#financefridays - Gamestop Short Squeeze Explained – The War between Wall Street Bets and Melvin Capital


The Stock Market Is Like A Reality Show Has social media taken over the investing world? This is the biggest short selling squeeze of the decade, which happened just because a sub community of Reddit called Wall Street Bets, decided to pump a stock. Now what is interesting is, it is illegal to pump a stock when individuals within an organisation do it, but when the government print money and pump their bonds they call this monetary policy. However, you also cant call it illegal in this case, as the Reddit community are all individuals, and not an organisation, and they are simply on social media just deciding they like the Gamestop (GME) stock and will keep buying.

Buying a stock is not normally a problem, but what has happened here is, the older generation hedge fund owners and companies that sell shorts have been selling a lot of shorts, even more than they own, and even more than the actual amount of outstanding stocks and float the company have available to sell.

Now let’s first understand what I mean by selling shorts. Normally you buy a stock for £10 and the most you can lose if the stock goes down is £10, as it can only go to zero. However, you make your money as the stock price increases as you own the stock. On the other hand some like to bet against a stock and make money as the value of the stock goes down. For example, you buy 10 £10 pound short positions which means you have paid £100 if the price goes down you can make up to £100 if it goes to 0, if we keep it simple as there are other things like leverage and the greeks involved with options and buying short positions that make it more financially lucrative and possible to make way more than £100 in this situation. However, if the stock value does not go down and goes up, there is an infinite amount of loss you can have.

Now hedge fund short sellers are supposed to have clients that have the shares they are selling shorts against, and essentially they borrow you their clients shares when you buy a short position. In reality hedge fund managers have been selling more than they actually own, and their clients have, because they make money on the lending fee for lending you shares. However, If your short selling bet goes against you, they may require you to put more money to cover the new price or to buy the shares so the hedge fund managers can cover their losses.

GME has gone nearly 10x in 1 month that is 1000% up from $22 to $232 dollars. In 5 days it has gone from $32 dollars to $232 dollars 7x in 5 days 725% up but why? Simply put shares go up when there is a demand and you buy, and demand is more than supply (more people buying than selling). Supply here just means people are not selling. Demand versus supply in this case is simple, but what is more difficult, is knowing why people like particular stocks and which ones they are going to decide to buy more of rather than sell.

GME or Game Stop is a US based retail video game store in malls and shopping centres globally including the UK, although many closed down, (all of them did in the UK), and they maintained selling through their online stores. Now Reddit is a community forum with millions of people, and a sub group of Reddit is known as Wall Street Bets or WSB, which is a smaller community with millions of people.

These millennials seem to have liked GME from years ago and decided they will hold and wait for a short squeeze, as the older investors saw GME from its company records as a dying brand and therefore its share price would drop and then hedge fund managers managed to sell more shorts than stocks actually available (this is known as naked shorts which is meant to be illegal since 2008 when the SEC banned it).

Why is this all important? Well GME only has 70 million outstanding shares (these are all the total shares available/authorised to be sold and currently owned). 27% are held by insiders within the company and that leaves a float of 47 million available to be sold in the market to anyone. Whereas the shares short value (amount of shorts sold) is 71.2 million, this is even more than the float available and even more than the outstanding shares available. The float is the shares available to the public, the outstanding shares minus those locked up for insiders of the company. At the end of December it was 144% shorts sold compared to outstanding shares now it is currently around 114%.

Now how this all affects the price is known as a short squeeze. A short squeeze is when traders are forced to buy a stock that they bet would fall in price in order to cover their costs, but by doing this, the price of the stock can continue to rise as there are more people buying than selling. and then more people that bet against the company as the price seemed too high, compared to its company records books (earnings, sales, profits etc) and future prospects, then get more shorts, believing it has to fall hard and quick.

Interestingly, as no one is actually selling, it doesn’t fall, instead these short owners have to keep then buying the stock, as the price goes up which creates this cycle of price going up forcing more to have to buy the stock to cover their shorts, and therefore unintentionally help to increase the rise of the price of the stock even more. This is what happened with GME just because it seemed a group on social media years ago decided they like the stock and would buy and hold and not sell, whilst the older generation looked at the charts and fundamentals and decided GME is doomed to fail so sold shorts and tried to make billions from the borrowing fees they charge people that bought the shorts.

How long this war of price and this short squeeze will happen will be interesting to watch. I decided to even buy 3 shares of GME to take my side of the war. It also makes me understand the film ‘The Big Short’ a lot more and interestingly the main character in the film also stated at the end of that film another crash in a particular market is coming where people are in a bubble just buying and buying and borrowing and borrowing like they were in the property and bonds market back in 2008, and some believe this will happen with index funds, when many people realise what is actually inside some of these index funds, and the bubble that is known as keep buying us and we will grow over time ends, as this essentially is the same bubble in the property market that is just keep buying and we will grow in value.

Millennials have been criticised of not being good investors and just gamblers, and as this new generation has access to the stock market on their phone via apps and are not qualified with financial qualifications they have been criticised over and over again, but some are stating if millennial’s like the ones on Reddit organised this big short squeeze can you still call them fools on mobiles, this was a very calculated play, and it means they understand market structure. Millennials are also the ones that believed in Bitcoin way before the older generation and institutions decided to get on board with it. It is very interesting to watch the stock market; I have been told it is like a reality show that is full of drama, but you get paid by being involved.

Now what is interesting is, does this mean you should follow random strangers’ advice on social media to make money rather than paying attention to company records and fundamentals and doing things the more traditional way? Definitely not, understand company records, charts and the team and utility of what you are investing in and the risks versus rewards, but also understand the market is evolving and this includes the power of millennials, and the power of momentum on stocks, from news articles or celebrities like Donald Trump or Elon Musk just tweeting about a stock. Investing is all about where you believe the money will be, not just where it currently is. Follow the money.

What do you think about shorts? Shorts mean you are essentially betting that a company will fail, and people will lose their jobs and bad things will happen. Hedge funds that have much to be gained from companies failing have also been known to try and help them to fail through using the media and other news to create bad publicity which is illegal. Should shorts even be allowed, many big billionaires who don’t like shorts on their own companies like Elon Musk have also joined the war on the side of the Wall Street Bets and have bought many shares with long term plans to hold in order for the short holders to be squeezed out of their positions, and then forced into buying the stock when its high to cover their losses instead of when it is low, this will mean hedge fund managers continue losing more billions from their greed.

When a hedge fund borrows shares in order to sell a short position to someone else they do this because they expect the share price to drop, so if they sold the short position at £10 and it has dropped to £1 they can now buy the share at £1 and have made £9 profit. However, what they did was even when it dropped instead of buying the shares to cover the shorts they instead sold more and more shorts, therefore borrowing more and more shares and more than their clients had to lend them, this was pure greed and affected the company ad help to make it fall, but instead of being happy when they had made some money from the company share price falling, they decided to just keep making more and more shorts positions until it got to the fact there where more short positions sold than shares available. This only came to light by the Wall Street Bets community.

Interestingly the war is not over, although many are stating Wall Street Bets has won the battle, two days ago trading platforms crashed from the huge amount of orders coming from people that wanted to join the battle and buy more GME, AMC, NOK and BB stocks. Wall Street Bets are now in fact going after all companies that Melvin Capital have a huge short position on. The war even got to the president and the Securities and Exchange Commission (SEC), who said they will investigate, a day after this trading platforms then decided you are no longer allowed to buy shares in GameStop and AMC, there was a huge uproar although they claimed they did it to protect the users, when did brokers start being the protectors of the retail investors.

News articles were taking the sides of the hedge fund managers and making the Wall Street Bets look as though they had manipulated the market illegally, without mentioning how they were actually the heroes in this situation. They saw a company that had unfairly been treated with too many shorts placed on it.

Due to buy these stocks be halted on platforms, many huge companies decided they would start a legal fight to help the retail investors, and then suddenly the next day after share prices had dropped from the scare mongering tactics, stating invesigations will happen regarding the GME stock shares and AMC, and with buying their shares being halted, trading permissions resumed and the stock prices skyrocketed again.

However, today it seems more and more communities are trying to jump into the war, but trading platforms have said they are unable to take on any new registrations, until they handle their backlog of new registrations. This drama is epic and a fried of mine reminded me that it seems the 99% have seen they have more power than the 1% when they unite.

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