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The Great Short Squeeze

Updated: Apr 29, 2021


Guys this whole thing with Reddit, GameStop, and AMC has been CRAZY! Not just news and investing crazy, but the movement crazy. The growth of the subReddit community, YouTuber growth, and media attention has been ASTOUNDING. YouTubers who have been doing finance videos for years with minimal growth is now seeing 20k+ people in a livestream. The SHEER number of people going onto the livestreams for YouTuber's who have less than 300k is crazy. The growth of 5 million Reddit users in a week is unheard of. During the week of January 24th, the subReddit WallStreetBets saw millions flocking to the community. I believe WallStreetBets started at around 2 million people and ended last week with like 6 million+.

Lets get a recap

For those unaware of what has been happening and only know the bare minimum I will go into what I know. From my research (which I never thought would include following the chats of a Reddit community) the main reason why stocks like GameStop (Stock ticker: GME) and AMC Theatres (Stock Ticker: AMC) are rising exponentially in the stock market is because of hype from the subReddit community WallStreetBets. Now that's what I thought when GME began to take off the week of Jan 17. When I was first learning about this meteoric rise in GME, I thought that it was dumb to see a stock rise so much. I thought that for a company that did not announce a new business strategy or had not announced a new product, that the people causing the rise were dumb. BUT this was before joining the Reddit community. When I joined WallStreetBets last week, I realized the confidence in the community. I realized that the rise in GME was more about money and that the community wanted to do more than just make a random stock go up. The main goal of the community is to bring more power to the people. Even the way investors have been using profits is meant to make a statement. Some investors have been paying it forward by paying off parents debts, donating to hospitals, and donating to charities. The amount of money that people have made from the movement has has been life altering, but even with the life altering profits the Reddit community still wants to stick it to the Hedge Funds until they are forced to sell all of their short positions.


What's a Short?

A short position is when people obtain shares of a stock at a value (lets say $200 per share) and then wait for the price per share to drop. When that happens, investors will sell the shares that they own for the lowered price (lets say the stock moved down to $100 per share). Once the sale has been executed to the buyer at $100 per share, the person will then buy new shares (since the person no longer owns any shares of the stock) for the lowered price and give back the shares that they owe. After they have given back the shares, the person will then have a profit of $100 per share. I hope that makes enough since because short positions are confusing in concept but knowing the overall idea is going to be very important to understand the rise in GME, AMC, etc. By making these hedge funds cover their shorts (that process of buying back the shares to), the Reddit community is hoping the Hedge Funds lose money. And so far the hedge funds have been losing money.... A LOT. By "A LOT" I mean by the BILLIONS. TENS OF BILLIONS. The term Short Squeeze is important because by making the stock go up so much, it is forcing the hedge funds to cover their shorts to prevent further losses. The Short Squeeze is when the short positions greatly fall in numbers due to hedge funds covering their shorts. As far as I am aware the short squeeze has yet to happen, despite the news outlets saying otherwise. I am not quite sure about the logistics, but retail investors have been keeping tabs of the numbers and are finding that the shorts have not been sold yet.


Reason

First off, the image above is the WallStreetBets community logo. Doesn't that look so cool!?! Anyways back to the reasoning behind all this. The main reason why WallStreetBets is hating on the hedge funds so much is because of what they did in 2008, and the fact that the hedge funds have so much power in the investing world. This is a social justice fight and the retail investors are using specific stocks to make sure their voices are heard on Wall Street. WallStreetBets is wanting to prove a point of the inequality that has been in the stock market and how the hedge funds have been the ones controlling the market. The community wants to prove that the market is not free and not for the people. Their point was proven last week when Robinhood and other brokerages stopped or limited trading for GME, AMC, and other heavily invested stocks. Now this is where the waters get murky because the reasoning behind the limitations are different depending what side of the spectrum you are on. To Robinhood (who was the one that stopped people from buying GME, AMC, etc but allowed selling) they say that the reason why they stopped trading was because they had to follow their financial requirements and that they had "SEC net capital requirements and clearing house deposits". The CEO (Vlad Tenev, the person who conducted the interviews) said that Robinhood stopped trading to "protect the firm and protect our customers" (CNBC). But to the Reddit community (or people apart of the movement), the reason why Robinhood stopped trading was to protect their biggest investor which is Melvin Capital and Citadel. The reason why the claims are important is because Melvin Capital was one of the hedge funds that heavily shorted against GME and lost 10s of billions of dollars. The reason Citadel is important is because they are responsible for executing the trades. Citadel is a clearinghouse that Robinhood uses and Citadel "facilitate[s] the exchange of payments, securities, or derivatives transactions" (Wikipedia). Usually clearinghouses are trying to mitigate risk so they will ask brokerage firms (like Robinhood) to put a certain amount of money down upfront in order to make the trade. The settlements take about two days to become official. When Citadel saw that GME, AMC and other stocks rise exponentially, they demanded more money upfront and that caused Robinhood to not have enough funds to pay the fee. This is also another speculated reason why Robinhood stopped trading. But the issue that people have with Robinhood is HOW they handled it. Rather than stopping trading they only allowed selling to happen which had a huge impact with the stocks. The interviews with the CEO were also poorly handled as Vlad was very vague and only made the situation look worse than it is. The uproar against Robinhood became so big that the U.S Securities and Exchange Commission (SEC) became involved and was quoted saying "We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws" (MarketWatch).



Impact

  1. The Robinhood drama has garnered attention from political figures (Alexandra Ocasio-Cortez and Ted Cruz being the most notable), millionaires (Elon Musk, Kevin O'Leary, and Mark Cuban being some of the most notable), and numerous others have flocked to the retail investors side. To see both sides of the political spectrum agree on a subject is rare. The political involvement has only added more fuel to the fire and created more confidence among the retail investors.

  2. The movement has also allowed AMC Theatres to pay off $600 million in debt and saving them from bankruptcy.

  3. Robinhood has rescinded its application for the Initial Public Offering (so that Robinhood could be traded on the stock market).

  4. Hedge fund's such as Melvin Capital lost billions by covering their shorts

  5. Mass media has been accused of aiding the hedge funds by spreading false articles on whether or not hedge funds have covered their shorts

  6. YouTuber's have seen record amounts of participants on livestreams. This is important because the average Twitch livestream (a popular gaming app where gamers do livestreams of the games they play) is around 5k. 5k in the livestreaming community is considered a successful livestream but the average livestream on YouTubers covering GME, AMC, etc has been over 20k. And these are YouTuber's doing the livestream for 5+ hours a day almost every day of the week. To further prove my point, I saw a livestream of a YouTuber with 8 million subscribers, YET, I only saw around 20-30k viewers. That's around the SAME amount YouTuber's with 200k subscribers or 1.4 million subscribers have been getting. Do you see the impact this has had now? T

  7. Retail investors have been doing charitable donations through the profits they have made from selling some shares of GME, AMC, etc. In fact I recall one retail investor taking some of his profits, buying 6 or so Nintendo Switches, and donating them to the Minnesota Children's hospital (CBS Minnesota). This is just one of many stories that have been occurring from the movement and is another way that retail investors have been

  8. I would say the last impact (and biggest) this will have is the effects this movement will have on the stock market for years to come. This will change how people look at Hedge Funds, will change how people view retail investors (whether they are seen as good or bad), and it will change the way people will look at investing.



Giving the other side

The other side has been arguing that the retail investors (basically the people from Wallstreetbets and other retail investors) will get screwed over in the long run and that the investors are dumb because they are investing in companies who have horrible financials. For example, GameStop and AMC theatres were expected to go bankrupt which is why their stock was falling and is why hedge funds invested billions into the failure of these companies. The media has been painting Wallstreetbets as irresponsible and participating in market manipulation (CNBC, Wall Street Journal, New York Times.... you get the point). Basically saying that these people need to be stopped before they crash the stock market. The supporters of the movement (like Kevin O'Leary) have been saying that what retail investors are doing is no different then what hedge funds have been doing for decades...Except that these investors are doing everything with open doors rather than in secret like the hedge funds have done. In my opinion the news outlets are wrong. I say this because they keep going at the subject objectively. The news outlets keep mentioning how these companies were failing so its dumb to invest in these companies based off their downward trend. What they fail to understand is that the retail investors don't really care. They care more about making a statement rather than investing in the company for long term growth. What the retail investors are doing is using a select few stocks as a tool to make sure their voices are heard. It's essentially another version of protesting.


My thoughts

What I think is going to go wrong with the movement is the diversifying. The retail investors have become a little spread out because they are no longer focusing on just one stock. Instead I am seeing more retail investors talking about investing in Nokia (stock ticker NOK), DOGE coin cryptocurrency, BlackBerry (Stock ticker BB), etc. I think this will eventually lessen the impact of the movement because eventually people will stop investing due to insufficient funds or confusion. By focusing on one stock at a time the retail investors would be able to make a bolder statement. Watching livestreams and following the WallStreetBets subReddit, I have noticed increased interest in AMC and DOGE coin the most. So far I do not think that retail investors have spread themselves too thin...YET. But I do think the retail investors should unite towards 1 stock at a time in order to make an even BIGGER impact. Last week was crazy in the investing world and this week is shaping up to be just as exciting now that the SEC is involved and dates are coming up for hedge funds to cover their shorts.


I am also in awe of the Wallstreetbets community because it consists of numerous types of people. From previous hedge fund managers to the average joe, the community is well diversified and consists of people who do research, people with expert background, etc. To say that the community only consists of new investors who don't know what they are doing is not true. Yes that is a jab at the news outlets calling these traders amateurs. I do agree their are definitely investors who are new, BUT what the news outlets fail to recognize is that their are also people who have a background in investing/finance. The frustrating thing about all this is the opinionated news outlets who are not doing their jobs at staying neutral. Even Kevin O'Leary called out mass media for their role in the whole GameStop thing (CNBC).


Recommendations

For those who want to continue following the news revolving around the movement, I highly recommend following YouTube livestreams as the livestreams usually consist of people who work in the financial world, people who do research on the topic, and people who try to give a holistic view. Of course these are also people who do support the movement but they do countless hours of research and are on the livestreams for hours on end following the latest news. I would highly recommend Brian Jung, and Meet Kevin. Both aim to educate and entertain their subscribers by talking about investing or finance in general. I also recommend looking at ALL sides. The news media gives one side whereas the the WallStreetBets community gives another. I personally think following the overall sentiment of the people who started the movement would be the best way to stay up to date. I say this because the news media outlets are the second hand sources giving a generalization of what is happening on WallStreetBets. The media is not the PRIMARY source, but WallStreetBets is where you are going to really understand the thought process of the retail investors.


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*Disclaimer: My content is for entertainment purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice*

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