LAGUNA BEACH, Calif., Feb. 2, 2021 /PRNewswire/ -- Legendary bond and fixed income investor, William H. (Bill) Gross today released a new Investment Outlook, "Gamestonk/Gamestink". In his third commentary of 2021, Mr. Gross writes that the victims in the failing GameStop experiment have and will continue to be the Robinhood investors storming the gates of capital markets without the size, the endgame plan, and the mathematical option pricing expertise to succeed. Even without regulatory action, the plan was doomed from the beginning.
Full text of Bill Gross February 2, 2021, Investment Outlook:
The GameStop/Reddit wolfpack plan of herding shorts into a self-destructive, short-covering frenzy seems to be failing for several primary reasons. For one, the movement appears to lack sufficient size and staying power in order to finish off established hedge funds and unconstrained individual investors who can close their eyes to daily fluctuations that have forced smaller, more short-term-performance-critical funds to throw in the towel. The GameStop model also fails to recognize that players would change targets quickly – GameStop turning to silver turning to whatever – which would weaken their stranglehold on poorer but unvanquished victims.
A leaderless posse was bound to move at different times and in different directions much like dating partners do. In short, their bond does not resemble a strong marriage.
Just as important however were the option premiums paid to panic the shorts. As I pointed out last week in a prior commentary, GameStop call premiums were priced and purchased at 700% or more volatility – an unheard-of price compared to the VIX at 25%-30%. Purchasing volatility at 700% levels reveals the investors' unreasonable hopes of future daily increases approximating 175 points (50%) or more, a level that quickly would bring even the most frenzied buyer back to earth, wondering who might be the ultimate bag holder at price levels of 500, 650,…or even 1,000 within a week's time.
As I also stated previously, the value for any of these perhaps legitimately targeted shorts must ultimately recognize herd strength, herd psychology, and option pricing if a successful raid is to be effective. Even then, the unwinding of positions eventually and commonsensically points to a musical chair, me-first exit that takes a company's stock price without fundamental prospects back where it first began.
The victims in the GameStop experiment have and will continue to be the Robinhood investors storming the gates of capital markets (for which they have an admirable objective of creative destruction of hedge fund/old Wall Street dominance) without the size, the endgame plan, and the mathematical option pricing expertise to succeed. Even without regulatory action, the plan was doomed from the beginning.
About Bill Gross
Bill Gross has been a pioneer in fixed income investing for more than 40 years. He co-founded PIMCO in 1971 and served as managing director and chief investment officer until joining Janus Henderson Investors in 2014. He retired in 2019 to focus on managing his personal assets and private charitable foundation. Throughout his career, he has received numerous awards, including Morningstar Fixed Income Manager of the Decade for 2000 to 2009 and Fixed Income Manager of the Year for 1998, 2000 and 2007. Mr. Gross became the first portfolio manager inducted into the Fixed Income Analysts Society's Hall of Fame in 1996 and received the Bond Market Association's Distinguished Service Award in 2000. In 2011, Institutional Investor magazine awarded him the Money Management Lifetime Achievement Award. Mr. Gross oversees the $390 million-asset William, Jeff and Jennifer Gross Family Foundation, which annually donates more than $21 million to non-profits involved in humanitarian causes, health care, and education. For more information or to view Investment Outlook archives, please visit https://williamhgross.com. For information about Mr. Gross's philanthropic activities through the William, Jeff and Jennifer Gross Family Foundation, please visit https://grossfamilyfoundation.com/