A 'Meme Stock' Icon Returns... And So Does This Market Sentiment

'Roaring Kitty' is back... A revival of the GameStop story... Dumb Money: The Sequel begins... What to make of it... Signs of a 'risk on' market... New inflation numbers this week...

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'Meme stock' mania appears to be back...

Do you remember the "meme stock" mania from early 2021? That's when shares of companies like video-game chain GameStop (GME) and cinema operator AMC Entertainment (AMC) soared as retail investors squeezed Wall Street firms that were heavily short the stocks.

Well, for another day at least, this story was back in full force... Today, GameStop shares closed 75% higher, at around $30. They shot up by 110% in the first hour of trading, resulting in estimated unrealized losses totaling around $1 billion for short sellers.

The catalyst? This is going to sound ridiculous, but it's the world we live in... It's the "return" of Keith Gill, aka "Roaring Kitty," to public life on the Internet. He's the guy and persona most responsible for orchestrating the GameStop short squeeze several years ago using the Reddit message board WallStreetBets.

Last night, Gill posted a sketch of a man "locking in" – as in getting ready to trade – on social media. As I (Corey McLaughlin) write, this image has been viewed 19 million times on X alone...

That was it. That was apparently enough to send shares of GameStop and other vintage "meme stock" names like AMC up by double digits today...

I suppose this is what constitutes "modern art"... along with that banana duct-taped to a wall a few years ago at a Miami art expo – a favorite of our colleague Dan Ferris.

And now the script to Dumb Money: The Sequel begins...

As we've shared in the Digest before, the 2021 meme-stock craze was the basis for a bestselling book by business writer Ben Mezrich, The Antisocial Network. His book then spawned a 2023 film version of the events, Dumb Money. (Mezrich's book is now sold under the same name as the movie.)

Mezrich, who also wrote the story of Facebook that became the movie The Social Network, was a speaker at our annual Stansberry Conference last October in Las Vegas. You can read our full report on Mezrich's talk from back then here – to get up to speed on what we mean by the "meme stock" story if you are unfamiliar – or get a look at how it was developing in real time in early 2021 here.

In short, GameStop shares went from below $5 to a peak of $483 in January 2021 as hordes of novice investors rallied online to bet against Wall Street hedge funds that were betting against beaten-down companies like GameStop, AMC, and others. As we said...

Then Wall Street essentially ended the party...

No-fee brokerage Robinhood, for instance, took away the "buy" button on GameStop and other suddenly popular beaten-down stocks. It became clear that certain hedge funds had interests in the mechanics of how retail trading actually worked on platforms like Robinhood... and the powers that be didn't want to lose any more money.

In the end, it appeared the hedge funds lost in the short term when GameStop shares surged, then won in the long term since the stock is down more than 80% from its 2021 peak... The end, right?

Not so, Mezrich told attendees of our conference...

He didn't think the story was over...

As we quoted him saying and wrote in October...

What really turned me on about the story was the idea that young people today do not see value the same way that generations before do. If young people feel like GameStop is worth something because they love it, they will buy the hell out of it. And if they can amass together on Reddit or somewhere like it, they are as powerful as any Wall Street bank.

Mezrich believes the markets will see more instances of retail traders ganging up on a firm or having pointed interest in a particular stock or sector, and it will happen "over and over and over again." He said...

Value is no longer tethered to the fundamentals of a company...

This is something that Wall Street has not gotten its head around yet. It is true that Wall Street now scours social media and won't publish its short positions... but I still talk to people on Wall Street all the time who still have not gotten their heads around the fact that retail traders are an incredibly powerful force, and they're not going to be "dumb money" for much longer.

Instead, Mezrich uses the term "pointed money" to describe younger investors – like millennials, now the largest demographic in the U.S. As he puts it, "They're going to go in the direction that they're pointed."

This sure rings true today. I guess you could say a possible Dumb Money: The Sequel or at least The Post-Script has begun...

What to make of this?...

Well, for most individual investors focused on creating and protecting long-term wealth, it could be a useful signal about market sentiment today... It's at least a sign for more speculative "froth" returning to the market... We'll want to see if or how it continues or if the flame burns out.

After all, we don't know of any stimulus checks or debit cards being mailed by Uncle Sam, for now at least. Moreso, we've read reports about folks on Main Street hurting because of high(er) inflation.

In any case, more quietly, GameStop shares have tripled from multiyear lows near $10 over the past few weeks, which some have speculated brought Gill out of "retirement" after he didn't make any public comments for three years.

I wouldn't be surprised if part of the reason was also the lure of another "short squeeze" story that has been ongoing lately with online car dealer Carvana (CVNA). Shares are up almost 1,500% over the past year, delivering shorts a reported $3.9 billion loss. About 30% of the bets on Carvana shares available for trading – its "float" – are short positions.

Now, "meme stocks" never went away completely... but they have been less popular, especially during the bear market of 2022. And while I've seen instances of speculative bets on little-known or suddenly popular companies on many days in the market over the past year or so, the fact that GameStop's mastermind is "back" certainly takes things closer to a "revival" level.

Take note.

Beyond that, if a stock you own happens to catch a "meme stock" tailwind, it may be wise to take profits before the euphoria wears off.

This isn't 'from nowhere'...

Dan just wrote to you on Friday about his observations on today's market and an always-helpful reminder to avoid "overhyped, overvalued companies in difficult industries – and any and every business trading at a mega-bubble valuation."

Doing this is a valuable skill, Dan said, that helps you avoid catastrophic losses. He talked about the 80% to 90% losses from pandemic "mania" stocks like Peloton, the ARK Innovation Fund, and Zoom since their peaks back then...

Then he shared a present-day example of speculative mania again, in the form of Destiny Tech100 (DXYZ). The fund intends to own 100 of the top private technology companies, like Elon Musk's SpaceX, backed by venture-capital firms. As Dan explained...

The fund went public on March 26 at $8.25 a share and soared like a meme stock to $99.79 by April 8 – up more than 1,100% in just two weeks.

On April 11, the fund's creator and chief executive, Sohail Prasad, said the crazy price action was part of the market's "discovery process," meaning that folks were trying to figure out what its holdings were worth. Since they're private companies, there's no public market valuation to check... leaving investors to figure it out for themselves. The fund periodically publishes a net asset value, but the latest one is dated December 31, 2023.

The fund has fallen 85% from its peak to less than $15 per share today. But it's still way overvalued.

DXYZ's most recently published net asset value is $4.84 per share. So even after dropping 85%, the stock is still trading at around triple the reported value. Also, knowing the guesses, fabrications, and justifications that go into private companies' valuations, I'm willing to bet it's worth even less than $4.84 per share.

Whatever its real value, the CEO's idea about a discovery process is clearly not true. There's no discovery process that says, "Let's assume this thing is worth somewhere between 5 and 20 times its net asset value."

Instead, DXYZ ran up like a meme stock and is still way overvalued for the same reason the stock market trades at mega-bubble valuations: because people have come to disregard the relationship between a business's market valuation and its financial performance.

Stocks don't move like that in a discovery process. They move like that when folks are in the throes of an insane speculative fever and don't care about anything except trying to make a lot of money very quickly.

A group of retail investors appearing to get excited again to "take on" Wall Street – and appearing to do damage for at least another day by following the lead of their "Roaring Kitty" – is a signal of the same.

Dan and I discussed this DXYZ fund and touched on meme stocks generally in this week's episode of the Stansberry Investor Hour podcast, released today. I actually mentioned GameStop during our discussion, which we recorded on Friday... not knowing that "Roaring Kitty" would come back to life on Sunday night. But the idea of a speculative buzz returning to the markets was already on our minds.

Here's another reason...

The first signs of a 'risk on' market...

"Risk on" assets – like stocks – tend to go up the most during "good times." Meanwhile, what many investors described as "risk off" assets, such as Treasury bonds, are the opposite... doing well when investors are scared and don't want to take risks.

As Stansberry Research senior analyst Brett Eversole wrote to subscribers of True Wealth Systems, he has been seeing a tell-tale sign of a return to a risk-on market... a recent resurgence of interest in non-fungible tokens, or NFTs, much like we saw in 2021. It fits with the "meme-stock story" revival consideration. First, some background on NFTs that Brett shared earlier this spring...

NFTs are digital tokens. Each token acts as a "certificate of authenticity" that proves an item is yours and authentic. With NFTs, you can own and trade art, music, videos, and even tweets... all verified by the blockchain.

NFTs are also coded to exist in scarce amounts (and can even be made to be one of a kind).

That's where the excitement began...

In 2021, Americans were flush with stimulus cash and earning near-zero interest on their savings. So folks plowed money into any asset that might offer big yields.

Stocks, cryptocurrencies, and collectibles soared in the frothy markets. And NFTs entered a full-on bubble. Ten months after [Twitter co-founder Jack] Dorsey sold the image of his [first-ever] tweet, monthly NFT market volume reached a peak of $17.2 billion.

Then, 2022 rolled around...

The Federal Reserve turned hawkish, raising rates to curb soaring inflation. Suddenly, volatile assets didn't look so appealing. Investors went "risk off." And over the next 18 months, NFT trading volume plunged 81%... while sales figures dropped 61%.

As Brett explained, the boom of 2021 turned to a total bust... This meant he "had to look twice" at this recent front-page Bloomberg News headline...

The article reports that NFT sales almost tripled from October to November in 2023... before surging another 85% from November to December. (Sales have pulled back since December, but they remain well above their recent lows.) As Brett said...

If you lived through the 2021 Melt Up, you know what NFTs represent more than anything else: risk.

NFTs combine the volatility of cryptocurrencies with the speculative upside of collectibles. Folks buy NFTs when they're willing to take on big risks for a chance at big returns... And today, NFT demand is soaring for the first time since the 2022 bust.

It's the first sign that euphoria is coming back... and the final nail in the coffin for the "risk off" market.

Yet while "bullish sentiment is back," Brett wrote, "we're still a long way off from the frenzy of 2021." And that was before a character named Roaring Kitty reentered Mr. Market's temporal lobe, the part of the brain involved in short-term memory.

And the Fed's response to all this?...

"Let's cut rates." "Our policy is restrictive."

Doesn't seem like it... or maybe folks are just trying to keep up with inflation.

The central bank is helping fuel speculation with its seemingly unwavering intent to want to cut interest rates before doing anything else. It's also making a "dovish" turn already by slowing down efforts to trim its balance sheet.

Even the more conservative of Federal Reserve officials – who say they want to see more numbers that give them "confidence" that 2% annual inflation is ahead – continue to speak like a lower-rate environment is an eventuality...

This week, Fed Chair Jerome Powell is scheduled to speak during a moderated discussion at the Foreign Bankers' Association in Amsterdam on Tuesday, and a handful of other Fed officials will make public remarks on Wednesday and Thursday.

What else to watch this week...

Traders are gearing up for another round of "inflation watch." April's consumer price index ("CPI") numbers will be published on Wednesday morning before the market opens. The producer price index readings for April come out tomorrow.

We'll also be monitoring some overseas CPI numbers in Europe and the first look at the Eurozone's first-quarter GDP on Wednesday to keep tabs on the global central bank "divergence" we discussed last week, and how that might influence U.S. stocks.

New 52-week highs (as of 5/10/24): ABB (ABBNY), Agnico Eagle Mines (AEM), Arhaus (ARHS), American Express (AXP), Aya Gold & Silver (AYASF), Booz Allen Hamilton (BAH), Alpha Architect 1-3 Month Box Fund (BOXX), Colgate-Palmolive (CL), Costco Wholesale (COST), Cintas (CTAS), Commvault Systems (CVLT), Dell Technologies (DELL), Dimensional International Small Cap Value Fund (DISV), SPDR EURO STOXX 50 Fund (FEZ), Kinross Gold (KGC), Kinder Morgan (KMI), Markel (MKL), Motorola Solutions (MSI), Mettler-Toledo (MTD), Procter & Gamble (PG), RadNet (RDNT), Rithm Capital (RITM), Sprouts Farmers Market (SFM), Sprott (SII), Teck Resources (TECK), Teradyne (TER), Toast (TOST), Texas Instruments (TXN), Tyler Technologies (TYL), and Consumer Staples Select Sector SPDR Fund (XLP).

In today's mailbag, some more feedback on our discussion last week about Argentine President Javier Milei, who has been taking a "chainsaw" to its economy... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Corey, Thanks for providing a link to President Javier Milei's speech at Davos in January 2024. You are right... it's stunning!" – Subscriber Michael U.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 13, 2024