by Bryan Perry
February 2, 2021
What a wild last couple of weeks in the world of what is arguably the highest-profile wave of short-squeezes ever witnessed in the history of the U.S. stock market. Prior episodes of those forcing short sellers to cover were typically instigated by professional market participants, and it was considered more of a “sport of kings” that garnered little fanfare and barely deserved mention in financial media outlets.
But Oh, how the tables have turned and now we are witnessing the stuff of a great Netflix series in the making. On a much smaller scale, we have seen David hitting Goliath square in the forehead with a small smooth stone not just once, but every day of the week, and it is dominating the news around the globe.
The power of social media has unleashed an army of millions of Reddit apostles and “hoodies” trading on Robinhood, which has a few of the “royals” on the ropes and the peasants chanting “off with their heads!”
Robinhood has roughly 13 million accounts, with a typical account balance of $1,500 to $5,000. There is also a crowd of 6.6 million followers of the WallStreetBets sub thread on Reddit.com. As of last week, it was being rumored that 50% of the total assets at Robinhood were invested in GameStop Inc. (GME), which might be one the reasons why trading in GME was restricted to only selling for a brief period.
As of last Friday, Robinhood restricted purchases of GME to only three shares, down from five shares earlier in the week, as this particular short squeeze in GME has morphed into a crusade. It has even launched a new emoji – diamond hands – referring to a fearless stock trader undeterred by high volatility.
The hyper-active thread on WallStreetBets is packed with movie trailers from films depicting courage – like Braveheart, Gladiator, 300 and Remember the Titans – urging their GME brethren to “hold the line!” or “be as one!” or “let ‘em play, cheater!” Driving the enthusiasm is one torchbearer (code-name: DFV) repeating YOLO (You Only Live Once) who set the millennials ablaze, giving them a crash course in long/short stock and options investing that has empowered millions of newbies to enter the market.
The story goes that DFV started with $55,000 just two months ago (late November), when he started buying stock and call options. He posts his account value every day and as of January 28 he was sitting on over $33 million, the high being over $47 million when GME was trading upwards of $480 a share.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This advertising of one’s meteoric path to extreme wealth has captured the fancy of the investing world and delivered entertainment value to many others. Over the weekend Zero Hedge, which publishes the Durden Dispatch, posted a story titled “Goldman Warns if Short Squeeze Continues, The Entire Market Could Crash.” Now, I’d say that’s an extreme headline, because it overhypes the situation by a factor of about 10, since the U.S. stock market has a current total market capitalization of around $50 trillion.
Tyler Durden of Durden Dispatch put it well: ““This is a big deal to the shorting community, but to the other 99% of the financial world, nobody gives a ….” “As much as young people on the internet like to imagine this as an epic, David vs. Goliath, Wall Street vs. Main Street showdown for the history books; from a bird’s eye view its actually just a brief dumpster fire where a couple hedge funds lost their shirts betting on one little small cap stock. It has happened before, and it will happen again.”
GameStop has a current inflated value of about $22 billion. You can view the most shorted stocks at www.fananchill.com, a site that lists the biggest percentage of short interest against the outstanding floats. That’s where all the action is, and that’s where the micro dumpster fires are lit. In the bigger picture, it is a crash course for the uninitiated, who will likely be caught at or near the top, when the music stops.
Hopefully, torchbearers like DFV will post a timely message about when to sell and not let the thrill of the moment become an emotional sword to fall on. Robinhood CEO Vlad Tenev is probably hoping for the same. He already tapped his credit lines for hundreds of millions of dollars to maintain liquidity with the clearinghouses and counter parties. A 50% drop in GME will zero out thousands of accounts that have bought GME on margin, and Robinhood is planning an IPO – or it was, before this happened.
As this story continues to fascinate and captivate the world of the small guy taking on “the man,” the short-selling community should be watchful. If this crusade takes on a larger life of its own – including investors with real buying power – we could see one GameStop “gamma squeeze” after another.
What’s going on in GameStop, AMC Entertainment (AMC) and others on page one of the most heavily shorted stocks, could last for months. It’s kind of the new “blood sport” for investors.
Just to be clear, not all short sellers reside in Darth Vader’s Millennium Falcon. Professional investors short stock for a number of valid reasons. Certainly, they short stocks as a way of betting on lower valuations to materialize when CEOs overly tout their companies. They also “short against the box” to freeze a position at a current price. This is when they short as much stock as they are long. And they can short for arbitrage with an announced M&A deal, when there is price discrepancy in all-stock deals.
The pandemic has produced an array of bizarre experiences, but seeing millions of young investors, many of whom are online gamers, embrace a stock that was going by way of Blockbuster Video, take part in a real-time phenomenon such as this is better than watching any sports venue with an empty stadium. Those shorting GME are living by the old Wall Street maxim “we can remain irrational longer than they can remain solvent.” When a guy can turn $55K into $33 mil, shouts of Game On are heard around the world.
Navellier & Associates does not own AMC Entertainment (AMC) or GameStop (GME). Bryan Perry does not own AMC Entertainment (AMC) or GameStop (GME).