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Bath Bomb

The rise and fall of another Meme Stock, but this one is particularly sketchy



Story of the Week

In what is essentially every smug wall street bro's wet dream, the floor finally collapsed on one of the most notable meme stock rallies this week.


Bed Bath and Beyond (BBBY) has gone through multiple waves of meme stock mania as the much-maligned 'wallstreetbets' and other cohorts banded together to take advantage of a build-up in short interest on the stock to generate the now infamous 'short squeeze'.


I have previously written about 'short squeezes' here.


Prior to the most recent drop, BBBY enjoyed incredible gains from retail trading in August—surging 400% from a July low.


But on Thursday, in what I can only assume is being heralded as a moral victory for Goliath, the stock plummeted 45% in extended trading (not including the 20% drop during market hours) on the news that RC ventures who owned 10% of the company had dumped its entire position in the stock.


BBBY Stock Price Movement Over the Last Month

Source Trading View


Background


At face value, that all seems relatively normal (by meme stock standards that is) but there is a bit more to it.

In short, Ryan Cohen; billionaire investor, GameStop Chairman, Head of RC Ventures and overlord of the meme stock brigade, revealed a 10% position in BBBY through RC Ventures in March.

Here is where the story gets interesting and a little sketchy.


On Tuesday, Cohen revealed bullish BBBY call option positions, which were interpreted as an all-systems-go signal for meme stock traders.

The next day, RC Ventures filed a notice with the SEC to allow it to sell the entirety of its nearly 9.45 million shares.


A complete U-turn in just 24 hours.

Understandably, this sparked a sell-off in BBBY, with some high-profile investors waving the red flag and calling on the SEC to investigate Cohen's actions.


Textbook Market Manipulation


The meme stock warnings have been well flogged at this stage. Clearly, the share price of these stocks is completely decoupled from the company's actual fundamentals, and any short-term positions is simple speculative gambling.


With that said, I'm not one to begrudge those who are making money on the way up here. Play the meme stock game all you want; just be mindful that the game you are playing is gambling, not investing and make sure not to blow yourself up in the process.


In my opinion, most of what has happened on the meme stock side is based on the interpretation of available market information and is simply an extreme version of normal market effects.

Momentum trading, trend following, and Herding happen all the time in markets, just not with the same speed and coordination of meme stock rallies.

While I have no issues with most of this activity, Cohen's actions seem questionable at best and have likely left a lot of his unsuspecting admirers in the red.


At first glance, this appears to be a blatant gamma squeeze whereby he set out to trigger widespread buying of short-dated call options, causing an upward spiral in stock prices, resulting in more call buying and even higher stock prices and on and on we go.


Textbook market manipulation.


Spoofing is one of the most prevalent (and illegal) market abuse tactic; it is defined by google as,


A term that refers to market manipulation whereby an individual tries to move the price of a financial instrument up or down by placing one large order, with no intention of executing it, to give the impression of market interest for that instrument.
Once the price has shifted, the original order is cancelled, and new orders are placed on the opposite side to take advantage of the favourable price movement created by the first order.

Sound familiar?


It remains to be seen if the SEC will fully investigate Cohen's activity, but until then, the $68.1 million in profit Cohen made from the trade will be safely resting in his bank account while those on the other side of the trade, lick their wounds.

It's a cruel game.


Moral of the story: Billionaire investors didn't become billionaires by letting you take your profits first.

What's Next for BBBY

Even with the recent pullback, the stock is still up 115% over a one-month period (bear in mind, that figure will likely have completely changed by the time I finish writing this article).

Impressive growth for a company with growing liquidity issues as its losses continue to widen year on year.


Until now, BBBY has been drawing from a billion-dollar credit facility from JPMorgan Chase, but given the fact that this would have been collateralised against the assets of the company that are now plummeting, things could get a whole lot worse, and extensive cost-cutting seems increasingly likely.

If you're holding onto this one waiting for the next rally, maybe think again.

"The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revival, but finally giving up in the final collapse."
Charles P. Kindleberger

Beware, the things that have gone down the most are not always the cheapest.


There is always further to fall.


College Fund

Lastly, for me, the most astonishing story to come out of this whole thing is how a college student turned $25 million into $110 million by trading BBBY options on Tuesday.


It's not the size or the speed of the gains that amaze me, it's the fact that a college student had $25 million to start with….


I always thought college was meant to be a potent mix of pot noodle, cheap beer, and regret… times are a-changin, I guess.