CY@CY Says Welcome to my dreamscape. Where a Lim is also a Ling.
Hundreds of thousands of little Davids took on the all-powerful Goliaths of Wall Street and won! It sounds almost like a fairy tale. It also demonstrates the power of unity. I am talking about the GameStop Insanity.
GameStop, the brick-and-mortar video game retailer with more than 5,000 outlets in malls and shopping centers across USA, suddenly became the darling of retail investors. Its share price has gone ballistic, putting the squeeze on Wall Street’s hedge funds.
GameStop
A few big hedge funds have been shorting GameStop. By shorting the stock, these hedge funds have been borrowing shares from some brokers and selling them, with the agreement they’ll return the shares later. They expect the price of GameStop to fall so that they can buy back the shares and pocket the difference. But shorting a stock can be very risky for if the price rises significantly, the losses can be astronomical.
These hedge funds thought retail investors have no means of fighting back, so complacent were they in their financial might. How wrong they are!
Over the past year, retail investors have surged into the market, made easier by the free trades available through platforms like Robinhood and E-Trade. These investors, most of whom are members of Reddit’s WallStreetBets forum, are buying shares of GameStop with many placing their options bets on the opposite side of the shorts. Through their brute-force buying activity, the price of GameStop has been pushed to such high levels that short sellers , most notably Melvin Capital and Citron, ended up with billions in losses.
Others just want to squeeze Melvin Capital, a hedge fund that was shorting GameStop, quoting Heath Ledger’s Joker character from “The Dark Knight”: “It’s not about the money; it’s about sending a message.”
The GameStop squeeze is “the public doing what they feel has been done to them by institutions.” The GameStop squeeze has been called the “real Occupy Wall Street” movement. It is a revolution of the little guy striking back against Wall Street, making it something of a moral crusade. There is also a new term for such internet darlings: meme stocks.
There is a joke going around Reddit right now: How do you become a millionaire? The answer is: Start out as a billionaire, and then short GME.
The joke is humorous because it’s accurate. There are some Wall Street billionaires who will no longer be billionaires after this. There are some multi-billion-dollar funds that had excellent track records coming into January 2021 that will cease to exist. The high and mighty are being toppled.
The ultimate prize for the retail army would be to engineer an “infinity squeeze.” The term “infinity squeeze” was coined to describe what happened with one of the biggest short squeezes of all time, which happened with Volkswagen in 2008.
Volkswagen appeared headed straight for bankruptcy as a result of the global financial crisis back in 2008. Because of the company’s dire prospects, hedge funds were heavily shorting Volkswagen shares. However, on Oct. 26, 2008, Porsche, another German auto company, made the surprise announcement that that it secretly acquired 74% of Volkswagen’s share float.
After the Porsche announcement, the hedge funds with Volkswagen shorts were now completely caught out with their pants down. If Porsche refused to sell, they would have to “buy back” their short positions at almost any price.
It was dubbed an “infinity squeeze” because, with no way to buy back shares, the hedge funds with Volkswagon shorts were at the complete mercy of the longs, which means the price of a heavily shorted stock can go almost anywhere — and with Volkswagen, it did.
The VW infinity squeeze turned Volkswagen from a near-death bankruptcy candidate into the most valuable company in the world for a brief period of time. The hedge funds that were short suffered an estimated $30 billion losses, and Porsche made eight times more money on trading that year than it did from selling cars.
If the retail army succeeds in pulling off an infinity squeeze in GameStop, it wouldn’t just mean a $1 stock going to $20, or a $10 stock going to $100. It would be more like a $10 stock going to $1,000 or beyond.
Not many will shed a tear for short sellers. But it isn’t great for markets when valuations cease to mean anything at all, and when share prices can be openly and aggressively manipulated not just for a few percentage points, but gains of hundreds of percent (or even thousands of percent).
And now, thanks to this army of retail investors, hedge funds are now fearful of shorting anything. The appeal of short-selling anything has been destroyed.
How is it all going to end? It is inevitable that the price of GameShot will collapse at some stage, wreaking havoc in the market. The real insanity still awaits.