(Warning, this is a long post, I am not a professional and thus it is opinion only, and my opinions are my own)

Let’s address the elephant in the room, what the #$@* has been going on with Gamestop, AMC, BB, and other stocks over the past couple of weeks and does it effect the market as a whole? The answer to the first is a little complicated, but I will try to explain it as simply as possible. The answer to the second is what many of you know is my favorite answer to complex questions, “yes…and no”. Buckle in, because here we go.

How did the price of Gamestop race up so high and crash so low and has there been manipulation of the market? Packed sentence, right? Well, here is the easiest explanation I can conjure to this predicament. We know that stock can either be bought or sold right? It is the basis of the market. Now for most of us we either buy a stock we want or sell one we no longer want. These are not the only possibilities though. Without breaching the options market in this explanation there is a third possibility, it is called short selling.

So, when traders talk about securities (read stocks), they talk about being long or short. This indicates their position in the market, long/bullish/positive all mean the same thing while short/bearish/negative cover the other side. If I think the market’s going up, I’m going to take long positions, if I think it’s down, I have the option to take a short position. This can be for the market as a whole, or for a particular company’s stock.

Some traders, and I call them traders because short selling is not an Investing strategy to my mind, will find a company they think is over valued and sell the stock short betting that the price will drop. Selling short is the process of borrowing shares of stock from a broker, selling them immediately at market price and betting that you will be able to buy them back and return them to broker in the future for less money than you originally sold them for allowing them to pocket the difference in the buy and sell price. It is the inverse of Investing although there is the principle of buying low and selling high, in that their belief is in a company’s failure not success.

What happened in this case? Well, some citizens in a Reddit sub thread r/wallstreetbets, no I’m not going into an explanation of Reddit, if you’re not familiar do some investigation of your own. These fine folks check the short float, (what percentage of a company’s outstanding stock is versus the amount of stock that is being shorted) which is readily available to anyone with an internet connection, and what they found was not only was the company heavily shorted…it was shorted an additional (according to which reports you read) 10 to 20% over all the outstanding shares in the company.

So, let’s remember, short sellers are selling the stock and betting they will be able to buy it lower. What these citizens believed, either as a matter of potential profit or sticking it to the big Wall Street firms who do much of the short selling in the market, was that if they bought the stock and drove the price up, these short sellers would have to buy their shares back at a much higher price, costing huge money. Also, with more short shares outstanding than exist (how that’s possible is beyond me) it would cost those big firms dearly to get out of their short positions.

Some will say it’s a matter of social justice and showing Wall Street that the individual investors have real power, let’s remember 80% of the money in the market is little guy (individual investor, or uneducated investor is how Wall Street often puts it) money, and make them pay it to the people. Some also will say that the instigators did it to make a quick huge profit, either way it doesn’t matter all that much in a sense the result was the same.

Generally accepted principle of the market is that as people buy or go long on a stock its price is going to rise. Essential supply and demand really, the more people want something that has a limited availability the more valuable it becomes, and the price rises, okay? Now consider that at the time, I believe the membership of r/wallstreetbets (that’s membership only, not people like me who poke around there from time to time) was at over 2,000,000 people who decide to act in concert, that demand has suddenly exponentially increased and price is doing what it will do in that case and rises exponentially.

Well now, the short sellers suddenly have a dilemma on their hands. Every short position is borrowed and now the person holding the IOU for the shorted position has a very valuable commodity in that IOU as the price rises. This can trigger what is known as a margin call if the person or entity doesn’t have the liquid assets pledged to cover the situation if there is not a defined term for the return of the shares. If there is a defined term, again that is a finite term, these entities HAVE TO eventually return these shares whatever the price might be. We are talking billions of dollars upside down in a trade at this point.

These short sellers either have to buy their shares at the lowest price currently available to cut their losses and admit defeat or hold on (hoping they don’t receive a margin call) and try to wait out the market move. Thus, unstoppable force meets immovable object with one of the sides having to blink and give in…unless…someone stupidly opens their mouth and says they aren’t worried and this unstoppable force will give out in a day or so and price will return.

Yep, one of the shorts blew off the movement…bold strategy, Cotton…if I may borrow a phrase from Dodgeball. It didn’t work out much better than you’d expect when you essentially challenge the silent majority by dismissing their collective power. As of this writing the current membership of r/wallstreetbets, or degenerates as they term themselves, is at 8.4 million and growing. That seems like a good hornet’s nest to kick…bad move for this individual. Nothing stings like millions of Redditors who take personal offense at your comments. It essentially galvanized an entire group to prove them wrong.

The price rose to a 52-week high of $483 dollars with the VAST majority of individuals on the thread calling for holding until the price reached at least $1,000. The frightening thing to Wall Street in all of this is that these people weren’t all motivated by greed. Greed they understand and can exploit, but people who want to raise a giant middle finger to the establishment and show the power of the little guy they don’t understand. A number of individuals on the thread which I do peruse daily have maintained that they will hold until $1,000 or go broke and they don’t care which. That, people is a movement, and nothing scares the established control like a movement.

This also wasn’t just any kind of movement; it was the kind of movement that crossed ideological lines and brough together the strangest gathering of supporters I could imagine. When Ted Cruz, Alexandria Ocasio-Cortez, Donald Trump Junior, Elon Musk, Mark Cuban and Ja Rule, to name only a few, are all of one mind on a subject I am going to sit up and take notice of this. Never would I have ever imagined those lists of names agreeing on something…anything really, this shows that this is a movement that cannot be boxed into our normal societal boundaries.

Now, I don’t want to make this post a book, I’ll let others who write those books completely delve into what happened with certain trading platforms that shall remain nameless which stopped allowing buying of Gamestop (and the handful of other stocks involved in this Short Squeeze, which makes me realize I need to define a short squeeze) or if allowing trading limited traders to the range of 1 share. When a broker only gives an option to sell…well let’s just say it raises questions and leave it there.

Defining a short squeeze, Investopedia.com defines it as, “A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock’s price.”, which sounds familiar right? Now this is speculation on both sides of the transactions, so not a guarantee to work, but with millions of backers and 69.75 million shares available in the company…well I think it’s pretty clear where the pressure will appear.

Gamestop went from a market capitalization of around $1.2 billion before the squeeze play (market cap = stock price x number of shares outstanding (available in the market)) to at it’s height just under $34 billion market cap before settling to where it is at the time of this writing of around $6.3 billion with no real change in the company or their products/services and it’s the same for the other companies that were caught up in the short squeeze. How about that for power of the people? A 33x market cap move in just inside two weeks…wow. Now depending on when these fine folks bought, they are either sitting on (or cashed in on) a once in a lifetime payday or suffering huge unrealized losses. What we know for a fact though is that a good number of the shorts paid dearly. Bankruptcies, companies who used to give short advice no longer offering that service, crying on tv, etc. have come in the wake of this. I’ll tell you, I never thought I’d see something like this.

Okay, enough about the short squeeze, and no I’m not going to give a prediction or advice on how to play this, I’m not smart enough and don’t want mistakes like that on my conscience. I have taken my own actions and they are mine alone and I certainly only ever use money I can afford to lose when I trade or invest and make no mistake this movement is purely trading. There is almost no long-term investing going on, I only know of one and he either had foresight like you’d never believe or is the luckiest person I’ve ever seen. Just saying, respect either way, but holy cow.

On to question two, does it effect the market as a whole? The answer I have already said is yes and no. I’ll keep this part short because I believe the answers while split is fairly simple and I don’t want to give bad information that is really out of my lane anyway. So, here we go.

Yes, this changes everything! This event showed the entire world that the little guy has power against Wall Street. Whether you believe that Wall Street manipulated the market illegally to protect itself or not, that’s immaterial. Funds closed, fund managers lost at a game they thought they owned, billions had to be borrowed to cover losses, businesses stopped giving advice on shorting after 20 years of doing so and people across the world were brought together by the movement. That is just facts, there is no conjecture in this, whatever else happens in this story these facts don’t change. Wall Street whether they like it or don’t have to acknowledge the individual investor or risk more upheaval, which for some is fine and others bad. I think we may see some fundamental changes, but there is also an argument that nihil novum sub sol, there is nothing new under the sun. We will just have to watch and wait or you dear readers will have to go do something about it.

Certain elements on Wall Street have claimed that there was collusion and illegal market manipulation by the short squeezers, but the case for that is fairly weak in my opinion. If I tell you I like Big Pete’s House of meatloaf and you should buy as much of it as you can because market makers have heavily shorted it and money can be made, is that market manipulation? Of course not, I’m making these comments from readily available information in the public sphere. Now, if I said I know from my work or contacts that we can artificially make a profit because there’s going to be an announcement that will drive the price up and with buying we can drive the price up further, well then that would be a case for manipulation. Or maybe if we agreed to buy the same stock to each other over and over again at successively lower…ooops I mean higher…prices to move the price overall…. well, I will just leave that there for you to chew on. However, the individual investor cannot do that, because they have no ability to choose who they are selling their stock to, it just goes to whoever happens to be bidding at the price they are asking for. So, let’s let go of the Reddit stock manipulation case okay?

It also changed things in the short terms because to cover their shorts a number of these brokers or fund managers had to sell other positions to generate the cash to buy back their short positions which lowered the price of some great companies. This led many to worry that the short squeeze was going to send the market bearish and common people would lose money because of a massive run on Wall Street. This is just wrong. Wall Street as a whole will not fall to one or even two events like this, what it does it make Wonderful Companies available at lower prices, so as Buffet style investors we buy on panic and man was there panic! The no part of the answer comes in to play now too.

This selloff was only ever a temporary construct of the moment. The market continues on through speed bumps and will correct. Now, I also believe we are due for a much more massive correction than we saw in January, heavily overdue for I believe. The reality though is most of these Wonderful Companies stock prices are moving back toward where they were previously. So, no I don’t believe this is some sort of drastic threat to the market as a whole, this made an opportunity if you were in a position to take advantage of panic selling.

The story that ordinary people’s pension funds were drastically affected due to the shorts losing a ton of money…I haven’t seen true evidence of on any grand scale. These fund managers for the most part were running hedge funds. Now, to invest in a hedge fund you have to be what is called a qualified investor which is heavily regulated. To be a qualified investor you have to have $2 million without the inclusion of your home in assets or have made $200,000 for the past two years on your tax returns and there is a reasonable expectation that you will continue making that amount going forward. Okay, let me say this right now, I am NOT a qualified investor, not even close. So, let’s agree that your average citizen was not invested in these funds.

Second, most funds are legally required to provide certain information to the SEC for one on their dealings. This changes depending on the size of the fund and whether they can get a private fund advisor exemption, etc. I don’t want to get into all of that though because it’s so complicated. It is also necessary for the investors to be given certain information on what the fund is doing partially due to legal implications of the Investment Advisors Act of 1940, but also due to the fact that THEY OPEN THEMSELVES TO LAWSUITS from angry investors who believe they acted in bad faith. Yeah…wonder how long it’s going to take before we see those start up. All of this is to say that it is possible (I would say likely in my opinion and my opinion only) that these investors knew what the fund was doing either by their decision to choose it in the first place or updates from the fund manager as part of their due diligence…or they chose not to look into it. Either way, hardly innocence.

I will publicly say I don’t really enjoy short positions, that is my personal view on it, I don’t see a lot of value in it and I am more conservative by nature sticking mainly to long positions. I have been burned by taking bad shorts and longs, but the shorts hurt worse and there is nothing really to shorts but trying to generate more money. I know some people disagree and say it’s an integral part of the securities system, but I don’t see it that way. If you disagree dear reader that is fine, I don’t judge you for it, we just have a disagreement of philosophy. I think they are almost always more of a gamble than an investment. Do you invest money to watch it go down? No, we want to make money, so if you are short you are betting on making money by something falling or failing. I don’t know, the dichotomy hits me wrong. Like I said though, it’s just my feelings. I think that large institutions will have to think much more carefully before taking large short positions after this. They saw the pain others went through and realize people are paying attention to that.

I have no idea what’s going to happen next, but I am watching with interest and maybe will have more to write in the coming weeks, but for now this is my only planned post on this.

-Daddicus Rex

This commentary is not paid for at all and represents my opinion only, it should not be taken as financial advice or a recommendation to buy or sell shares of the listed position. I am writing this for education and entertainment purposes only.

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