Fair warning. Buying stocks with high short interest is, over the long run, a terrible investment strategy. Mountains of academic research has consistently found the most heavily shorted stocks to significantly underperform the market[1] (to the order of 10% per year).
Heavily shorted stocks tend to be the companies with the most negative cash flow shocks[2], low quality earnings statements[3], negative earnings revisions, and future bad news[4]. In other words, when a company is heavily shorted it's almost always for a good reason. (Like being a brick and mortar video game retailer, that's losing mountains of cash with no turnaround plan.) High short interest is a tell-tale warning of a bad investment.
This shouldn't be surprising. Research has consistently found that short-sellers are the most sophisticated and well-informed investors in the market[5]. There activity strongly predicts soon-to-be released negative public announcements[6]. Short sellers are exactly the type of trader, you do not want to be on the other side of.
This was one scenario were the shorts really did have it wrong. GameStop's financials were and are pretty solid. There was no reason to short the stock so heavily, which is why they're in the trouble that they're in right now.
You should watch Roaring Kitty's video from June 2019 I believe (maybe its 2020?) on YouTube about this. He goes into great detail, with something like an hour of analysis on why $GME is a reasonable investment.
Remember also, Dr. Michael Burry was buying into $GME (it was 5% of his fund in fact). Other big institutional investors like BlackRock, etc. had major positions as well.
BlackRock own a large position in basically every US equity. The reason is that their funds generally want to be exposed to the entire market or some large subsets of it. They aren’t stating some opinion about the value of GameStop by owning 10% of it as they own about 10% of the entire stock market.
If you see regularly someone’s name on the front page of the New York Times you might infer something about them. If you see someone’s name in the phonebook that is less interesting as (ok, not actually true but hopefully you get the point) everyone is in the phonebook. BlackRock is the phonebook.
I read this a lot on yahoo finance, reddit and other investing related discussions, that somehow Blackrock or Vanguard having a big position means they know something and is a positive sign for a stock. There are a ton of articles and documentaries about Blackrock being some secretive bank that "secretly" owns a big chunk of worldwide assets, which fuels this belief in my opinion. And while it's true that they own a lot of assets, they don't own it directly and are actually a rather boring business. They are completely passive most of the time.
Someone explained to me (perhaps incorrectly) that GMEs market cap was less than the value of it's real-estate holdings. Now GameStop isn't a great company but it's not bleeding as badly as you would expect and it has a turnaround plan that's it's executing.
It never should've been shorted as much as it was without hedging the other side of the bet. What was Melvin going to do if GameStop found a way to be wildly profitable in e-commerce?
This is fundamentally terrible risk management coming back to bite people in the ass. This time it was a Reddit internet mob but it could've been anything.
Right. GME market cap was $250 million at a time when the company had literally $1 billion in assets.
For people wondering, "Well why didn't some behemoth like Sequoia Capital or BlackRock just swoop in and load up?" When purchasing such large blocks of a company, 5%, 10%, 15%, etc., there's a lot of paperwork involved.
Retail investors don't have to file with the SEC when they YOLO $200,000 on GameStop at $4 a share. They can shrug and say, "We like the stock."
The rational analysis was the basis. What's happening the last weeks is just the noise of WSB once it came through. Now it's a lot of noise and a lot of money that's going to be lost by people wanting to get in on this -- far too late.
A rational forum would be everyone marvelling at what was already pulled off, not this free-for-all where everyone's pretending there's a big battle going on right now and pretending there is anything to gain left.
> GameStop's financials were and are pretty solid.
But aren't stock prices almost entirely about future performance? So will GME's business model work tomorrow?
I think the answer is yes. They're the best option for buying used peripherals that I've found. I can get it right away, can exchange easily if a problem and can see the item before I buy (or at least when I pickup).
I've just wasted too much time trying to see through the Amazon reviews gaming, do what feels like national security background checks on eBay sellers or go through the hassle of FB marketplace.
Maybe it's just me, but as a casual gamer and fan of legacy consoles, I like shopping at Gamestop. Whether online with "at the door" pickup or in the store. The locations around me have employees that seem genuinely happy. Maybe they're good at hiding their misery.
If Gamestop would expand into more hobby shop items, it could really take off. Board games, miniatures, etc. And why don't they stock energy drinks (my locations don't anyway)? Post-pandemic add small cafes with rentable game systems. I think people will be desperate for actual human interaction once that's possible again.
Finally, with this ongoing retail apocalypse maybe their leases will get cheaper.
> But aren't stock prices almost entirely about future performance? So will GME's business model work tomorrow?
Yes, and that's sort of Roaring Kitty's point in that video. He interpreted the negativity about it as being way too extreme for the financials of the company. It was basically saying the company was going to fail tomorrow, whereas his analysis said to him that it still had several reasonable years ahead of it which the share price didn't reflect.
> But aren't stock prices almost entirely about future performance?
This depends on what kind of investor you are. Do you believe the market is entirely rational and depends on the underlying fundamentals of a company? Or do you believe that the stock market is ultimately irrational and trades solely on hope and fear?
Frankly, I don't see how anyone can disagree that the market is entirely irrational and solely emotionally based, and the reason is because humans are irrational and emotionally based. We rationalize our positions after we've taken them, not before, I'm totally convinced of this, mostly thanks to Sam Harris, and to a lesser degree, Richard Dawkins.
We want to believe that we logically poured over the facts and figures and we arrived at the only inescapable conclusion possible. Were that true, everyone would arrive at similar conclusions. Despite what some people have said the past several years, there are no such thing as "alternative facts". A thing is either true, false, or unknown.
Smarter people than I have made cases on both sides of this argument, but for me, I see it happen every day, all the time, all around me. I watch it happen in finance. I watch it happen in book publishing. I watch it happen in development. I, for one, am a believe in what I call the "emotional market hypothesis". Hell, Tesla is a perfect example. There's absolutely no reason for a stock to be trading at 1660 times its earnings, but Tesla is. That's its Price-To-Earnings ratio right now. The stock is fueled by hope. Elon is the personification of that hope, for better or worse.
It's from 2020. I just want to add that he's humble about his analysis too. He explains his case in a lot of great detail and still writes "bullish on gamestop, perhaps foolishly so".
These situations tend to blow
Up both sides, more or less.
A few lucky Redditors will get out with profits. Most of the late entries are going to take steep losses. Those losing Redditors will be paying the winning Redditors.
The narrative that this is hedge funds losing to Redditors isn’t fully accurate.
This is very much reminding me of 2008. If you keep blowing up financial institutions, eventually you're going to hit a Lehman and the counterparty risk spreads to the rest of the system.
Yes, I'm aware of that. Do we actually want to rerun 2008 again, though? Are people expecting it to have a different, better outcome and not a different, worse outcome or just the bailout again?
The hedge funds aren't structurally important. Brokerages start to be. Retail banks definitely are.
They probably don’t understand. If they do understand, they don’t seem to care.
There are a lot of people under the age of forty who don’t feel like they are benefiting from our current system. When the Boomers hit age 35, they owned approx. 21 percent of the nation’s wealth. Gen X plummeted down to 9 percent. Millennials are on track to own about 3-4 percent. This is according to the Fed.
They make less, own less, don’t see themselves or their interests represented at the highest levels of our government, and are fed up.
So, yes, the young would suffer more than the wealthy, the elderly, and the connected in an economic collapse, but they don’t seem to care.
Well said. And these people under forty (to reduce everything to simple terms) divide themselves into roughly equal camps. Some see the problems as fatcats/gov not doing enough to help the poor. The other side sees the fatcats/gov not doing enough to help citizens as opposed to certain elites and all here because of illegal entry.
Both are right to a large extent, and both are slandered as evil/racist/etc. by the other side.
If you only add up the estimated short positions, and you assume they didn't hold any winning long positions, and you assume short positions are only held by hedge funds, and you assume the hedge funds didn't hedge with other contracts, that estimate might come close.
> Ortex said the figures are based on the change in trading prices between the start of January to Wednesday’s close, and the number of short positions.
The shorts might be down 70 billions, but won't most hedge funds hedge their position with something more complex than just a short?
The motive I've seen most prominently displayed is “buy to hurt hedges, expect 100% loss”. Of course, many individuals will be upset at the results, but this wasn't touted as anything other than a risky bubble, even by those who believe in gme.
It's far simpler than that. There was no scam, just a long steady accretion around those that pointed out the fundamental mispricing of gme, and the explosive nature of any expected correction given it's extremely high short ratio. The rest is just piling on, and even less understandable than most reddit piling-on given the volume and technical nature of the issue.
You're assuming that people on r/wallstreetbets are exactly the same as people on wall street who literally only care about money. The redditors buying don't want to make money, they just want to kill the hedge fund. By wasting a few hundred dollars they are making a larger dent in wall street than congress has made for the last few decades.
That's the future defense against this kind of short squeeze. Funds will engage these subs (or hire people) and deflect interest from the stocks they're shorting and maybe steer it towards competitor's.
Good one. They also call themselves Autists and Retards.
I read a suggestion that it’s not the price of the stock that scared the hedge fund. But the borrowing costs, where the interest rates might have gone as high as 80%!
That’s quite an expensive credit card there to be shorting stocks with.
This is why r/wallstreetbets uses "hold" as a rallying cry. The interest continues to accrue with each day they hold out.
An obviously that's only to a point. If you get into this late you are definitely more likely to get burned. But it's clear some of these people genuinely seem to care about "wrecking hedge funds" as much as anything else.
I've received upwards of 30 for short periods in hard to borrow issues (we're talking american certificates of canadian mining stocks, etc). I've never heard of 80.
So currently some hedge Fonds are bleeding money, true? So who is the counter party who currently gets this money (can't be the community since they hold)
Whoever has been selling into the funds which needed to cover shorts has been doing very well. As have those who were lending out the shares for the shorting.
Probably some of the early WSB pumpers have quietly sold while yelling at the community to hold, too.
However, we should always be careful with unrealized gains and losses. Those aren't confirmed until people exit their positions.
That would be virtual bleeding (which could be the case though), but if you bleed real money then somebody else has to receive it. If you hold a stock money doesn't come to you (except as annual profit distribution but that is a different issue). I read the fees for borrowing a stock for shorting are coupled to the market price (not sure). So if you fund lost a few billion real money (so they have to sell other assets to pay that) then somebody else has to get these billions now.
The stocks they are borrowing for their shorts have really high interest now. They are bleeding money just paying interest. And now that goes for a couple of hundred percent of the stock float.
Depends on the broker. They publish their fees and the amount of those fees they share with the stock owner. Not all have loan fee share programs mind you.
It sounds like in the case of Melvin, their aggressive and continued short-selling likely drove down the price. It sounds like powerful and aggressive short-sellers can parasitically drive a company's value down and then make a killing at the bottom.
If that's the case then yes, you don't want to be on the other side, because they're manufacturing their desired outcome.
Yea, but you know what a lot of these studies fail to grasp that the WSB exposed? The human factor. Namely, predatory humans.
Yes, a lot of the companies who get heavily shorted stumbled. But then, to guarantee a profit, the shorting hedge funds knee cap the company. Then they short them again and again. The current fiasco also shows the widespread influence these firms have to enact their will on the market.
If you look at the stock market as independent number generator, you'll always use statistics to explain what's going on. If you realize there are humans behind those numbers, you see it more like a crime scene rather than a math problem.
> Mountains of academic research has consistently found ...
"Past performance does not guarantee future returns", and vice-versa.
That's a somewhat trite statement (albeit technically true), but it's particularly relevant here where people are betting on disruption. The "concept" behind this movement is that one can influence stock performance through collective action by taking decisions that would not have been taken in the past (for very obvious industry reasons, like those given in your comment).
It's a high-risk bet for some, but noone is going into this hoping for a return based on traditional market performance.
I'm fairly confident it's going to be a while before a stock is shorted over 100% again, barring some big regulatory overreach. As soon as it happens, we'll meme it again.
Are you sure? Won't markets get more efficient and the squeeze start earlier (before it gets to 100% short interest)? Surely there will be more caution on the shorters' side (and perhaps earlier exits) and faster uptake on the squeezers' side? I think this GME thing is not only unprecedented, there won't be followed by anything similar (for maybe 100 years...the Piggly Wiggly short squeeze happened almost exactly 100 years ago...)
In addition to making cars people want, Tesla also makes their own software, chips for AI inference and training, batteries, charging network, home energy solutions (solar+ battery). All of these not just related products but a cohesive strategy with sum much equal to its parts.
Which other automaker does that?
Edit: Having said that, I bought them long ago at their IPO price and sold long ago when they were around 300 pre-splits. The current valuation is indeed a little risky.
1) still has a lot of scaling to get through before they reach anything close to the sales volume of their competition. Elon talks a lot about scaling but Tesla is still microscopic compared to other manufacturers. The business operations of a much larger company will present challenges in communication, structure, quality assurance, legal liabilities in various jurisdictions, not to mention the struggle of sourcing battery components. Tesla scaling is not as easy as spinning up additional Kubernetes pods.
2) The competition WILL electrify. Tesla is not likely to have more than 6 models in the coming years yet they will compete with hundreds of models from different companies that cater to different niches. Any company that offers an electric vehicle with physical buttons instead of a touchscreen has my attention.
3) Tesla workers will unionize and/or mature away from the company. I grew up around Detroit and witnessed a lot of labor dynamics with the UAW. Assuming Tesla succeeds in preventing a union the workers will eventually cash out their stock and leave for better offers at other automotive companies or spin off their services into tier automotive groups. Why write software for Tesla robots when the robot company will hire you to write software for all auto companies?
Regardless, it should definitely be worth more than the $8 per share that it was in 2013, or the $45 per share that it was in 2014. Short sellers were clamoring very loudly then too. Lots of people preached "the market can stay irrational longer than you can stay solvent".
Eventually, of course, if a security keeps only going up, this mantra will become true. The point is that sometimes, a bet that seems like a sure thing will blow up spectacularly. And that not everyone who takes such a bet is obviously wrong.
Why should it be worth $8 a share? Do you really want GameStop in your retirement portfolio? It's pretty clear to me that it will, and should, be worth $0 eventually.
You mean their market value right? Tesla's enterprise value (EV) is pretty high thanks to their market value, but they have a ways to go before they surpass the EV of everyone else combined.
Also, they're an energy company too, which means at least some of their speculative valuation is in energy, which is a totally different market.
Depends if they can have profit margins a lot higher than other auto companies. They probably can't, but higher profit margins are one way to justify a valuation.
Really, it's priced higher because people like the brand, even if it's run by someone easily distracted who used shareholder money to bail out his cousin's solar business who goes around making 420 tweets, and that's when he's not calling people pedophiles. Oh, and their hubris kills people.
Killing people comes with manufacturing automobiles. Takata airbags and other "cost cutting" disasters, selling cars that can go 300+ km/h which can't be legally driven at that speed anywhere except race tracks and German autobahns, making safety features such as seat belts, side mirrors, traction control etc. optional until the government regulators have had enough deaths and mandate it...
'Fundamentals' and all that is a bs excuse used to scapegoat driving stocks they or their friends don't like to the ground.
Let me ask this.
How in the world can an 'analyst' know more about tech than the people that work all their lives in bleeding edge research and technology?
They don't. They don't know more than Jim Keller whose primary task was development of Zen architecture at AMD - which traded at $5 before he joined and until after he was done.
Why do I mention Jim Keller? Because a certain class of people can not only turn around a company, but whole industries even if only due to being famous and drawing unknown talents.
In the case of TSLA; Andrej Karpathy leads the AI division.
My argument is that 'analysts' know nothing of tech and they are in no position to act as the judges.
People who know tech often don't know how to find their way out of a paper bag. Business is a fundamentally social thing. People who want to understand tech businesses must understand both tech and business; neither alone is sufficient.
Many analysts do. Some don't. They all tend to cover several names, and each name has some analysts who are more influential than others. The influential ones aren't exclusively found at prestigious investment banks, either. One of the most influential analysts for AAPL, Dan Ives, works at Wedbush.
Technology experts are often clueless to a fault and don't have some kind of "third eye" for business, any more than business experts have a "third eye" for technology.
It's also a mistake to think that just because a person is familiar with one technology, he/she understands the demand for that technology -- let alone other, weakly related technologies.
> 'Fundamentals' and all that is a bs excuse used to scapegoat driving stocks they or their friends don't like to the ground.
I agree with this in the case of GME and AMC, but in other situations fundamental analysis can help a person to understand valuations. It seems like BS until you actually find yourself carrying risk and trying to figure out how much a stock should be worth.
Fundamentals shouldn't play much of a role for valuing companies that are at risk of default or bankruptcy, because the stock prices the long-term EV of a binary outcome: either the equity value approaches zero or it doesn't. People who think they know what GME stock is worth, but haven't sold any shares short, are just pontificating and they should either put their money where their mouths are or sit on the sidelines and watch with fascination like the rest of us.
“Our goal is, and I feel pretty good about this goal, that we’ll be able to do a demonstration drive of full autonomy all the way from LA to New York, from home in LA to let’s say dropping you off in Time Square in New York, and then having the car go park itself, by the end of next year,” [Musk] said on a press call [in October 2016]. “Without the need for a single touch, including the charger.”
How much did you need to know about tech to realize that wasn't going to happen?
Consider the following, everyone claimed reusing rockets was physically impossible. Well here we are now.
Sure 'end of next year' may be impossible, but doing it at some point is not necessarily impossible given certain conditions.
Nothing to do with targets, everything to do with values. And a company is more than what it produces, it is also the patents they own and the brains they wield.
A valuation of 20 times revenue - and thousands of times earnings - is not justified by saying "a company is more than what it produces".
Edit: put otherwise, how does your comment relate to the fact that Tesla was trading at 5-10% of the current price in 2019? Aren't the patents and brains the same? Why are Tesla's patents and brains worth now almost as much as those of Apple or Microsoft?
I don't know anyone who claimed that reusing rockets was physically impossible. The Space Shuttle SRBs were reusable. To paraphrase you, "here we were then."
"At an altitude of approximately 45 km (24 nautical miles), the boosters separate from the orbiter/external tank, descend on parachutes, and land in the Atlantic Ocean. ... They are recovered by ships, returned to land, and refurbished for reuse."
Those analysts are incredibly specialised. The rank and file developer ‘at the bleeding edge’ spends their day buried deep in a single codebase. The analyst spends their day carefully picking through industry trends.
You say short sellers are using fundamentals as an ‘excuse’ to short stocks ‘they don’t like’. If not from careful analysis of the business, where should the opinions come from?
How about potential and understanding of underlying tech?
Nvidia was an obvious play in 2013 with the precursor of AlexNet, AMD was an obvious play when Jim Keller was done.
I don't think Nvidia was a particularly obvious play at the time. GPU bitcoin mining had taken off and GPUs were in high demand, but I don't think many people realised GPU compute would take off the way it did: everyone I knew in ML was still using clusters and most of them were using Matlab.
Even if you took it for granted that GPU-powered deep learning was the next big thing, it wasn't obvious that NVIDIA would be the dominant player. CUDA made GPGPU programming easy at the time, but any other manufacturer could have released something better. It just didn't play out that way.
Alexnet was 2012 by the way. Shortly after Nvidia stock tanked!
Is it not also possible that the shorting itself influences the direction of the stock/performance of the company? I'm not sure you can make a statement like you're making. There, to me, is not a direct cause/effect relationship here.
I sometimes wonder how much the share price affects management's opinion of its own performance. If valuation is viewed as a report card of sorts, then management is likely to seek financing and damage control when shares are cheap. Doubt of that nature could have a negative effect on their ability to perform. Not to mention that share price likely plays a role in their personal wealth.
Companies can and do leverage the capital provided by their stock value, so just there would be an influence (less value = less capital = less ability to make market moves), but beyond that, I think, as others had mentioned, it could have an outsize negative psychological affect on the workforce. Plus, it could cause a feedback loop of sorts, as other investors might look at the short and jump in on the chance that someone knows something they don't, causing it to further decline, causing a multiplication on the above issues.
I have no clue how anyone, especially edge funds, could get majorly impacted by just one stock moving the wrong way.
I have stocks in my portfolio that move 25 to 50% the wrong way almost everyday and I still get about 1% overall gain daily in this bull market (which is probably not great in this economy).
Shorts are a little unique in that the risk is technically infinite. Stocks you own can only lose whatever value you bought them for. Stocks youve promised to buy later from someone else, though, can lose you however much money they decide to charge you when you have to buy. They could have thousands of profitable positions and lose 2 billion off one very unlucky short call because of a meme.
Not a chance. The human mind generally isn't built to correctly assess the impact of unlikely, catastrophic events. Maybe they'll steer clear of excessive short selling for a while, but you can be sure they'll forget it eventually. In the meantime, they'll find some other pitfall to step in.
Well, your dad decided to side with one or more large, faceless hedge fund managers known for burning down several companies to the ground. He bet against the retailers and be bet against GameStop company. There will always be losers and winners but at least you should own your position/side. I guess loosing on the wrong side of the fence feels even worse.
Anyone seeing this list as a list of investment opportunities should think twice. This is the list of companies that Big Money is betting heavily against.
In 99% of cases you don't want to take the other side of the bet against these big funds. They could be right and the company is actually a loser, or they could just have way more money than you and the market will never reflect anything but their perspective.
GME is a really fun ride (and I'm rooting for the WSB crowd) but it is a result of a uniquely heavily shorted stock and an even more unique groundswell of popular interest.
and if enough people take the other side of the bet, these whales will fix the game to their favour. We pay taxes and yet the law enforcement we pay for works against us. Where are the arrests?
I know there are a lot of Wall st guys here. Can someone explain what's really going to happen here in regards to the short squeeze? Is it really so simple? How will the shorts be able to cover?
Also, is this page correct in saying that GameStop is the only stock on all listed US markets that's shorted over 100%?
Re: 100%, yes for companies with a reasonable minimum market cap.
The one thing not really being explained enough is that short interest as reported through the exchanges is reported bi-monthly. You can imagine that with current events that is an eternity to wait for the next update.
Also worth noting is that these are the official channels, there are plenty of dark pools where there are no rules but all sorts of exotic instruments are being traded in volumes that boggle the mind.
A dark pool is just a private securities market. They don’t have to disclose much since the general public can’t participate but they can trade all sorts of exotic instruments without a lot of the “public focused” regulations.
> They can also trade run of the mill securities in large quantities without moving the market or making known that a large position shift is happening.
For US public equities, dark pools are still required to print all trades to the public consolidated ticker. They hide potentially huge volumes of hidden orders waiting in their order books, but they don't hide actual position shifts (trades).
An exotic instrument is basically any contract more complicated than a simple put or call option.
For a slightly fictionalized version of why these might be useful in the real world, let's say a Finnish life insurer is selling life insurance in Hungary. So, they're doing their accounting (the numerare) in Markka (FIM), taking in payments in Forints (HUF), and exposed to changes in Hungarian mortality rates. So, for the next 30 years, this insurance company wants some secondary protection against adverse shifts in the Hungarian mortality curve, but to make that insurance less expensive, they only want protection if those losses in HUF, converted to FIM exceed 100 million FIM.
So, this insurance company goes to the structured products desk of large multi-national firm and gets a very bespoke option created. The multi-national sells this single contract to the insurance company, and hedges the individual FX components using FX options and the actuarial risk with actuarial derivatives. There's basically no market for this stuff, so the large multi-national basically commits to hedging out the other side of this contract for the next 30 years.
I've worked with optimizing risk modeling for exotics, because it turns out that for some of the more complex exotics, the daily computational costs get very expensive for basically re-calculating a first-order multidimensional Taylor approximation (the risk components) of these contracts. Every day, we then take these risk calculations and buy/sell a bunch of simple options to bring the first-order partial derivatives (risk components) back close to zero.
I don't know much about the structured product particulars or the details of the hedging. I'm not sure if the actuarial derivatives are mostly options or futures. I think they're mostly over-the-counter products, and rather large contract sizes. So, I think trading actuarial derivatives involves passing some certifications, getting a few million dollars, and cold-calling a bunch of large financial institutions to see what they currently have on offer, and convincing them that you're not going to go bankrupt in the next 30 years.
But, I don't really know. I know a bit about making the computers go fast, and I talked with the structurers enough to know very generally what was going on.
Funny story poking around exotic financial models: a big part of the collateral a shipping company can offer is its ships. I saw "cape size" show up in a model for the value of a ship, and imagined ships dressed up like Superman or the Green Lantern. It turns out that for the same carrying capacity, ships that are dimensioned to fit through the Panama and Suez canals are worth significantly more than those that are forced to round the Cape of Good Hope or Cape Horn ("cape size").
Don't misconstrue this as investment advice, but be careful about taking the short side. If you happen to randomly be short Hungarian lives, and genocide breaks out, and you make 3 billion dollars out of pure happenstance, there will be double-digit percentages of the population believing in conspiracy theories about you for hundreds of years. Very few people will want to live in the same city or even sell a hamburger to the alleged architect of the Hungarian Genocide. This isn't investment advice; it's life advice. It's possible to be 100% right, for the wrong reason, and lose 1000%.
I should add that I'm pretty sure the actuarial derivatives pay out based on population-level official government statistics. They aren't based on the death rate of the population actually insured by one insurer, and the insurer has to hope that their insured population is similar to the population as a whole, or is at least predictably and consistently offset from the general population so that the hedges are strongly correlated with expenses.
e.g. A custom tailored interest-rate swap[1] to hedge very specific circumstances between two parties. Or if you like cool names, maybe a gigantic Bermudan swaption[2]. Or maybe two traders want to take opposite ends of bizarre 10 leg option with unlisted strike prices...
There are higher frequency indicators capturing essentially the same dynamic derived from securities lending agents (e.g. borrow rate, availability) and option markets (estimated from end of day open interest)
Of course, but those other estimated/derived numbers are not what retail investors are looking at. Everyone tries to get an edge with math, models, or subsets of data and fill the gaps, but the official number is a reported figure.
(Edit: removed mostly wrong info, but here's an article on some stuff that goes on with voting rights and shorts that could potentially be used to vote for a capital raise and break the short squeeze by issuing new shares:
https://www.wsj.com/articles/SB116978080268188623 )
> ... you generate a new fictional long position from the loaned shares which gets additional voting rights without any conservation law.
That’s not how it works. Votes don’t magically appear.
The lender gives their voting rights along with the stock to the short seller. The short seller gives it to whoever purchased the shares from them. So only the final purchaser gets to vote, the original lender lost their rights while their stock is lent out.
I believe this is actually an easy way that a true short squeeze can actually happen.
A bunch of shares are shorted, and the company announces a vote on something, which causes people to recall shares that they've loaned out (because they want the voting rights).
I won’t pretend to fully understand this but the analyst answered a lot of FAQs on this data on his Twitter: https://mobile.twitter.com/ihors3
What differs in this data: “S3 data is shares shorted, our competition's data is broker stock borrows. Problem is, stock borrows do not equal shares shorted. Stock borrow includes financing trades, broker to broker transactions but does not include all internal rehypothication used to cover short sales”
I'm no analyst, but this still looks really bad to me.
If you buy a random share, there's a 55% chance that share is currently loaned out and a short-seller has to buy it and give it back. There's a 55% chance that share the short-seller buys is currently loaned out... A single share purchase cascades into 2.2 purchases on average.
If any sizable fraction of shares held are committed not to sell, that math gets way worse.
Bad data, code, or both? It is not 76% short. Are you going to go to fundamentals and verify each raw and derived data point from the feed you consume much like you would a news source?
The case of GME is more complicated than only being highly shorted. A short squeeze doesn't emerge solely from being highly shorted. Please be very careful with any single-stock gamble.
But the question is, how do you mobilize enough people to act on something that causes market movement? As I understand it, the new thing wasn't lots of short positions, it was that a bunch of people coordinated to make something dramatic happen. Isn't that the problem?
It is fairly rare for stocks to be so heavily shorted.
It doesn't necessarily take a bunch of people to make the price move up, but it does take a lot of money, enough to capture most of the floating shares of stock. And in particular these folks banded together to use call options to amplify their money (and risk) as they purchased stock to drive the price up.
The only thing new is that rather than a few dozen wealthy people coordinating behind closed doors to use a ton of money to cause the short squeeze, it was a ton of small time investors coordinating in public, plus a bunch of others hopping on board when they saw what was going on.
I assume hedge funds know when a short squeeze looks viable, so they know how to do it and turn a profit. If they didn't do this, that means they didn't think it could turn a net profit, so there's a decently chance people late to the party will lose a lot.
Note that for banks the law limits how much of a company you are allowed to own. For us little guys that isnisn't a problem, but for the big guys it is.
Shorts have finite payoff for infinite risk. If you buy into shorts when the interest is above 100%, you _immediately_ open the door for this type of counter position to become rational.
Is it really a problem that a bunch of people on a message board collectively decided to act on a rational position?
And further, these were large sophisticated investors that should have known when to get out and take their losses (as Melvin eventually did). For us small time folks we can do a limit short so that our risk exposure is limited.
It's full of plausible deniability phrases like "from what I understand" and it's very much a game of telephone. They could easily say "when I meant we were out of the stock, I meant that we had covered some of our positions" or similar.
I can't find a non-hearsay source anywhere, neither written nor in the form of a recorded interview.
I am inclined to believe Melvin got out, because market manipulation that the SEC will actually go after is lying about your trades (covering your short) when you haven't made those trades.
Most of what WSB is doing is market manipulation but from what I've read it isn't something the SEC will go after in court as fraud is not clearly involved.
An official statement would run afoul of the law, yes. A concerted effort to whisper to many people in an effort to manipulate the market would be fairly easy for the SEC to uncover in an investigation.
A single false statement or two, said to a reporter as a confidential source, would be much more difficult to prosecute. The reporter might not willingly give up their source, and the company could deny everything, fire the person who "inaccurately represented our position", and claim the party acted of their own volition. Modest fine, at best.
FT has Citron on the record saying the position is closed. Muddy Waters is on the record saying the position is greatly reduced. Melvin has "people familiar with the matter".
Unless the big guys are convinced that they are right and have the money to not worry about a margin call. In that case they should be shorting more. If GameStop is really worthless then they win when the company finally files bankruptcy.
but with this high a stock price, they could issue new shares can't they? They can survive by diluting existing shares at this price, and work out a new business model with plenty of runway.
This is all presuming your average retail investor doesn't get cold feet and drop out.
This is, unfortunately, going to be a situation where the sophisticated investors win out, and the people they cajoled into buying stocks will be left holding the bag. Gamestop could not reorganize quickly enough to assure investors that they actually have the ability to capitalize on this influx of investment, especially not with a historically terrible business performance.
You are mostly correct, but there is one exception. When you own a stock your broker keeps them for you, and can loan them out (for money - this is why brokers don't charge to hold your stocks for you). There are various ways to buy stocks and then get them transformed into a form where they cannot be shorted. If enough people do this the brokers will be forced to get those shorted shares back, which means they can buy your shares back on the market and leave you with the bill.
The above has happened, but it is rare. Not letting your broker deal with holding the stock for you is a big hassle.
Read that way, this may be really needed to correct that sort of behavior within options. Just maybe short interest above 100% is a problem to avoid in itself.
It doesn't need to go to infinity. GameStop just needs to get to parity with totality of the collective assets of every short seller. Then to make good on their debt, those entities will be fully liquidated.
They took on unbounded risk and have no leverage if all of the stockholders refuse to sell for anything less.
The stock is less a company than a contract that can be purchased that says the other party has to pay you any price you set (assuming the stockholders are able to hold until the shorts must close their position).
There is a lot of assumptions there. You're assuming the short sellers must cover their shorts at the highest possible price instead of, you know, waiting a day or two. You're also assuming that GameStop doesn't issue any new stock which is already not the case for AMC.
I'm not assuming anything, I'm just asserting that it's a rational strategy that has a possibility of succeeding.
Can the short sellers stay solvent long enough to wait for the price to drop? Short squeezes can last for weeks. The answer is already no, at least some of them cannot, e.g. Melvin Capital
This was heavily, heavily, heavily shorted. WSBers trigger a small squeeze at which point blood was in the water and the sharks came to feast...
...along with the entire internet. This triggers triggers more margin calls, more gains, and more attention.
It's a vicious cycle and given the liquidity conditions in the market there was enough jet fuel for take off. Now add more media attention, more people finding out about WSB, and you have the mother of all short squeezes.
This only became truly coordinated once the media got involved and was exacerbated more by the brokerage firms shutdown buying.
It's relatively easy to move the price on a low interest stock.
The problem with GME is it was shorted something like 140% of the available floating shares. If the shorts hadn't shorted the stock so excessively, we wouldn't be talking about GME today, it's what left them exposed to so much risk. The blame lies squarely with the shorts, or the lack of regulations preventing absurdity like 140% short interest.
And people wonder why hedge fund managers with short positions on GME are scared by the squeeze! They will do everything they can to stop retailers buying GME. They got caught naked!
The current candidates being floated by WSB are Nokia, AMC, Ericsson and Blackberry. Even though Virgin Galactic is second on this list, my impression of the WSB crowd is that they look for companies that are both high-short-interest and some nostalgic notion of being “worthy of saving”... Virgin would probably not fit their MO given the high-profile billionaire owner...
Nokia and Ericsson are not highly shorted. Nokia short ratio is less than 1%. I have no idea why WSB picked them. Also, both companies' market cap is greater than 20B so it's not easy to manipulate the stock price to the GME levels.
It's more likely that WSB did not pick NOK, they have been battling infiltration and spamming from hedge funds since last week -- the hedge funds have been trying to shift the focus of the subreddit to any other ticker that they could. The original suggested tickers are: BB, AMC, and NOK.
I won't get into it too much but the first 2 (BB and AMC) have had some material good news lately (AMC got 900M in funding together and bankruptcy is likely off the table, so that warrants a fundamental pop), but the last one is the obvious trap -- NOK has not had any super significant good news lately, and is not highly shorted. It might gamma squeeze, but I think that it's a trap to push retail into so they can actually dump it, so much so that I bought puts on NOK that I was up on (but suffered a bit from IV crush).
I know HN is just getting to this story, but WSB has been dealing with this for the last like... ~2/3 weeks.
> and some nostalgic notion of being “worthy of saving”
This is the biggest aspect I don't understand. People _hate_ Gamestop, the store. But to hear them talk about it on WSB, it's like they were best friends the entire time.
Why does the WSB ethic permit the existence of Richard Branson? Shouldn't a UK public school billionaire descendant from violent colonial oppressors earn a spot up against the wall?
that's what puzzles me. All these founder-owners basically took (literal) truckloads of fresh money printed for "keeping the economy running" and swapped it for shares in their extremely overvalued companies. Doesn't sound a lot better than bankers and crucially doesn't work without bankers?
I actually don't even know what you're referring to, but I'm quite confident that it's untrue that "all" founder-owners did it, or that it's anywhere near as nefarious as you're positing.
I dont think SPCE has the focused attention necessary to make it happen like GME. GME had a lot of different factors leading to it drawing focus, including the insane amount of shorting. SPCE is not shorted as much, so it falls into a lower tier of interest with splintered focus. That's why I don't think we'll see a repeat with SPCE, but I am open to alternative args
Well let's see: they lost $250 million on revenue of only $61 million, their most recent quarter had their largest loss ever, their most recent year had their largest loss ever, there's no prospect that this business will ever turn a profit again. On paper it appears to be among the worst businesses of all time.
Streaming is a business like gyms. The more people use your product, the worse it is.
Everytime some one watches something, there goes some $ for the rights, and some $ for the bandwidth. If everyone has lots more time to watch your product, and they do, that's bad for your bottom line. And you can't charge more, because there's tons of options. And internet ad prices were trending down (not sure if that's still true), if Fubo is ad-supported (I can't keep track of all the services)
That's not really how streaming works. The streamers generally don't pay per stream, they pay a fixed cost for a fixed amount of time of unlimited streams. At the same time, if a user is streaming or not is negligible cost. They build the infrastructure assuming everyone will stream, because unlike a gym, most people drop the service if they don't use it.
what he's talking about is what happened with Netflix: once the media companies realized how much money Netflix was making they revoked their content (or upped the price) and created their own services.
I agree with OP, streaming is a terrible business and only sustainable if you create your own content. Which is exactly what every streaming service does nowadays
Parent is wrong indeed, but your reply also misses the point (sibling comment by ‘swang gets it right). For a streaming media provider, infrastructure costs are a rounding error compared to the fees to license the media for distribution (which can be negotiated any which way, so you can’t generalize the impact of service utilization by customers, although swang makes a good point about leverage).
i worked on a streaming product but not on the marketing/financial side but none of this sounds right at all. the biggest cost of a streaming service is paying for the channel rights (if doing live tv) and for the vod/streaming rights. nothing else has that big of an effect.
and having more customers gives you more leverage against the right holders since they themselves need eyeballs so they can tell their advertisers how many eyeballs are watching these streams. this allows them to charge advertisers way more.
I’m surprised this sort of attack has never be carried out before. Is it just because no one ever thought there’d be a crazy army of retail investors that could be so coordinated and so irrational and large enough to matter?
There have been many attempted short squeezes, notoriously the attempt by the founder of Piggly Wiggly to squeeze shorts 100 years ago. He ended up broke, of course, because cornering the market on shares that you pumped to a ridiculous price is never a great idea. More recently there was a cartel that tried to squeeze Volkswagen shorts in 2008.
The only reason the Piggly Wiggly guy ended up broke is because they changed the settlement rules out from under him. It was extremely legally questionable.
I think we should clarify here that trying to corner the market isn't some kind of by-the-book playing, it's an immoral scheme and whatever happens to such people is well-deserved.
Short squeezes and similar battles happen all the time. Normally it is one Wall Street behemoth vs another, and the winner gets lauded as being a genius. The Herbalife saga is a good recent example. The only difference this time around is that there is a completely new and unknown outside entity involved. The average retail investors and consumers, social media, mainstream news etc. have all just never been this deeply involved.
Be careful not to fall into the narrative the mainstream US media is selling, though it shifted drastically yesterday -- this is not a coordinated attack. WSB is full of people shilling all types of tickers for all types of reasons, but there is a large amount of people there who understand (or at least pretend to) the dynamics of a gamma + short squeeze, and are in it for that reason.
The person who posted one of the earliest bull case research for this (referred to by his YT channel name RoaringKitty or his reddit username u/deepfuckingvalue) has been into GME since last year. He was holding LEAPs (long-dated call options) and shares and has been holding for the last year. He was ridiculed in the original post, because everyone still believed Gamestop was Blockbuster v2. Gamestop is not Blockbuster v2 (I used to think it was), but what's happening right now is not about fundamentals (and if you see anyone arguing that, they are trying to trick you by reframing), it is about the mechanics of a combination of a gamma and short squeeze happening at the same time.
Hedge funds do this kind of attack when they realize the opportunity is there -- you don't hear about it because it doesn't make the news, and because the news makes up a rationalization. Here's an example -- a bunch of stocks that were essentially left for dead (heavily shorted) popped yesterday and the rationalization was retail jumping in. That makes sense, unless you take a second and think about it -- how can the retail that's all still all-in on GME be simultaneously moving huge amounts of market cap of smaller companies? Yes those companies were cheap but they're cheap because they were shorted -- this means anyone could move them. Don't forget that ~90% of all stocks are owned by the top 30% or something like that. Retail can possibly cause gamma squeezes (see TSLA last year), but institutions have to take part for it to go anywhere.
It is 140% the fault of the short sellers that didn't take profit last year (assuming some rode GME from 45 to 5, this is a ~10x position If i understand correctly) that this short squeeze had the chance to happen. Greed got them.
> Here's an example -- a bunch of stocks that were essentially left for dead (heavily shorted) popped yesterday and the rationalization was retail jumping in.
Yeah, AMC, BB, NOK, AAL, EXPR, any stock that had a meteoric rise yesterday was explained as "unsophisticated" retail investors getting in, when I'm very convinced it was shorts getting out.
'Rational' investors try to make money off each other. That operating in pursuit of a class interest is considered irrational suggests there might be some shortcomings in mainstream economic theory.
I'll buy the "operating in pursuit of the class interest" angle rather than the "make money off each other" angle when the bubble properly bursts and we see the media stories about the early moving millionaires bailing out the late movers who lost their life savings. I'm not betting on that. The people who architected this bubble had a fair share of self-interest.
I think it's a mix. Some people certainly wanted a profit and planned to get out early, others bought in with the appreciation that they might suffer a loss when the price falls back down, but like the idea of pushing a hedge fund into bankruptcy. I have had conversations with both sorts of buyers in recent days. BTW I am not holding any positions in these stocks myself.
Why the hell would iRobot have 40% short interest? I love my iRobot. I swear to you if they make these things talk or take commands like Siri iRobot will be the ultimate consumer electronic item.
My guess would be that this space has become way more competitive in the last few years. If you haven't noticed, there are a lot of robot vacuum cleaners on the market now with more coming soon.
On a side note: I finally understood what Buffet and B. Graham meant when they said:
“In the short run, the market is a voting machine but in the long run it is a weighing machine"
It’s such a cryptic phrase, that I never quite understood it for the longest time, until I came to understand the price insanity of TSLA and Bitcoin. And now GME.
My layman’s explanation is:
People get together to buy a stock, because they believe in it, even against all odds. This gives the stock its value to this nebulous group of people. They are the true believers. They are the voters.
Then the stock price runs high, and has a very high market capitalization. Like TSLA, Bitcoin, and now GME. This is the weighing machine part. This means that over time, the company must deliver on its value, in order to justify that its market capitalization is worth its weight in gold.
So, Tesla the company, has been delivering electric cars and new technology, that helps to justify its lofty valuation.
Bitcoin, has brought the Blockchain idea to the masses. Although I’m not quite sure yet how it maintains its weighing part of the valuation. Maybe its Blockchain system becomes the underlying mechanism of other electronic commerce systems.
And GameStop, if they survive this, can cash out at $1000, issue new shares, and take the money to build itself into a giant e-Sports Gaming company. Or maybe it can even build its own GameStation video game system, to justify its lofty market capitalization.
Or something like that. And also, the initial investors are probably just hoping to ride a rocket ship to riches, and then they hold on for the long term.
If a company with say $1bn market cap has more than 100% of shares on loan for shorts, how much money does it take to trigger a short squeeze? Isn’t it trivial for any investor who has enough capital?
Shorting a stock and having that information be public seems like a big risk, since it opens you up to people trying to make money by short squeezing you.
When you sell your stock certificate, you hand it over to someone who can loan it out themselves.
As a thought exercise, consider that I can borrow your stock and sell it right back to you short. We can repeat this process a million times. 1 million shares short now based on 1 share.
This is not naked shorting because borrowed the stock from you each time with you willingly participating.
It would take a bit more time, because stock certificates are a pain to handle. But I would let you borrow my stock certificates (for interest and with good collateral), you would sell them to someone; then that person might let you borrow them (for interest and with good collateral) and you could sell them to another someone (or the same someone, whatever).
Certificated stock is slightly less fungible than shares of book-entry stock; because I probably want you to return a single certificate with my shares, and you may have to separate or combine certificates which takes time and money. One of the many reasons certificated stock has been on the way out.
If they were printed on stock certificates, how would you get to 0.01% short interest? You get to any other number by repeating that process.
Imagine a company with 1 share of stock floating. Abel buys that share and loans it to Baker (via Abel's broker). Baker borrows the share and sells it to Charlie. Charlie loans their share to Diane. Diane sells it to Earl. Earl loans their share to Fred. Fred sells it to Gary...
No, naked refers to not having the borrow. More than 100% can be borrowed if someone buys it from someone who borrowed it and loans it to someone else. That's just short, whatever the percentage, not naked short.
When the price is, let's say, 10k or more, then the poor sod having a short position now has a really huge problem. And the WSB people are attempting to do force exactly this - basically, a distributed game of chicken at a world-wide scale with many billions of dollars at stake.
> The company can create stock and sell it if the current holders don't.
That process takes time to set up and exposes the company doing this to image and legal liability - if enough people shout "market manipulation" and file lawsuits, something may stick in the end. Gamestop, AMC etc. will avoid such a drastic step, I believe. Also, there's a side risk of stochastic terrorism in that case, aka one person gambling their life savings away and now going on a "revenge", which is not to be underestimated given how riled up the situation is.
Hertz was within a day of issuing more shares before the SEC told them to fuck off because it was bankrupt and the prospectus was literally “you will likely lose all of your money immediately”.
GameStop has had enough time to do an additional offering. It can happen in a couple of days.
> Hertz was within a day of issuing more shares before the SEC told them to fuck off
Your timing is off, Hertz was selling shares in the morning, and stopped when SEC called them. They stopped selling promptly, but not before "Hertz Global issued 13,912,368 shares under the ATM Program for net proceeds of approximately $29 million"
Their boards authorize it. It takes a phone call to have a board meeting. A company could do a board meeting by tweeting each other if they wanted. Filing that a private placement (to the short holders) has occurred is followup paperwork. A company that gets immensely overvalued is doing their shareholders a disservice by not capturing that valuation.
The articles of incorporation dictate what a company needs to do to issue shares. GameStop, for example, requires a vote of the majority of voting shares (of which there are 50 billion votes among the preferred shareholders and 300 million votes among the common shareholders).
That said GameStop is authorized for 300 million common shares and there are only 70 million outstanding according to this table so if their corporate treasury has been at all competent they might be sitting on a huge pile of cash right now.
Having a high stock price does altogether nothing for the company if they can't sell stock. Similarly, having a low stock price doesn't bankrupt a company.
Low stock price wont make a company bankrupt, agree.
But if in the process of doing so, you stole value from your own 19yr old stockholders.... then its pretty certain you just painted a bulleye on you. And... They are also your targer demographic customer base. Woops! Lets see how quickly your revenues dip to $0 after that.
If you have $0 revenue you dont have a business. Period.
It's GameStop... They already have garbage revenue. They don't have a business. They're failing. Hence the short. Issuing shares while the stock price is high is not only an everyday business move but it's also the correct thing for them to do here. AMC has already done it.
The shares available for purchase is also a significant factor. Most companies have some shares held by employees/execs/board members that cannot be traded on a whim.
Not always, it depends on the usual volume and the willingness of shareholders to sell.
There was a smaller short squeeze in TSLA circa 2013 going to the ~90$ (pre-split) price range and IIRC short interest was "only" in the 30-50%.
In time they will print new shares to pay the executives 100s of millions each but printing those shares is not instantaneous and it is regulated.
If the business does not become profitable, they will keep diluting it to pay the executives and fund the operation till people no longer trade the stock.
I hate that this site is getting posted around, when it does not show the update time. These short interest numbers can be 2-4 weeks old depending on NYSE and NASDAQ.
Heavily shorted stocks tend to be the companies with the most negative cash flow shocks[2], low quality earnings statements[3], negative earnings revisions, and future bad news[4]. In other words, when a company is heavily shorted it's almost always for a good reason. (Like being a brick and mortar video game retailer, that's losing mountains of cash with no turnaround plan.) High short interest is a tell-tale warning of a bad investment.
This shouldn't be surprising. Research has consistently found that short-sellers are the most sophisticated and well-informed investors in the market[5]. There activity strongly predicts soon-to-be released negative public announcements[6]. Short sellers are exactly the type of trader, you do not want to be on the other side of.
[1]https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00... [2]https://www.sciencedirect.com/science/article/abs/pii/S03044... [3]https://link.springer.com/article/10.1007/s11142-006-6396-x [4]https://onlinelibrary.wiley.com/doi/abs/10.1111/fima.12144 [6]https://www.newyorkfed.org/medialibrary/media/research/confe... [5]https://onlinelibrary.wiley.com/doi/abs/10.1111/jfir.12121