Wednesday Briefs – 27 January 2021

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This week: Video Game Companies; WallStreetBets and Riots; Russia Protests; Coronavirus USA.

Video Game Companies

Video gaming companies and stocks have been hot for many months. This should come as no surprise given that any and all home entertainment companies have done exceedingly well during the pandemic. If pre-pandemic, the cost of an Xbox and accompanying annual subscription seemed on the high side, it became a small price to pay for some much-needed entertainment when shelter in place became mandatory in March. For gamers and parents of gamers, playing at home became a reasonable way to keep themselves and their children engaged with friends all over the country or indeed the world. The latest games shrewdly incorporate a surreal and fantastic play experience with a socializing component that allows players to converse from thousands of miles away.

The investable universe does not have many listed companies but it is growing. There are Microsoft and Sony with their Xbox and Playstation consoles and online subscription businesses. There is Tencent, a Chinese conglomerate that has the games League of Legends and Honor of Kings. Tencent also holds an estimated 40% in Epic Games, the company that produces the mega-hit Fortnite (the remaining 60% is privately held). But none of these are pure plays on video gaming.

The purer plays are Take-Two Interactive TTWO (NBA 2K, Grand Theft Auto, Red Dead Redemption), Electronic Arts EA (Madden NFL, FIFA, The Sims) and Activision Blizzard ATVI (Call of Duty, World of Warcraft, Candy Crush Saga). These three companies have a combined market cap of $137 billion and are highly profitable. Their stocks are up 30% to 60% in the past 12 months.

Providers of peripherals and accessories include A4Tech, dreamGEAR, Razer, HTC, Roto VR, Steelseries, Venom, Turtle Beach, Corsair, Mad Catz, Numskull, Logitech, Oculus VR (owned by Facebook) and others. Finally, there are the companies preparing to list on the market, among them Playtika, Roblox and others. This is a sector of the market that is going to grow significantly in size and in sophistication.

WallStreetBets and Riots

The stock of GameStop GME has spiked in recent months from $4 in July to $20 in December to… over $200 yesterday. This mad climb was driven by small retail investors, many of them acting in concert through the subreddit page WallStreetBets. Their method is to buy call options on small company stocks that are heavily shorted and to force a run-up in prices when market makers buy the underlying stocks in order to neutralize their own exposure. On the other side, funds caught with short positions are forced to join in the buying in order to limit their losses while the targeted stocks are rising. The resulting short squeeze allows the early buyers to close out positions at substantial profit.

It also allows them to “stick it to the man”, the man here being the big bad hedge fund, and to boast about it on WallStreetBets. The goal is not just to make money but also to break, to tear down, to carry the revolt to the bourgeois boomers who have had it good for too long. For this reason, it would be foolish to dismiss WallStreetBets as a temporary insanity or fad. The bias for action, the contempt for calm analysis, the profanity-laced anger, the thirst to win, the collective political tone are all ubiquitous on the page and they speak of rebellion. There are on the page plenty of vows to overturn tyranny, to beat the pros who charge too much and deliver little, and to disrupt the “establishment”. We noted in the Wednesday Briefs – 30 September 2020 that politics have invaded everything in our lives. They have now invaded the stock market, a few weeks after the Capitol.

Another aspect of this phenomenon is the gamification of stock trading. Members of WallStreetBets and some other sites treat stock investing like a game and view investment analysis with derision. Metaphorically in that world, investing is no longer a game of chess. It is Fortnite, or investing as an action-packed video game in which the fastest and most resolute prevail over those who are slow or methodical. It is about fast money with a gaming mindset. Just as in Fortnite, a player must move swiftly and decisively or risk being ousted from the game. This approach has worked with GameStop so far and it could work with other names. All good, right?.

Except for two considerations. One is that the losing hedge funds will probably make a case to the SEC, FTC or other regulatory body that collusion and incitement at WallStreetBets amount to stock manipulation. As evidence, they will use posts by many members on the site who seem at least as interested in hurting other market participants as they are in making money. Two is that it will ultimately be difficult to beat hedge funds at a game that they essentially invented or perfected, even if not in this exact form. On both these scores, WallStreetBets is the equivalent of market rioting and as we know from conventional rioting, very few people will win in the end.

Russia Protests

The audacious return of dissident Alexei Navalny to Russia stirred tens of thousands of people to protest, including many who came out in temperatures well below zero degree celsius. Are these protests one-offs or are they the signs of an incipient revolt and regime change in Russia? Impossible to tell, but the odds today favor regime survival. President Putin may (or may not) be popular with a non-negligible segment of the population. More importantly, he and his entourage control Russia’s industry in one form or another. It is a similar question of upending a dominant paradigm as with WallStreetBets but in a different theater and with higher stakes.

Coronavirus USA

The number of confirmed cases in the US appears to be receding, as shown in the first chart. The dip at the end of 2020 and the subsequent surge can be attributed to undercounting during the holidays followed by a back to school/work increase in testing. Researchers at the University of Washington’s IHME believe that this wave has peaked, with the caveat that new variants (for example the UK or the South African) could reverse the decline.

Deaths move with a three week lag and appear to be plateauing now near a 7-day average of 3,400 daily, before an expected decline that would start in a week. The case fatality rate (chart below) has been in a 1 to 2% range since late July with an average of 1.6%. If 50% of cases are undiagnosed, this suggests a 0.8% infection fatality rate, in line with early estimates made last spring. On the other hand, there is credible research that covid-19 deaths are undercounted because excess deaths (from all causes combined) in many countries surpass the number of covid-19 deaths. Excess deaths are total deaths (from all causes combined) during a given period minus an average of same over several recent years. If actual covid-19 deaths are in fact higher by 25%, then the case fatality rate is 2% and the infection fatality rate 1% if we assume 50% undiagnosed.

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