The Ongoing Victories in the GME and AMC Short Squeeze
One of the most exciting moments of 2021, so far, at least, was the populist uprising against the hedge funds in early February of 2021. As a quick refresher, that was when small investors, organizing largely on the Reddit forum r/Wallstreetbets (WSB), stuck it to the man by orchestrating a short squeeze of GME and AMC.
By buying GME and AMC (GameStop and the movie theater chain), both heavily shorted stocks, they were able to send the share prices skyrocketing, financially punishing the shorts (especially Melvin Capital) that were hoping GME’s share price would crater. Furthermore, because short sellers have to “cover” their positions if a share price rises, those were real losses that they suffered, not just paper losses. Hedge funds lost billions in days as the common man bought and held GME.
Of course, the oligarchs struck back and the SEC protected them, as has also been the case with the silver market. Moneyed interests, especially hedge funds, those blue-blooded bastions of snobbery and hubris, worked to crush the populist revolt and crater GME’s share price. In fact, they were hoping that GME and AMC would be driven out of business by the shorting and bear raid that resulted from it; that would mean they’d make the maximum return. To them, the specter of tens of thousands of their countrymen becoming jobless because of financial schemes meant nothing in comparison to making a few bucks.
For a time it worked. GME fell from the mid $300s to the $40s. It looked like the shorts had crushed the populist insurgency organizing against them.
But the “apes” of WSB refused to give in. Again and again they sent GME and AMC back up, punishing the elites. As of the time this article was published (6/8/2021), GME was back up to $300.00.
And the losses from that were devastating. On June 4th, 2021, Fox Business reported that “Traders betting against the Leawood, Kansas-based movie-theater chain [AMC] suffered a weekly mark-to-market loss of $2.07 billion, or 54%, as of midday on Friday in what is the worst week of 2021 for these investors.” I’d replace “investors” with “speculators,” but the point is otherwise truthful. The shorts, in having to cover their positions, lost billions on AMC alone.
When combined with the GME rally, the losses for the elites have been truly magnificent. According to Bloomberg, “Investors betting against retail trader favorites GameStop Corp. and AMC Entertainment Holdings Inc. were dealt a serious blow on Wednesday to the tune of about $673 million, according to data from financial analytics firm S3 Partners.” And that was on just one day; almost 3/4 of a biillion dollars of losses in one day alone.
Well, the big banks are finally getting tired of having to cover the astounding losses of the hedge funds.
According to ZeroHedge, “Following Wednesday’s decision by Jefferies’ Prime Brokerage to suspend short sales in meme stocks such as AMC, Gamestop and Microvision, other banks are following through with steps of their own, and as Bloomberg just reported that more of Wall Street’s top brokers are quietly tightening their rules for who can short the most-popular meme stocks which have soared in recent days.”
The article states that Bank of America and Citigroup are among the other banks readjusting their risk controls in light of the GME and AMC rally.
ZeroHedge also adds that:
“As a result, hedge funds and other institutional investors who wish to short the “memes” now face higher collateral requirements or are simply prohibited from shorting certain stocks.
“Until further notice, Jefferies Prime Brokerage will no longer offer custody on naked options” in GameStop, AMC and MicroVision, the firm said in a memo to clients seen by Bloomberg News. Naked options allow investors to short a stock without owning the underlying securities. Jefferies, which told clients that other stocks may be added to the list, will also no longer permit short sales of those securities.”
While that does mean that there will be fewer opportunities for the Reddit “apes” to engage in short squeezes, the higher margin requirements could also make the existing squeezes even easier.
Why It’s Important
This might seem like a small issue, but it’s not.
The constant refrain throughout the first act of the GME and AMC saga (those early days in February) was that the elite “experts” know best. We’re supposed to do and die and they’re supposed to be the ones that manage everything, pulling the levers of the economy and engaging in financial schemes as they think is best. The pundits claimed that the reddit crowd didn’t know what it was doing, the financial analysts were flabbergasted that a motley crew of little guys could change the calculus considerably, and the oligarchs were furious that anyone messed with their fortunes.
The most important aspect of that was that, throughout it all, the powers that be seemed certain it would end so because the experts knew best. They claimed the Reddit crowd would just lose all its money, folding and losing in the face of the obviously superior hedge fund blue bloods. Populist observers, however, had a different take. Unless the government got involved, couldn’t the WSB short squeeze work, and continue working? Who said the hedge funds were that smart and had to win, they rarely (if ever) outperform the market…
Well, guess who was proven right…the populists. The elites, as usual, were wrong. They were wrong about WMDs in Iraq, wrong about the efficacy of nation building, wrong about CDOs being a safe investment, wrong about Covid being such a threat, wrong about Covid’s origin, and wrong about the GME and AMC short squeeze. The apes, by simply buying and holding stocks they thought had a reason to go up, beat the elite hedge fund managers with all their years of fancy schooling and knowledge of arcane financial instruments.
In fact, the “apes” triumphed over the hedge funds to such an extent that even the biggest banks in the US had to acknowledge their victory and back down, halting most of their traders from shorting GME or AMC. What a victory for populism and win over the elites!