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Game Stop Hedge Funds and the little guy Jan 2021


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A Summary of the Madness on Wall Street

As DOW, S&P 500 Sink into Red YTD, GameStop, AMC, 4 Other “Most Shorted Stocks” Jump 135% to 538%. Utter Mania. But Bloodletting in Late Trading By Wolf Street. “It’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino”: AOC What a hilarious show this zoo that has gone nuts has turned into. White House Press Secretary Jen Psaki came out today and said the White House “economic team including Secretary Yellen” were “monitoring the situation.” The situation being total utter mania in the most shorted stocks, such as GameStop and AMC.

The SEC came out and said today it too is “actively monitoring” the options and equities markets. “Consistent with our mission to protect investors and maintain fair, orderly, and efficient markets…” which was when humongous laughter drowned out the rest. Did the SEC really say “efficient markets????” Hahahahaha.

Fed Chair Jerome Powell, during the post-meeting press conference today, was asked right off the bat about the mania around GameStop and similar mania stocks, and he refused to comment.

This came after Alexandria Ocasio-Cortez tweeted in her inimitable style: “Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino.” The mania revolves around the most shorted stocks, shorted by hedge funds that hoped to make a killing when those stocks collapse.

Short sellers have to borrow the shares and sell them, hoping that their prices will collapse, and that they can buy them back for a song and close out their position with a huge profit.

And a bunch of hedge funds jumped into this shorting of the-most-shorted-stocks business, and at one point the short interest of GameStop shares [GME] was over 140% of the float, which is ridiculous, and a sign that hedge funds were taking enormous risks. They will all have to buy those shares to close out their positions. But who is going to sell them those shares?

Well, folks figured this out, and they were ganging up on these hedge funds, organizing their Wall Street revolt on the social media, particularly on the WallStreetBets subreddit. Most of these stocks have a relatively small float – that’s why the hedge funds shorted them in the first place because stocks with a small float are a lot easier to manipulate, and Wall Street has long gotten fat off manipulating stocks. And those traders on Reddit also figured out that stocks with a small float are the easiest to manipulate if enough people got together. And they figured out that stocks that were massively shorted and didn’t have many sellers left could be driven up to the point where those that were short those stocks would panic-buy those stocks to cover their short positions and curtail their losses, and that panic buying, with no eager sellers on the other side, would trigger a huge surge in prices, which could wipe out those hated hedge funds.

And it’s not just a bunch of small investors playing this game. Hedge funds too jumped into it with both feet, with hedge funds now lined up on both sides of the trade, and this started a cycle where buying by the longs on one side and forced buying by the shorts on the other side made those stocks explode. And they exploded, even as the rest of the market swooned, with the major three indices down between 2% (DOW) and 2.6% (Nasdaq), the worst day since October, putting the Dow and the S&P 500 into the red for 2021.

In afterhours trading today, all heck broke loose in the other direction – more on that in a moment. But during regular trading hours, these stocks were among those that skyrocketed. And not all of this crazy stock mania was in the most shorted stocks.

It included a tiny no-nothing Chinese insurance broker, Tian Ruixiang Holdings [TIRX] whose American Depositary Receipt (ADR) went public on the NYSE on Tuesday at $4 a share in an IPO that raised $11 million, and started trading today, and amid various trading halts soared by over 1,000% intraday and closed up 538%. That’s how nuts the whole mania was.

Here are the 22 stocks that by the end of regular trading hours today had jumped between 31% and 538%. The names with an “ADR” tag are American Depositary Receipts of foreign companies whose actual shares are traded overseas. After the close of regular trading hours on Wednesday, Reddit briefly made WallStreetBets private, locking out the hordes of onlookers that weren’t subscribed and even locking out many subscribed users, according to the Verge. And when WallStreetBets came back online, the bloodletting started and produced these afterhours results:

  • GameStop: -15%

  • AMC: -26%

  • Koss: -14%

  • Express: -24%

This mania, even as the overall markets are swooning, is a sign that something is seriously broken – that highly leveraged hedge funds took on way too much leverage and risks, that too many of them were shorting the most obvious shorts, thereby digging their own grave, and that people and other hedge funds have figured out how to gang up on them and run them over the cliff.

There now remains a problemita for the Reddit traders that have run the hedge funds over the cliff: They have to sell their shares to get out of their positions, and if short sellers are no longer panic-buying those shares, the Reddit traders, by pumping those shares, will have to induce others to buy them at those insane valuations. And the group will spit in two: those that got out successfully with their loot intact, and those that didn’t (the bag holders). Pump and dump on all sides, in classic Wall Street manner.

Read the rest here… An audio discussion takes place here regarding the Gamestop caper.

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