66 and 2/3 Percent Sucker

GameStop, Piggly Wiggly, r/wallstreetbets, and the Next Last Great Corner

“He who sells what isn’t his’n

Must buy it back or go to prison”

***

On Friday, January 22, 2021, GameStop shares closed at $65.01, up 51%. GameStop, a video game retailer, traded at less than $5 a share just five months prior. On January 11, the company announced that Chewy.com founder and major GameStop investor Ryan Cohen would be joining the board, sending the stock upwards. Reported the Wall Street Journal at the time (emphasis mine):

Many traders believed GameStop’s shares were set to decline. As of the end of last year, short interest in the stock—expressed as a percentage of GameStop shares available for trading—exceeded 138%, making it the second-most shorted company by that metric with a market value of at least $1 billion, according to data from FactSet.

It is fairly rare that short interest would exceed shares available to trade on the public markets, said James Angel, a Georgetown University professor who studies financial markets. Such positions can build up because traders are able to borrow shares from other investors, and those shares can be loaned more than once, according to Dr. Angel.

“When you see the high short interest, you know the bears are circling,” he said. “These are often companies where there are big differences of opinion about the company’s prospects going forward.”       

Naturally, this setup attracted the attention of one of Wall Street’s most powerful and august institutions: I speak of course of the subreddit r/WallStreetBets (Official Motto: Like 4chan Discovered a Bloomberg Terminal). Reports Wired: 

“It was a huge, massive short position,” says Corey Hoffstein, chief investment officer of quantitative investment and research firm Newfound Research. A significant amount of money was caught in what's known as a "short squeeze," which happens when investors who have bet against a rising stock have to buy it to cover their losses. When the price goes up, so does the loss risk for short sellers. They may then buy shares to cushion that risk because they theoretically face, as Hoffstein says, “unlimited losses as the price goes up and up and up towards infinity.” The price skyrocketed.

...

[GameStop] was a meme stock that really blew up,” said WallStreetBets moderator Bawse1. “The massive short contributed more toward the meme stock.” GameStop seemed so utterly doomed that the current situation was actually sort of funny to the subreddit’s denizens. Banded together, WallStreetBets members bought in big enough to move the stock.

... 

Meanwhile, calls of “BUY” alongside emoji rocket ships flooded the WallStreetBets Discord Friday, where over 25,000 onlookers watched chat fill with diamonds, rocket emojis, and obscenities. GameStop’s stock had just hit $60, a great leap from the $20 it was worth just last week. On Friday, 194 million shares were traded, over 12 times its average trading volume. In the Discord’s voice channel, where hundreds participated in the “gme-rocket,” yelling, humming, and intermittent announcements coalesced into something like a Gregorian chant. The stock continued to rise. It peaked at $73.09 midday today before quickly falling to about $58. Discord members urged each other to “HOLD.” Bawse1 says that this is the first time in years on WallStreetBets that “everybody was making money.”

***

In 1959, the great New Yorker writer John Brooks penned “The Last Great Corner”, chronicling a similar situation in the stock of Piggly Wiggly in 1922 and 1923. (The article can be found in Business Adventures, a collection of his writing that recently made it back into print through the efforts of Bill Gates and Warren Buffett, who count it as among their favorite books. Well worth the $3 price on Kindle, if you ask me.)

The Piggly Wiggly chain of grocery stores was founded by Clarence Saunders in Memphis in 1919. It was the first self service grocery store, where you could pick goods off the shelf and pay as you leave, rather than order from a clerk. Observed Brooks: “Although Saunders did not know it, he had invented the supermarket”.

The concept caught on like wildfire. Within 3 years, there were 1,200 Piggly Wigglys nationwide, many of them franchised, at which point Piggly Wiggly shares were listed on the New York Stock Exchange.

The protagonist of this piece, Clarence Saunders, is described as:

...[having] most of the the standard traits of the flamboyant American promoters–suspect generosity, a knack for attracting publicity, love of ostentation…[but] he had a weakness, a tragic flaw. It was that he insisted on thinking of himself as a hick, a boob, and a sucker, and, in doing so, he sometimes became all three.

Surely the denizens of WallStreetBets cannot relate at all.

The origin story of this attempted short squeeze (or “Corner”) is familiar enough, even a hundred years later. In November 1922, several Piggly Wiggly franchisees in the Northeast failed, causing a surge in short interest in the publicly listed parent company. How did our hero respond?

Saunders announced to the press that he was about to “beat the Wall Street professionals at their own game” with a buying campaign. He was by no means a professional himself; in fact prior to the listing of Piggly Wiggly he had never owned a single share of any stock quoted on the New York Stock Exchange.

Again, no similarities whatsoever to WallStreetBets, none at all.

In any case, he took on the bears with characteristic zest, supplementing his own funds with a loan of about ten million dollars from a group of bankers...Legend has it that he stuffed his ten million-plus, in bills of large denomination, into a suitcase, boarded a train for New York, and, his pockets bulging with currency that wouldn’t fit in the suitcase, marched on Wall Street, ready to do battle.

Whatever innovations Robinhood has brought to the stock market, it has certainly deprived us of some color that we will never recapture. 

Born a century too early to use Twitter, Reddit or Discord, Clarence Saunders began running ads in local newspapers to recruit others to his populist cause:

...[He] began running a series of advertisements in which he vigorously and pungently told the readers of Southern and Western newspapers what he thought of Wall Street. “Shall the gambler rule?” he demanded in one of the effusions. “On a white horse he rides. Bluff is his coat of mail and thus shielded is a yellow heart. His helmet is deceit, his spurs clink with treachery, and the hoofbeats of his horse thunder destruction. Shall good business flee? Shall it tremble with fear? Shall it be the loot of the speculator?”

Saunders tried to harness the power of the crowd in an ingenious way. Having bid the stock up from $40 to $70, he took out newspaper ads offering to sell stock at $55 on an installment plan, claiming his generosity was because “he was anxious to have Piggly Wiggly owned by its customers and other small investors, [rather] than by Wall Street sharks.”

Brooks decodes the true intent of the maneuver: Saunders wished to squeeze the shorts without the risk of being stuck in the end with a lot of stock that couldn’t be sold, and a $10 million loan that can’t be repaid. By selling stock on installment, with delivery not scheduled for a year, he could profit by selling some shares into the short squeeze, and be guaranteed that he could later sell enough of his remaining shares at a high enough price to pay off the loan.

***

On March 20, 1923, with the stock at $70, Saunders recalled the shares that he had loaned out to shorts (meaning shorts would have to buy stock to deliver to him within two days), and chaos ensued. The stock soared to $124 by midday, as shorts began to capitulate. Then, a miracle (for the shorts): The NYSE suspended trading in Piggly Wiggly and extended the deadline for delivering stock to Saunders indefinitely. This move should not have come as a surprise to Saunders, as many of the shorts were members of the NYSE. The shorts now had time to locate small shareholders they could buy shares from, and avoid having to pay $150 per share to Saunders, the price he demanded. 

Stuck with a $10 million loan to be repaid and stock he could not sell, Saunders began to actually liquidate Piggly Wiggly stores, so the company could buy back stock on the open market. He even tried to raise money from the citizens of Memphis. It was not enough, and on August 22, 1923, just five short months after the attempted corner, Saunders handed all of his assets over to his creditors and resigned from the company. The stock traded at $1 a share in the liquidation on that day.

Brooks again: 

The immediate aftermath of the Piggly Crisis was a wave of sympathy for Saunders. Throughout the hinterland, the public image of him became that of a gallant champion of the underdog who had been ruthlessly crushed. Even in New York, the very lair of the Stock Exchange, the Times conceded in an editorial that in the minds of many people Saunders represented St. George and the Stock Exchange the dragon. That the dragon triumphed in the end, said the Times, was “bad news for a nation at least 66 ⅔ per cent ‘sucker,’ which had its moment of triumph when it read that a sucker had trimmed the interests and had his foot on Wall Street’s neck while the vicious manipulators gasped their lives away.”

***

It is understandable why Brooks titled the article The Last Great Corner. The NYSE and SEC later tightened its rules to prevent similar schemes, and at the time he wrote it, no major (intentional) short squeeze had occurred in the previous 35 years. However, the lure of the game is such that people keep rediscovering the scheme in different markets and and in different forms, forcing regulators to scramble to stay a step ahead. The billionaire Hunt brothers, heirs to a great oil fortune, attempted to corner the silver market in 1980, eventually resulting in personal bankruptcy. Porsche successfully squeezed Volkswagen voting shares in 2007, costing hedge funds a reported €20 billion, but they ultimately capitulated in their ultimate goal to control Volkswagen: their loans came due in March 2009, and the timing of the global financial crisis forced them to succumb to a bailout from their target.

Perhaps the iteration of the Corner seen in GameStop is the revenge of “a nation that is 66 ⅔ per cent sucker” (in the words of the New York Times). It is easier to deal with a single market manipulator than thousands of individual traders loosely coordinated over social media, each acting irrationally. In poker, a novice player is known as a “fish”, and a feature of the game is that fish can “school” - a table full of players playing in a suboptimal way force a would-be “shark” to drastically change their game in order to avoid losing. One result of Matt Levine’s “Bored Market Hypothesis” might be that professionals have to abandon their muscle memory and limit their usage of short selling as a strategy, or else make their own involuntary contribution to reduce wealth inequality.  

*** 

Piggly Wiggly would quickly recover and thrive as a franchisor, and there are still 530 Piggly Wigglys in operation today, over a century after its founding. Saunders would himself soon bounce back from bankruptcy and would find investors to back his new grocery chain, succinctly named Clarence Saunders, Sole Owner of My Name, Stores, Inc., in reference to his recent debacle. It was immediately successful enough for him to purchase a million dollar estate and launch an independent professional football team in Memphis called the Clarence Saunders Sole Owner of My Name Tigers, which defeated the Green Bay Packers 20-6 in 1929. The team was subsequently invited to join the NFL, but Saunders declined.

Then the Great Depression hit, and the Sole Owner chain went bankrupt too. Undeterred, Clarence Saunders launched Keedoozle, a fully automated grocery store, which sadly was too far ahead of its time technologically, though echoes of it can be seen in modern self-checkout and grocery pickup. Perhaps Clarence Saunders and Piggly Wiggly really just go to show us that financial schemes come and go, and speculators make fortunes and lose fortunes, but American innovation inexorably marches forward.