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My Not So Short Story on GME


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19 minutes ago, Zwylde said:

I just can’t fathom the fallout if the Gov’t bails this out.

 

 

Totally agree but I can also sadly see it happening. Same as it ever was.

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Naked shorts are already illegal, but happen on a fairly massive scale on the daily.

There should be a reckoning.

Shorting is necessary for "price discovery," I suppose, but it's a nasty business.

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27 minutes ago, TwiceHorn said:

Naked shorts are already illegal, but happen on a fairly massive scale on the daily.

There should be a reckoning.

Shorting is necessary for "price discovery," I suppose, but it's a nasty business.

It's absurd that hedge funds were allowed to short sell 140% of GME shares with the objective to drive them into bankruptcy so they don't have to fill the orders. That's straight up market manipulation, and it's nice to see fat hedge fund cats be the bagmen for once

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Can't have populism destroying the game that the the institutional houses created. I think there's value in the institutional guys rating and projecting a stock's long term growth or decline. But let's not kid ourselves into thinking it's all altruistic in nature. The same dudes making the pronouncements also have skins in the game to see that their advice comes to fruition. 

So the individual investors got together and form a large buying/selling block. They disagree with some institutional investors forecast of a certain stock so they go all in in the other direction. Again, no altruism there neither but both are playing the game. The gubment will see that the second example is punished to allow the first example to be the standard.

Crazy world we're living in. But stocks have been distorted from reality for a long time so I guess crazy is just normal.

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7 minutes ago, crash_davis said:

Can't have populism destroying the game that the the institutional houses created. I think there's value in the institutional guys rating and projecting a stock's long term growth or decline. But let's not kid ourselves into thinking it's all altruistic in nature. The same dudes making the pronouncements also have skins in the game to see that their advice comes to fruition. 

So the individual investors got together and form a large buying/selling block. They disagree with some institutional investors forecast of a certain stock so they go all in in the other direction. Again, no altruism there neither but both are playing the game. The gubment will see that the second example is punished to allow the first example to be the standard.

Crazy world we're living in. But stocks have been distorted from reality for a long time so I guess crazy is just normal.

Thing is, though, much of what the institutional houses did is already unlawful or flat illegal.

 

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Just now, crash_davis said:

is the market a free market or not? 

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I'd honestly argue that it isn't right now. Every retail trading platform halted trading on GME to enable institutional investors to drive the price back down.

It's looking pretty clearly like that the institutional investors just want retail to be the bag holders for their derivative strategies

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1 minute ago, TwiceHorn said:

Thing is, though, much of what the institutional houses did is already unlawful or flat illegal.

 

So is members of Congress making trades with private knowledge had from closed door congressional meeting. I'm still waiting for the severe punishment to be doled out there.

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2 minutes ago, Captainant said:

I'd honestly argue that it isn't right now. Every retail trading platform halted trading on GME to enable institutional investors to drive the price back down.

It's looking pretty clearly like that the institutional investors just want retail to be the bag holders for their derivative strategies

I was making a joke about the "free" market. It's not and has not been for a long time. The institutional houses run the market. They'll not have populism beat them at their own game, even for a few extraordinary instances.

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2 hours ago, TwiceHorn said:

Thing is, though, much of what the institutional houses did is already unlawful or flat illegal.

You say that like it matters.

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OP, that's a great explanation of what happened, thanks.  I think the second half of your post though lacks perspective of markets and how they work.  There's a lot of liquidity in the market right now-  money from lots of newly minted hedge funds, as you said.  And this new money is inexperienced money.  It follows trends and so initially when everyone is following the same trend, making money is easy.  But there will come a day where the strategies diverge, liquidity dries up, the markets become stagnant again, and then the newly minted active traders start losing consistent money day after day.  Death by a thousand papercuts.  

 

So I'd say be careful.  Make that money!  But be careful and realize the market psychology aspect of trading is something that takes time to develop.  The experience of observing market cycles takes time to develop.  Don't be too caught up in the current euphoria to ignore this.  

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2 hours ago, crash_davis said:

So is members of Congress making trades with private knowledge had from closed door congressional meeting. I'm still waiting for the severe punishment to be doled out there.

 

37 minutes ago, XYZ said:

You say that like it matters.

All true.  

But it matters in the sense that new laws aren't required here at least not until the enforcement mechanisms are improved.

And, it probably justifies a punitive bailout or denial of bailout.  

The mortgage crisis was full of unethical and criminal behavior, but the central mechanism of the problem was not illegal.

Here, the central mechanism, naked shorting, is already illegal.  The number being bandied about is that 140% of the issued shares of GME were shorted.  That is massively illegal.

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Good post OP - if for no other reason than to get the discussion started - but you provided a good recap.

I will say...

18 hours ago, Eastwood said:

Or maybe this shit just ain't as hard as Wall Street wants us to think it is. And maybe Wall Street was so habitually comfortable with how little people knew about their industry in the past that they didn't even bother concealing their moves because they didn't think retail investors would know how to play the other side. Well, the secret's out.

michael jordan laughing GIF

HF managers got cocky and did something really stupid and when it got outed a lot of people made a quick buck. I'm not dismissing your credentials or anything you've learned since you started trading but mostly you and a lot of other people got lucky. 

I promise you Wall Street and the Big Boys will get their money back and probably then some. Yes they got pantsed but most of these guys have been doing this for decades. They aren't going to lose the war against a bunch of hobbyists and emotional investors - and even if they got close the gubment would be happy to bail them out.

But - way to take advantage - that's really all you can do. I'm definitely a bit jealous of everyone that cashed in on this one. 

Edited by ztejas
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2 hours ago, fattyflattie said:

So they screwed that dude over for more than a million.  Yeah, that's guillotine shit.

I would imagine he got margin called since every broker doubled (or more) the margin reqs for GME and a few others. They for sure dicked him by covering at the very bottom.

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7 hours ago, Captainant said:

It's absurd that hedge funds were allowed to short sell 140% of GME shares with the objective to drive them into bankruptcy so they don't have to fill the orders. That's straight up market manipulation, and it's nice to see fat hedge fund cats be the bagmen for once

How would selling short on the secondary market force GME into bankruptcy?  The underlying financials and balance sheet for GME is what was forcing them into bankruptcy.  The short sell was a bet on the inevitable.  Although I would agree that being allowed to go over 100% doesn’t make sense. 
 

When this is all over GME will most likely go into bankruptcy unless they change their business model pretty quickly 

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4 hours ago, TwiceHorn said:

Here, the central mechanism, naked shorting, is already illegal.  The number being bandied about is that 140% of the issued shares of GME were shorted.  That is massively illegal.

And nobody will go to prison.

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7 minutes ago, EuroHorn said:

The underlying financials and balance sheet for GME is what was forcing them into bankruptcy.

Um... any public's balance sheet is pretty heavily tied into their stock valuation.

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7 minutes ago, ztejas said:

Um... any public's balance sheet is pretty heavily tied into their stock valuation.

Stock on the balance sheet is recorded at book value after the IPO.   Equity is Assets minus Liabilities. GMEs balance sheet has not changed due to all the trading that has happened. 

Edited by EuroHorn
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21 hours ago, Zwylde said:

I just can’t fathom the fallout if the Gov’t bails this out.

 

 

I am 100% expecting a government bailout + regulatory action against retail investors. Maybe even criminal action against some.

And I expect the media to demonize the wallstreetbets crowd. I mean, that's already happening.

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19 minutes ago, EuroHorn said:

Stock on the balance sheet is recorded at book value after the IPO.   Equity is Assets minus Liabilities. GMEs balance sheet has not changed due to all the trading that has happened. 

You're right. I misspoke. Obviously stock price can have some effects on a company's financials long term but it doesn't move the needle day to day. 

The more relevant point I think is that it can make activist takeover easier - which a HF or new ownership group could try and do to further tank a company's financials while they fight over the scraps. In which case they'd probably doubly benefit from short positions even if they owned a bunch of GME on top of it.

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12 minutes ago, ztejas said:

You're right. I misspoke. Obviously stock price can have some effects on a company's financials long term but it doesn't move the needle day to day. 

The more relevant point I think is that it can make activist takeover easier - which a HF or new ownership group could try and do to further tank a company's financials while they fight over the scraps. In which case they'd probably doubly benefit from short positions even if they owned a bunch of GME on top of it.

the market provides access to capital if it is a going concern. 

Who’s going to buy a company that’s the blockbuster of video games?  The stock will eventually go to zero and bondholders may get something out it. 

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13 minutes ago, ztejas said:

You're right. I misspoke. Obviously stock price can have some effects on a company's financials long term but it doesn't move the needle day to day. 

The more relevant point I think is that it can make activist takeover easier - which a HF or new ownership group could try and do to further tank a company's financials while they fight over the scraps. In which case they'd probably doubly benefit from short positions even if they owned a bunch of GME on top of it.

Massive shorting can lead to bankruptcy or other ruin, but it's not usually the stock price per se as much as the (dis)information that shorts tend to put out on the shorted company.

I don't remember the company, but Kyle Bass was short in some pharma and himself began attacking the validity of their patents.  That's not illegal, and there is a public interest in invalidating patents, but that made me very squeamish.

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8 hours ago, Captainant said:

I'd honestly argue that it isn't right now. Every retail trading platform halted trading on GME to enable institutional investors to drive the price back down.

It's looking pretty clearly like that the institutional investors just want retail to be the bag holders for their derivative strategies

you need to make a correction - and it a critical correction: they didnt halt trading on GME, they halted buying on GME. 

you could 100% panic-sell all your shares back, and they were happy to do it.

 

 

(also, they opened up the call options chain....but , oh whoops , you guys like it too much, so cant buy those either)

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12 minutes ago, TwiceHorn said:

Massive shorting can lead to bankruptcy or other ruin, but it's not usually the stock price per se as much as the (dis)information that shorts tend to put out on the shorted company.

I don't remember the company, but Kyle Bass was short in some pharma and himself began attacking the validity of their patents.  That's not illegal, and there is a public interest in invalidating patents, but that made me very squeamish.

Again, that wasn’t about the shorting. It was about their products. People short stocks everyday. It’s not going to send a company into bankruptcy. And people going long and raising the stock price is not going to keep GME in business.  They need to make profits by selling products or services. 

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27 minutes ago, ztejas said:

You're right. I misspoke. Obviously stock price can have some effects on a company's financials long term but it doesn't move the needle day to day. 

The more relevant point I think is that it can make activist takeover easier - which a HF or new ownership group could try and do to further tank a company's financials while they fight over the scraps. In which case they'd probably doubly benefit from short positions even if they owned a bunch of GME on top of it.

not some effect - massive effect. 

small effect = you have good credit rating and can sell bonds at low coupon (i.e. cheap borrowing)

big effect = your stonk is hella stonk and you can issue very nice new shares for lots of cash.  thats money that goes to your balance sheet. see: tesla.

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14 minutes ago, TwiceHorn said:

Massive shorting can lead to bankruptcy or other ruin, but it's not usually the stock price per se as much as the (dis)information that shorts tend to put out on the shorted company.

I don't remember the company, but Kyle Bass was short in some pharma and himself began attacking the validity of their patents.  That's not illegal, and there is a public interest in invalidating patents, but that made me very squeamish.

Massive shorting results in lowered share price, which leads to lowered market cap, which affects not only the company's debt on the books by possibly changing interest rates and possibly causing acceleration, it affects the company's ability to borrow in the future. Without the ability to borrow, already struggling companies lose the ability to try to extend the amount of time they have to make the necessary changes to survive.

If we want to talk about valuation, GME's cash on hand, plus assets, led to a fair market value of around $10 - $12 per share. Sure, market sentiment that the company was a loser could have suppressed the price down to the $4 level, but the presence of 140% short float is a very good indicator that the share price was artificially depressed. Additionally, GME unloaded a ton of older inventory and increased their cash reserves, which was then used to pay off an entire half of their outstanding debt that was coming due in 2021, which put them in a better position to negotiate better financing in the future. Then Cohen bought 9.8% of the company and the price STILL didn't make it out of single digits.

If that isn't an artificially depressed share price, I don't know what is.

Edited by Eastwood
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Just now, DonkeyCigars said:

Also are we sure naked shorting is illegal? I’ve heard it both ways the last few days and I’m not a Hermès tie wearing WallStreetBro...

100% illegal, but poorly enforced

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1 minute ago, 52-80 said:

100% illegal, but poorly enforced

According to Bloomberg;

  1. This does not necessarily mean a lot of people are doing evil illegal nefarious naked shorting! Really, I promise! There is no special limit on shorting at 100% of shares outstanding!¬†I want to offer a¬†simple¬†explanation. There are 100 shares. A¬†owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90‚ÄĒthere are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.

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9 minutes ago, EuroHorn said:

Again, that wasn’t about the shorting. It was about their products. People short stocks everyday. It’s not going to send a company into bankruptcy. And people going long and raising the stock price is not going to keep GME in business.  They need to make profits by selling products or services. 

Well there are simple short positions.

And there are massive short positions with attendant arguable misbehavior by the shorting party to insure that their short positions pay out.  I'm not sure longs could get away with some of the things shorts get away with to assist their positions.

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4 minutes ago, TwiceHorn said:

Well there are simple short positions.

And there are massive short positions with attendant arguable misbehavior by the shorting party to insure that their short positions pay out.

Yea and the massive short positions were there because there’s a very very high probability that GME was heading to bankruptcy. This wasn’t taking a viable company like Microsoft and having massive short selling put them out of business.  Had Reddit not got involved we would be discussing a company going bankrupt due to a dinosaur business model. Regardless of the short selling.  Unless GameStop some how managed to reinvent themselves.  But they probably still file to reorganize 

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3 minutes ago, 52-80 said:

not some effect - massive effect. 

small effect = you have good credit rating and can sell bonds at low coupon (i.e. cheap borrowing)

big effect = your stonk is hella stonk and you can issue very nice new shares for lots of cash.  thats money that goes to your balance sheet. see: tesla.

Yeah but that wasn't what I was thinking about. So sure I'm kind of right but I had the wrong idea. 

Which is a little embarassing but what can I say I'm rusty.

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1 minute ago, EuroHorn said:

Yea and the massive short positions were there because there’s a very very high probability that GME was heading to bankruptcy 

Which is absolutely false. After they survived Q2, they had enough cash on hand and assets to pay off 100% of their debt in the event of a bankruptcy and would actually have funds left over to pay shareholders. Companies in that position don't go bankrupt. Company's that are about to go bankrupt don't have someone like Ryan Cohen dump $75 million into it. Anyone saying the GME was going bankrupt in 2020 after Q2 was writing hit pieces. It's exactly why I went long on it in May. Someone gambled the house on it going under and all of the indicators after Q2 said otherwise. That's also when Cohen stepped in.

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2 minutes ago, Eastwood said:

Which is absolutely false. After they survived Q2, they had enough cash on hand and assets to pay off 100% of their debt in the event of a bankruptcy and would actually have funds left over to pay shareholders. Companies in that position don't go bankrupt. Company's that are about to go bankrupt don't have someone like Ryan Cohen dump $75 million into it. Anyone saying the GME was going bankrupt in 2020 after Q2 was writing hit pieces. It's exactly why I went long on it in May. Someone gambled the house on it going under and all of the indicators after Q2 said otherwise. That's also when Cohen stepped in.

What were they going to change fundamentally with the $75 million. Selling games online?  Their current business model will be nonexistent unless they reinvent themselves 

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12 minutes ago, DonkeyCigars said:

According to Bloomberg;

  1. This does not necessarily mean a lot of people are doing evil illegal nefarious naked shorting! Really, I promise! There is no special limit on shorting at 100% of shares outstanding!¬†I want to offer a¬†simple¬†explanation. There are 100 shares. A¬†owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90‚ÄĒthere are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.

if you give financial statements to 3 tax filing firms, they'll each give you a different tax return.  these things are kind of gray area.

 

 

naked short selling is not illegal strictu sensu, but it is all-but-discouraged: https://www.sec.gov/investor/pubs/regsho.htm

 

the way that you can short sell >100% float is if you havent "located" (i.e. secured) a share TO sell short.  it doesnt meet this requirement:

 

Rule 203(b)(1) and (2) ‚Äď Locate Requirement. Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security.[7] This ‚Äúlocate‚ÄĚ must be made and documented prior to effecting the short sale.

 

based on how gray the regulation is, you can see how people get away with it

 

 

 

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1 minute ago, EuroHorn said:

What were they going to change fundamentally with the $75 million. Selling games online?

but that's not up to you or any arbitrateur to decide, w.r.t. how the stock should be traded.

the issued shares are a secondary instrument, "freely" (lol) traded on a secondary market.  if people buying and selling decide that the price is $350/share, even if the underlying company that the microfractionalequity ownership represents is totally shit, thats for them to decide, not you.

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