This week we are witnessing a very rare event in the financial markets. From the fringe, the small company GameStop has captured the attention of the world. A failing retail store that had many institutional investors betting against it, found support from an unlikely source, causing a “short squeeze.” The success these investors saw in their first squeeze motivated them to pursue others, to the point where we have potentially five-to-ten short squeezes happening simultaneously. The last time we had so many “short squeezes” was during the Dot.com bubble.
Don’t know what a short squeeze is? Below we’ll explain what a short is, then a short squeeze. But first, please know, this phenomenon is fascinating to observe but usually hurts only participants and not the general market. We have seen short squeezes before, and the market will survive this one.
A short is when someone sells shares they do not own (borrowed from another investor), hoping that the stock will fall. Selling short is a risky event because there is no downside limit. A stock could rise, such as we are witnessing with GameStop, rising hundreds of a percent in a day (see chart below). The shorts who do not cover are taking paper losses without end. These investors can lose everything, and most are professionals risking hundreds of millions, if not billions, of dollars of their and their investors’ money. Furthermore, the Securities & Exchange Commission (SEC) scrutinizes such activities.
Certain company stocks look so awful that short-sellers may sell more shares than the company has outstanding. When this occurs, the professionals feel the company will fail big time. Tesla has had several run-ins with short-sellers.
GameStop is a company that sells video computer games, mostly from stores in malls. The company has been struggling for years, as online competition has made the brick and mortar company seem obsolete. With the pandemic and online competition, their financial situation has worsened. Currently, short-sellers have sold more sales than the company has outstanding, and GameStop now has a short position of 130%. This means that for every share of GameStop, 1.3 shares have already been sold. The short-sellers are waiting to buy back the shares at what they hope is a lower price.
Blackberry, maker of the once-ubiquitous Blackberry smartphone, is also under pressure from short-sellers, as Samsung, Apple and Chinese manufacturers dominate the smart phone market. AMC, the movie chain, has threatened to seek bankruptcy protection due to the effect that the virus has on its revenues (who wants to go to a crowded movie during a pandemic). Bed Bath & Beyond is another retail establishment hurt by demographics and internet sales. The pandemic worsened their situation.
Now a short squeeze is when these short-sellers are forced to close their positions at a loss because the stock is rising rather than falling. Usually, a short squeeze is due to some event. This entire short squeeze started from a reddit subgroup called Wall Street Bets. These groups are one of the more troublesome areas for regulation. Market manipulation is illegal, and a coordinated attack could be something the SEC would have to look into. That is the argument against the people going long on GameStop.
However, the trade has turned into much more than investing in a company that was oversold. It has turned into a socioeconomic fight, and aggression against and between Wall Street hedge funds. Fueling the fire, one of the largest shorters Andrew Left of Citron Capital, was bailed out by two other hedge funds. This has a similar taste to occupy Wall Street, but from a completely different angle.
GameStop has currently rallied from $5 all the way to $380 per share in the past six months, moving from $30 to $380 in the last five days. It has also spurred other heavily-shorted stocks to start to jump as well, such as the above-mentioned AMC Entertainment Holding, Bed Bath & Beyond, and Blackberry. The current Short Squeeze has been an educationally fascinating week in the market, however, before this ends, there will likely be a lot of pain and financial futures lost to those involved in these risky bets.