and the Texans have made the playoffs two of those three years, including winning a playoff game last year.
Far from being a Detroit Lions or Cincinnati Bengals level of incompetence, this past decade, the Texans have been to the playoffs six times, which is tied for the fifth best performance by any team in the NFL. Here are the number of times this decade that teams have made the playoffs:
Patriots 9
Packers 8
Seahawks 8
Chiefs 7
Texans 6
Ravens 6
Saints 6
Steelers 6
And in addition to getting there, they have won four playoff games during those six trips. Yes, they haven’t made the AFC title game or the Super Bowl, but neither have most teams in the NFL, especially not with the Patriots soaking up so many of those trips over the past decade.
So I find it hard to believe the Texans are going to move on from Watson, and I reject the idea that they are somehow an awful franchise. And I also find it hard to believe that Watson is truly willing to sit out an entire season to drive up the acrimony. He’d have to repay the Texans for the money they’ve already advanced him under the contract if he chose to sit out or “retired.”
Now that doesn’t mean someone couldn’t make a huge offer that’s worthy of consideration. What if, for instance, the Jags offered the No. 1 pick straight up for Watson? Or what if the Dolphins offered Tua and the No. 3 pick? Heck, what if the Jets offered the No. 2 pick and Sam Darnold? Do the Texans think any of those quarterbacks could potentially win for them on a high level? Could Darnold to the Texans be the equivalent of Tannehill to the Titans?
Who knows.
But in the end, I’d put my money on Watson being with the Texans come Week One of the 2021 season.
And if I were going to bet on a trade, I’d bet to a trade to an NFC team like the Saints, Panthers, 49ers or Rams over an AFC team because I don’t think the Texans want to see Watson in the AFC playoffs in the years ahead.
…
Thanks for reading OutKick, and I hope you guys have a great weekend.
i’ve been reading a lot about ‘disturbed character’ in narcissitic people. they have to be confronted and redirected as soon as possible or they can get worse.
maybe deshaun is the 2nd coming like Obama, but i think he needs to be told that he is a Texan or he is retired from football.
i still don’t buy his greatness. winston played better in 2019 when i saw them head to head. winston is a backup in NO.
Stop the madness. Can’t have players run the league by throwing tantrums.
The hedge funds themselves aren’t the problem – it’s the mechanism for short-selling: That they can “reserve” shares without actually buying them, locking in a lower price, then, if the price plummets, only then do they have to actually pull the trigger. That’s not an investment mechanism – it’s rigging the system, and that’s what the Reddit posters were / are pissed about. Lots of them are knowingly taking losses in the hundreds or even low thousands of dollars to make a point: putting their money where their mouths are.
SEC should ban the shorting mechanism, as Elon Musk argues. It used to be illegal. Let’s ban it again, and if folks want to try to get rich by betting that other people will fail, let them do it the honest way: By betting against the Raiders. 😉
“Top coaches are wildly underpaid, and only top programs can afford to pay them what they are truly worth.” C’mon, reallyi? Only, what, between 8 and 14 collegiate athletic departments so much as break even? The rest – your Power 5 also-rans, Indianas, your Mississippi States, your Oregon States, yes, your Tennessees – bleed red while chasing the chimera of those TV “billions.” They keep spending more and more trying to catch the handful of schools actually making money on sports: ‘Bama and the Buckeyes, Texas, USC, Florida. And then there are the hundreds of other schools hoping to become a Power 5: your BYUs and Cincinnatis, San Diego States and Central Floridas. I’ve got two kids in college, Clay, one in a Div. II Cal State school, and the other at UC school that just jumped to Div. I. Both are paying hundreds of dollars per semester on top of their tuition to underwrite those schools’ money-losing athletics programs. Working class families are having to go further into debt so these school presidents and alumni can have the prestige of a collegiate sports program.
You run a business, Clay, as you point out: If you were bleeding red ink, would you get into bidding wars over middling talent?
The difference is YOU don’t have a captive audience of high school kids feeding into your bottom line every year with hidden fees buried under tens of thousands a year in tuition. If your readers aren’t happy, we don’t renew – and you have to cut costs. There’s no such pushback on college athletics programs.
So, no, there isn’t a single college coach who’s “underpaid.” Put every single one of them on the faculty pay scale. If you can’t balance your houshold budget on the six-figure salary of a University of California professor, how on earth are you going to run a successful team?
I was with you until your last sentence! I’ve know many a talented and skilled person who rocked it in their profession, but couldn’t pay a bill on time if their life depended on it!
My one hope with all of the covid lockdowns is that a whole lot of parents see that sending kids to physical college is no longer necessary, and that enrollments will start to drop as online-degrees become more vogue do to cost savings. The universities need to be bitch slapped at all the money that is wasted and laundered at taxpayer and parent expense.
According to this data: https://sports.usatoday.com/ncaa/finances; 146 institutions broke even or better.
Mississippi State was the 6th most profitable in the country. Not sure you know what you’re talking about TBH.
The hedge fund manager worldview of Gamestop is more true now than before the mania.
Maybe GameStop needs to come up with a new video game:
It’s called HedgeFund Manager. It’s basically like Grand Theft Auto, you land on Wall Street with a vial of cocaine and a $1400 suit and you start ripping people off.
Instead of jacking cars, and going to trashy strip clubs, you cold call little old ladies, and try to swipe their pensions by selling them garbage stocks. Instead of drug buys, you go to a 3 hr 9 martini lunch and plan derivative stock swaps.
You get the idea. Not sure who would play the game, since most pimply-faced teens aren’t gonna buy it, but maybe those Reddit RobinHoods seem like they would knock it out of the park . . .
Gamestock is also being run up by other hedge funds trying to run Melvin Capital, et al… out of business. The short sellers have unlimited losses when the stock goes parabolic so Melvin, stopped out and closing out it’s short sent the stock even higher. Citidel and other hedge funds also profit from HFT, high-frequency trading, as most all stock execution is now done that way, sp maybe Citidel, paying Robinhood for order flow, parlayed that same action along side the Redditors?
There are many famous, smart and rich hedge fund guys who lost their shirt shorting Tesla. The last shorts likely exited in 2020 when Tesla rose about 700%. So it goes.
Brokerage firms can stop or slow the nonsense by raising margin requirements. Buying call options on margin is using crazy leverage and even Robinhood had to tap its credit lines with 6 banks and raise an additional billion in equity to meet net capital requirements.
Regulators should bring back the “uptick” rule so you can only short after an uptick in the price of the stock.
Query: Why would other hedge fund managers proactively set out to destroy Melvin, Citadel, etc. when their entire sector depends on the monopoly they’ve established? Do you not think they all work together to protect what they have, and if one sets out to destroy Citadel, then they risk being destroyed themselves? They have a perfect, “legal” system of manipulating the market, and everyone makes billions. Why would one of them upset the apple cart, and would the others let them?
“it’s worth noting that the hedge fund perspective is based on a logical investment thesis.”
What you failed to mention is that, “even if” Andrew Left had believed the fundamentals for Gamestop was a cause for shorting, Andrew then went out on every social media platform and business show and tried to convince stockholders to sell “because the bottom was going to drop out.” He didn’t just short the stock, he then went out and actively tried to convince investors to sell now before the bottom. He was MANIPULATING the market for his benefit.
Further, Jeff and the other hedge fund managers had shorted 300% of the float (the available stock on the market). 300%! I wouldn’t exactly call that a logical investment thesis. They got massively greedy and believed they could force the stock price to fall to their benefit. Manipulation, pure and simple.
This is exactly right. Clay’s statement “it’s worth noting that the hedge fund perspective is based on a logical investment thesis” is too stupid to believe it was made by accident.
I mean, shorting the stock is based on a logical, long term investment hypothesis. Many retail businesses have gone bankrupt because their markets move online and disrupt their business.
That’s exactly what has happened to GameStop for both direct game sales and for used game resales, which don’t exist for them much at all now. These were both huge profit margin parts of their business.
Banding together to push up the stock price doesn’t counter the investment’s long range thesis, it just defeats it in the short term.
There is no rational hypothesis for GameStop being worth $25 billion. Zero. The stock will fall back to a rational valuation at some point in the near future. It already began today. That will continue in the days and weeks and months ahead.
This price isn’t remotely sustainable.