Having done several interviews over the last couple of days with various media outlets, the question that everyone is asking is “What is going on with Gamestop and AMC?”
By now, most people have gotten the gist of the incredible price moves of Gamestop’s stock. Up 75% at this writing today. Down 45% yesterday. Up 300% this week, and so on. The ultimate short squeeze they are calling it.
I call it “The Nerds vs The Turds” and honestly, I mean no disrespect to either faction but lets be realistic. The Nerdy group on Reddit and through Robinhood (and other platforms) have stuck it to the Turdy group of hedge fund operators that shorted this stock.
I am not going to dissect it in a way that every media outlet has beaten to death. What I would like to do is give the reader some interesting points that may or may not play out in the future and facts that are often forgotten when people talk about hedge funds and Wall Street in general.
Media may play this as some form of new populist uprising and taking it to the people everyone blames for every economic failure in the last 40 years. They will portray hedge fund managers as villains and greedy capitalists that would sooner crush the masses rather than think about the havoc they have sowed.
Let’s get real for a second and take a step back. People’s distrust of the hedge fund industry is misplaced. Before you curse me out, think about this: Every union pension plan has some part of their investible assets with hedge funds. Every state and corporate retirement portfolio does as well. Plan sponsors that say they have divested themselves of these investments are not telling the truth.
All pension plans have one goal in mind, maintaining some level of return that will meet the future obligations of their members. To do this, they invest in multiple investment assets. Bonds, equities, private equity and hedge funds. The percentages vary widely but they are all invested somehow and it’s not wrong. Smart managers make these investments cautiously and keep a very keen eye on what risks they are taking by allocating money to the various hedge funds.
Bottomline, if you have any sort of retirement plan, you have some exposure to hedge funds. It might three times removed but the fact remains, their success is your success, however limited it might be.
Next thing for everyone to think about is the fact that this company, Gamestop, was a major target of short sellers for a while. So much so, that the short interest in this stock was said to be over 140%. Now in practice, with options, thats very possible but in theory, how could any stock have more shares sold short than actually exist. The whole idea of shorting is borrowing shares from one of the many stock loan departments on Wall Street, which can only lend out the shares they have in inventory.
It should be impossible to loan out more shares than exist, but yet they did it. Easy to figure out what would happen if someone decided to buy up shares for no other reason than to squeeze the short sellers into a margin call. Exactly what happened.
Boom, all hell breaks loose and every talking head is explaining but no one is giving anything significant and it continues.
Here are a couple of questions to ponder:
If you are Hedge Fund (no names please) and you shorted, lets say two million shares at an average price of 9 dollars a share (it’s probably a little higher) and the stock trades up to 13 or 14 dollars a share ( without the short squeeze) why wouldn’t you start to cover? Why wouldn’t there be some sort of margin call at that point. Granted hedge funds have a large capital position and can expect more latitude as far as covering a bad position so the immediacy was never there. However, the managers remained convinced that this was an excellent short and I am sure you will see that they continued to short the stock in mid and late December as the stock started on this trajectory. What will be interesting to see is the hedge funds trading as the stock was skyrocketing. Were they covering or continuing to short it?
What will the SEC do? Remember, there has been no significant legislation regarding capital markets in over 10 years and markets and technology have changed drastically. While I think this can be a very divisive issue, the bigger issue is that one group of traders took advantage of a system that is broken. Do I think any laws were broken? Going to be very hard to prove and it will take years to completely unwind the course of events.
One possibility that is out there is that someone who has owned GME set these wheels in motion by joining that infamous Reddit feed and stoked the fires for his own gain. Thats the cynic in me, always believing there is one Spectre involved in these sorts of blowups.
The story is not nearly over and the stories of John Q Public turning a $500 investment into $90,000 overnight will be as plentiful as they are BS and we will wade through this because honestly, we all love a great Wall Street story.