Today's the big day!Two weeks ago, I wrote that GameStop Corp.'s "fourth-quarter earnings are going to be the financial event of the season." Well, it's all happening today after the market closes. There will be an investor conference call at 5 p.m. New York time. That should be fun. I hope it will start with a rousing group rendition of "The Tendieman," Reddit's GameStop sea chantey. I hope that "yelling, humming, and intermittent announcements" will coalesce "into something like a Gregorian chant," there on the earnings call. For the last two months or so, there has been a wild social phenomenon in which thousands or perhaps millions of individual investors have not just bought GameStop stock, but also joined together in a mass movement focused on GameStop stock. It was a never-before-seen coordination of retail traders on Reddit banding together to move the price of a stock, it was the leading story on the news for like a week, it became a meme, the phrase "diamond hands" entered the (well, my) lexicon, there are nine movies being made about it, the entire edifice of modern financial capitalism shifted subtly, and GameStop's stock is still up almost 1,000% year-to-date for no particular reason. Meanwhile, in another part of town, GameStop Corp., the actual company, was doing stuff. I mean, I assume it was. I don't really know what the stuff was. While GameStop shareholders on Reddit talked about it constantly, noisily, entertainingly, profanely and in detail, GameStop's managers have put out just a handful of press releases during the last few wild months. The chief financial officer left, as did the chief customer officer, and there's a new chief technology officer. I assume those changes have involved the expected amount of human drama, but that seems to have occurred mostly in private. There's a new board committee to figure out how to "transform GameStop into a technology business," but it has not yet released any detailed plans. But surely people at GameStop — its executives, as well as Ryan Cohen, the Chewy Inc. co-founder who is a big GameStop shareholder and chairs that new board committee — are working very hard on figuring out what sort of company GameStop will be in the future, and how it will get there. They just haven't said much about it yet. I have written before that these two things are strangely disconnected. People on Reddit are buying GameStop based on memes and social media and technical theories about gamma squeezes and short squeezes, without hearing much from the company. People at the company are working away at its business, without saying much about the crazy stock price. If your theory of stocks is, like, "the price of a stock reflects the present value of the future cash flows of the underlying company," the disconnect between this stock and its company must feel a bit eerie. Why is the stock so busy and the company so quiet? "The world in which GameStop is a fun gambling token and up a zillion percent really is cut off from the world in which GameStop is a company with a CEO and a board and 5,000 struggling stores in malls and a big activist investor with plans to turn its business around," I wrote in January. But today they meet! This afternoon, for the first time since GameStop's stock went crazy at the end of January, GameStop will give the market a detailed update on how its business has been doing, and how it expects it to do in 2021;[1] one expects that it will also have some sort of update or projection or commentary on what the strategic plan might be and how it's going. Perhaps that plan will incorporate feedback from the stock market: "Since you all are so desperate to buy our stock at $200, we've decided to sell a bunch of it and buy a game studio," say, or "since buying GameStop call options looks so fun we've decided to do that too, diamond hands rocket rocket rocket." Meanwhile all those retail traders who have been excitedly buying short-dated call options will, finally, have a ton of new fundamental information to consider; they can assess GameStop's earnings and evaluate its plan and decide if their optimism is still justified. Or not, I don't know. It's entirely possible that GameStop will keep ignoring the stock craziness and that no one who likes the stock will care about earnings: GameStop devotees have made it clear that they "like the stock," and not even the company's first earnings results since the Reddit-fueled rally will change that opinion. The videogame retailer, the OG meme stock, is set to report its fourth-quarter earnings after the closing bell Tuesday. But while Wall Street is taking a cautious approach to valuing the brick-and-mortar company, rocket emojis are apparently not subject to the usual laws of physics and finance. Users on Reddit board WallStreetBets equipped with "diamond hands" say they're ready to buy more GameStop shares regardless of what Tuesday's quarterly results say about fundamentals.
Yeah, look, if you had asked me six weeks ago "how long can this thing go on," I would have said "not very long, certainly not past earnings." A stock just isn't a pure token of social value disconnected from cash flows; eventually the company will report earnings, the optimism about the company will or will not turn out to be justified, and the stock price will reflect that. That's what I thought, in my naivete, in February. Now: - There is a lot more evidence that purely social tokens of value, with no underlying cash flows, are super hot right now; and
- The GameStop thing keeps going.
So, sure, whatever. For all I know (1) GameStop's earnings will be bad, (2) Ryan Cohen will get on the call and say "hey we'd love to transition to being a tech company but I'm not sure how we're gonna do that, it's a hard problem, I'll keep thinking about it but no promises," and (3) the stock will triple tomorrow. Or the reverse of all of those things. Or something else entirely. Earnings will happen, and something will happen to the stock price, but I don't see any particular reason to assume that those two things will have anything to do with each other. Elsewhere: "Melvin Capital Is Facing Nine Lawsuits Related to the GameStop Frenzy," one for each movie about the GameStop frenzy I guess. Seems a little harsh; Melvin Capital definitely wasn't the winner in the GameStop frenzy. WeSPACSure, why not: WeWork lost $3.2bn last year as Covid-19 shut its co-working spaces around the world, the office provider has revealed in a pitch for $1bn in new investment and a stock market listing. ... The "Project Windmill" documents show that WeWork is aiming to go public at a valuation of $9bn including debt, through a merger with a special purpose acquisition company, or Spac. WeWork is in discussions with BowX Acquisition Corp, a "blank cheque" company which raised $420m in August, according to people familiar with the matter and to the documents. BowX counts former basketball star Shaquille O'Neal as an adviser and is run by Vivek Ranadivé, the founder of the California-based software group Tibco. To make up the rest of the $1bn sought by WeWork, the two sides are aiming to line up institutional investors to secure the deal. A listing for WeWork, albeit at a much reduced valuation from the one it was chasing in an abortive initial public offering two years ago, will be a marker of how sharply Spacs have changed investor appetite for businesses which once struggled to go public.
A couple of points here. One is that, even after its bruising failed 2019 IPO, WeWork still seems to be doing its thing of marketing itself as a tech company rather than a real estate company. Here is the prospectus for the BowX SPAC: Our management team consists of seasoned investors and industry executives with an extensive track record of identifying, building, operating, advising, and investing in TMT [technology, media and telecom] businesses. The team also has a track record in identifying disruptive technology platforms that have the potential to transform industries. We believe the team will be able to source superior TMT investment opportunities through an extensive network of individuals from private equity, venture capital, growth equity, global corporations, sports and entertainment, and higher education. We believe this network of relationships will provide us access to proprietary and differentiated deal flow. … Vivek Ranadivé, our Chairman and Co-Chief Executive Officer, has been at the forefront of the technology industry, from his early days at the Massachusetts Institute of Technology ("MIT") to his time at TIBCO which powered some of the world's largest companies and government agencies. He is an entrepreneur, technology visionary, New York Times best-selling author and philanthropist recognized for his innovative thinking.
WeWork founder Adam Neumann was also a technology visionary before people realized he was actually running a money-losing real-estate company. (Also great, from the prospectus: "Our team believes that companies with sound business models, strong competitive positions, healthy unit economics, and unique product offerings can rapidly grow without having to sacrifice profitability." Yes, if there is one thing WeWork is famous for, it is rapidly growing without sacrificing profitability!) Here's the other point. This is a "de-SPAC merger," in which WeWork will merge with BowX, take its $483 million,[2] and become a public company. It is natural to emphasize the SPAC here: It is a SPAC deal, that is the mechanism that WeWork would use to go public, and the SPAC and its sponsor would play a major role in both the deal to go public and WeWork's future as a public company. But I wouldn't emphasize it too much. If this deal goes through, more than half the money WeWork raises will come not from the SPAC but from the parallel "private investment in public equity," or PIPE, transaction that it does with big institutional investors. WeWork is apparently out on the road now, with a pitchbook, explaining to big institutional investors why it's a good investment at a $9 billion valuation. Eventually that will work, or not; it will find buyers at that price, or it will have to lower the price, or it will have to give up on the deal and stay private. Or else demand — from these big institutional investors in these private meetings — will be so strong that WeWork will be able to upsize the deal and raise more money, or it will be able to raise the price and go public at a $12 billion valuation or whatever.[3] All of this, though, will happen in private. WeWork and its SPAC partners and their bankers will meet one-on-one with a selected group of big investors, and show them projections, and answer their questions. News and opinions will leak, of course: The quote at the top of this section is from a Financial Times report yesterday, and perhaps big investors will talk to each other and share their views of the company and its valuation. But the process will be much more controlled, and much quieter, than WeWork's IPO process. One way to understand that process is that WeWork published a prospectus first, and the prospectus was full of ludicrous details about its governance while failing to answer important questions about its business, and everyone immediately made fun of it, and "the WeWork IPO is bad" became a matter of common knowledge. Everyone knew that everyone knew that WeWork wasn't going to get the price it wanted; no one wanted to catch the very high-profile falling knife. One way to understand the SPAC process is that WeWork will line up money first, and then publish a prospectus. (Or a merger proxy, but same basic idea.) When WeWork publishes its financial results and projections, when it discloses its current governance situation, when it does or doesn't include blather about world-changing and community-building in its securities filings, it will already have commitments for at least most of the money it is looking to raise.[4] I have said before that WeWork is a perfect use case for a SPAC: That sort of certainty is exactly what it needs. But I am not sure it needs a SPAC; it just needs that certainty. A deal in which WeWork lined up a billion dollars of commitments from big institutional investors, sold them stock, and then went public via a direct listing a week later would be fine. A deal in which WeWork lined up a billion dollars of "anchor orders" from big institutions for a regular IPO, and then did that IPO, would be fine. The actual mechanism, or even the current popularity, of the SPAC is not what's important here. What's important is lining up investors before everyone has a chance to make fun of WeWork again. Should index funds be illegal?The basic theory is that, if a handful of big diversified institutional investors own all the companies in one industry, those companies will have less incentive to compete with each other. "If we cut prices," executives will reason, "we will gain market share at the expense of our competitors, and that might be good for our stock price, but it will be bad for their stock prices, and our shareholders are their shareholders too. So let's keep prices high, we'll all make a nice fat profit, and our common shareholders will be happy." That's the theory. We talk about it a lot. There is, let's say, suggestive empirical evidence for it. The most famous modern paper about it — also the first one I wrote about — is Azar, Schmalz and Tecu 2018, which studied airlines and found that "within-route changes in common ownership robustly correlate with route-level changes in ticket prices": Airlines tend to raise prices when they have the same shareholders as the airlines they compete with. (Other studies do or don't find anti-competitive effects of common ownership in other industries, and there is some controversy about the airline study.) One objection to the theory is that, if these common shareholders are giant diversified index funds and other institutions that own the entire stock market, it is not at all clear that they should want to raise prices in any particular industry. The common owners of widget-machinery companies want the prices of widget machines to be high, sure, but the common owners of widget manufacturing companies want the prices of widget machines to be low, and if they are the same owners then what happens? One obvious answer would be "corporate profits will be high, but it doesn't particularly matter how they are divided up." Big institutional investors own stock in companies; they don't have any residual claim on consumers, or workers. The giant asset managers, the "Big Three" (BlackRock Inc., Vanguard Group Inc., State Street Corp.), want corporate profits to be high; they want widget workers to get paid a low salary, they want widgets to be sold to consumers at high prices, and they don't particularly care if the price of widget machinery is high or low. The point is for someone (widget-machine companies, widget manufacturers, both) to collect big profits; the common shareholders will share in those profits wherever they are collected. A slightly more nuanced version of this theory would note that big institutional investors own stock in public companies, but mostly not private ones, certainly not small private ones. Higher profits at Amazon.com Inc. or Walmart Inc. are better, for big asset managers, than higher profits at your local independent bookstore. If the wholesalers of some product are mostly big public companies, while the retailers are mostly small independent private businesses, the big asset managers will prefer anticompetitive pricing in the wholesale market, etc. But you could have cheerier and more utopian theories. You could say, look, the gigantic index-y asset managers have great incentives. They invest in everything and can never sell; they have the broadest and longest-term perspective. The only thing that is good for them is growing overall corporate profits, and the only way to do that in the very long run is for businesses to be sustainable. If your investment portfolio is "all businesses, forever," the details of their pricing strategies are not that important to you; what you will care about are macro questions like "are global consumers becoming more prosperous?" and "is there widespread respect for the rule of law so that companies can make investments?" and "will rising sea levels wash away all the factories?" So we have talked a few times about Covid-19 vaccines. "Will the economy reopen?" is just a much more important question, for universal permanent asset owners, than, like, "is this widget company optimizing its pricing strategy?" In fact it is a much more important question than "is this Covid-19 vaccine company optimizing its pricing strategy?" Shareholders of the pharmaceutical companies that developed Covid-19 vaccines, to the extent that they are also shareholders of airlines and retailers and cruise-ship companies, should prefer that the pharma companies cooperate to distribute vaccines as broadly and quickly as possible rather than maximizing profits or market share. What is good for the economy is good for the Big Three, much more than what is good for any individual company. The maximalist view here is that there is only one company, The Stock Market Inc., and there are only three owners, The Big Three, and the owners make economic decisions not through the decentralized logic of market competition but through their own wisdom and judgment and socialist calculation. I don't know that that's any better than the old system, of many different companies competing with each other, but it sure is different. Anyway here's a new paper on "Revisiting the Anticompetitive Effects of Common Ownership," by José Azar (of Azar, Schmalz & Tecu) and Xavier Vives. Specifically they revisit airlines, and find something sort of neat: We use data from the U.S. airline industry to test the hypothesis, consistent with the general equilibrium oligopoly model of Azar and Vives (forthcoming), that inter-industry common ownership should be associated with lower prices in product markets. We find that, as the model predicts, increases over time in intra-industry common ownership are associated with higher prices, while increases in inter-industry common ownership are associated with lower prices. We also find that common ownership by the "Big Three" (BlackRock, Vanguard and State Street) is associated with lower airline prices, while common ownership by shareholders other than the Big Three is associated with higher prices.
Some airline common shareholders are, specifically, airline common shareholders; they own stock in all the airlines, but not so much stock in everyone else. They want airline prices to be high. Other airline common shareholders, particularly the Big Three, are universal common shareholders; they own stock in lots of multinational companies that consume a lot of air travel. They want airline prices to be high (as airline shareholders) but also low (as everyone-else shareholders), and it seems like the latter effect dominates. The story here might be that the Big Three are managing the economy for everyone, in their wisdom. NFTsI don't really play complicated immersive multiplayer video games, but I gather that a lot of them have money. Like, you are a character in a virtual world, and you accumulate gold doubloons by completing quests or robbing other players or crocheting armor or tax farming or financial speculation or whatever, and then you have a million doubloons, which can be used to buy in-game items. You can spend your doubloons on a horse or a spaceship or a laser sword or whatever, but if you have a whole lot of them you will eventually exhaust the practical needs of your character in the virtual world. I gather that games sometimes solve this economic problem with expensive rare items. A food costs 1 doubloon and a horse costs 20 doubloons and a spaceship costs 10,000 doubloons or whatever, so that relatively new and normal players can acquire them, but for a million doubloons you can buy Schmendrake's Purple Hat of Holding, which has useful magical in-game properties but is also a particularly rich and shimmery shade of purple. Also there is only one of it, or only 10 or whatever. The magical properties are useful but not that useful, not 100 times more useful than a spaceship; the real value comes from its rarity and its shimmer. It is a status item; what makes it so valuable is mainly that it is so expensive. In a big popular game, all this stuff will leak into the real world. There will generally be some sort of market in which players can exchange real-world dollars for in-game doubloons. (Perhaps this market will be blessed or even run by the company that makes the game, perhaps not; perhaps the exchange will be at fixed rates, perhaps it will fluctuate with supply and demand.) There might also be a market in which players can resell their expensive rare in-game items, for doubloons or for dollars. Thus it would not be a category error to say something like "I own Schmendrake's Purple Hat of Holding, which is worth five thousand U.S. dollars." Still the connection is imperfect. What do you own? You have a character in a video game, and on the animation of that character's head you can put an animation of a hat. The intellectual property rights to the game, and the animation of the character, and the animation of the hat, belong to the company that makes the game. If the company decided tomorrow to shut down the game and pivot to cannabis, your hat would disappear, and your legal recourse might be limited. Also, while your hat might be worth $5,000 on some as-converted basis, in practice you might have trouble selling it for dollars. The most likely buyer of Schmendrake's Purple Hat of Holding will probably be a fellow player of the game who has also gotten rich in in-game doubloons; the demand for the hat from doubloon millionaires will be a lot higher than the demand from dollar millionaires. Anyway: The chief executive officer of Malaysian blockchain service Bridge Oracle paid Twitter Inc.'s co-founder $2.9 million to buy his first tweet. Sina Estavi paid for the non-fungible token in cryptocurrency Ether, according to Cent, the operator of auction website Valuables where it was sold. Jack Dorsey, also Twitter's CEO, announced the sale of the 15-year-old tweet -- "just setting up my twttr" -- on March 6. "This is not just a tweet!" Estavi tweeted after his purchase. "I think years later people will realize the true value of this tweet, like the Mona Lisa painting."
Okay. All I am saying is that one approximate but useful model here[5] is that a lot of people got rich in the in-game currencies of various blockchain games, and there are only so many useful items that you can buy with those currencies, so now they want to spend their in-game money on rare, expensive, useless in-game status items. Does this person own Jack Dorsey's first tweet? No, of course not, what would that even mean. Does he "own" it within the rules of a certain sort of blockchain game? Sure, why not. Can he exchange it for $2.9 million? I dunno, maybe? Can he exchange it for $2.9 million worth of Ether? Sure, why not. Why is it worth $2.9 million? Because it announces to other players of the game: "I was able to spend $2.9 million on this thing." Is all of this real? Yes, a little, in a certain sense, but not entirely, not in the way that … real things are real? Things happenCitigroup CEO Bans Friday Zoom Calls, Encourages Vacations. Goldman's beleaguered banking analysts raised red flags about the brewing strains of remote work a year ago and asked bosses for meal and tech stipends. At BlackRock, New Accusations of Discrimination and Harassment Are Met With Contrition. Microsoft in Talks to Buy Discord for More Than $10 Billion. How Beeple Crashed the Art World. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] GameStop has a weird fiscal year; its fiscal 2020 ended on Jan. 30, 2021. So today's earnings are for the fourth quarter (and full year) of "2020." [2] BowX raised $420 million in its initial public offering, plus an extra $63 million when its underwriters exercised their over-allotment option. Also SPACs generally have withdrawal rights, so there is no guarantee that all $483 million would stay in the pot. [3] This will be awkward if Ranadivé and BowX have a ceiling at $9 billion: WeWork wants to merge with the SPAC *to go public*, so BowX is kind of the anchor of the deal; if WeWork gets $3 billion of PIPE orders at a $12 billion valuation that does not quite solve the problem of going public. But: (1) There are a lot of SPACs hunting for deals, and presumably if there are a ton of institutions willing to pay a higher valuation, some SPAC will go along too, and (2) further down in the text I will suggest that you don't *really* need a SPAC to go public. [4] The PIPE commitments will be more or less firm; the SPAC commitments will depend on a shareholder vote and withdrawal rights. These commitments will not be ironclad: If the SPAC votes down the deal (or everyone withdraws), the PIPE investors probably won't have to go through with their investments, and WeWork won't be public. But they're much better than nothing. [5] Of course there are others. | 
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