GameStop – Short squeeze of the decade? (FINANCIAL HORSE)

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Gamestop – A quick summary

Background

I’ll do a quick recap (Vox has a more detailed one if you want more info).

GameStop is a US bricks and mortar store that sells video games.

For obvious reasons, their business has been absolutely crushed, because of (1) COVID – nobody goes to stores, and (2) Digital download of games.

This was fairly obvious to many people, and it got to the point where GameStop was one of the most shorted stocks around.

As at Dec 2020, short volume was a whopping 139% of shares outstanding – you read that right, short volume is higher than the amount of shares, which means a whole bunch of people are doing naked shorts (they don’t have the underlying stock).

Over the past few years, the shorts made a ton of money, because GameStop’s business has not been doing well.

In recent months, things have started to turn around, because of (1) GameStop’s new management has unveiled plans to turnaround the business (rebrand as a shared space for gamers, and also tap into ecommerce), and (2) the new console cycle has been good for physical game trading.

The Short Thesis

Last week, Citron Research (a famed short seller) unveiled his short thesis against GameStop.

He did it via a Twitter live stream, and his Twitter account promptly crashed multiple times.

He eventually got the message out on YouTube, but that only resulted in him and his family getting death threats from the online mob.

He eventually gave up and stopped commenting on GameStop because of all the hate.

The Short Squeeze

But the story doesn’t end there.

Late last week, a whole bunch of retail investors from the online forum Reddit WallStreetBets (r/WSB for those familiar with it) started coordinating to buy shares in GameStop.

And of course with such small cap, low liquidity stock with a high short volume, once it started going up, it REALLY started going up.

It got to the point where Melvin Capital (which had a big short position on GameStop) was down by $3 billion (out of a $12 billion portfolio).

It then took a $2.75 billion loan from, among others, Citadel (the famed high frequency trader). This allowed it to maintain its short position without closing it off and locking in the loss.

That was Monday, and of course the move only infuriated the online mob even more, leading to even more buying.

Giving us the epic chart below:

The closest parallel is the Volkswagen short squeeze in October 2008.

Very similar dynamics – essentially the short volume was greater than the free float, so once prices started going up, the hedge funds were forced to cover their shorts – at ANY price.

You can read more about the saga here, the hedge funds eventually lost about $30 billion then.

Interestingly, the Game Stop mania has also bleeded into other stocks. Europe's most-shorted stocks saw big price swings on Wednesday.

BlackBerry soared 185& on Tuesday, and Nokia also saw a surge. The 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60% on average so far this year.

Who else is happy about this?

BlackRock is said to have made gains of about US$2.4 billion on its approx. 13% stake in GameStop.

GME Resources Limited - listed as "GME" on the Australian Securities Exchange - surged in early trading. Investors appeared to mistake it for GameStop. Management of the Western Australia-based nickel miner had no idea what was happening, until a younger family member explained.

r/wallstreetbets

If you're curious, you could check out r/wallstreetbets, to understand the thinking from the retail guys who are doing the buying.

Really interesting psychology.

It’s a mix of guys who want to stick it to Wall Street, guys who want to rage against the system, and some guys who just want to make a quick buck.

Some interesting screenshots:

Update (30 Jan) - Situation has changed since, check out the latest article here.https://financialhorse.com/gamestop-explained-what-happens-next/

All in all, excellent reading at our 8-person gatherings over this Chinese New Year. Huat ah!:

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