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The infamous gamblers on the subreddit called Wall Street Bets have found a new way to make money.
They are buying up shit companies that have highly shorted stock.
Wall Street suits lost billions due to retail traders buying up the heavily shorted GameStop stock. Other stocks with high short interest like AMC, BlackBerry, and Bed Bath & Beyond saw wild gains from the short squeeze as well.
It’s Time to Shut Up About It
Financial media has had a field day with the story, and it’s being blasted all over the place.
Hordes of people looking to get rich frantically installed Webull or Robinhood to join in.
The problem is most people are going to lose money and already have. Most of these stocks have declined as much as 60% or more from their highs. It will likely get much worse.
Here Come Trading Restrictions
Some brokerages started to limit the purchases of several stocks. Implementing the most restrictions, Robinhood forced some clients to sell their positions and limited trading for over 50 different securities.
Is this a sign of more things to come? The freedom to purchase whichever stocks or financial instruments we want with our own money should not be violated.
Free capital markets are critical for our way of life in the United States. Let’s hope matters do not get worse or retail trading could become even more restricted.
Short Squeezes are Nothing New
Short squeezes aren’t new, but retail causing them and making money is. As you have seen, market manipulation is only okay if the suits are doing it. This is a valid reason to be wary of this continuing for much longer.
History has shown that squeezes come to an end and people buying at ridiculous prices end up with ridiculous losses.
Here is some notable short squeeze story’s outside of GameStop.
Hedge funds took a $30 billion loss from the 2008 Volkswagen short squeeze. VW was struggling financially even before the great recession, and many hedge funds felt it was a good bet to short the stock.
The auto industry was in trouble, and VW seemed to be in the worst position. Then Porsche announced they had increased their stake in VW by over 70% through cash-settled options contracts. Before the news, the short interest in VW was under 13% of outstanding shares.
However, due to the large stake Porsche had in the company, it only left around 1% available float of outstanding shares. The imbalance caused major panic and a short squeeze that drove the price of shares to over a thousand dollars.
Clarence Saunders, founder of the 1920’s supermarket chain “Piggly Wiggly,” saw the company’s stock get attacked by short-sellers. He responded by getting a large bank loan and buying up shares to fight back against the bears.
The stock shot up and squeezed the shorts, but the exchange suspended trading and allowed short sellers to postpone the delivery of shares.
In the end, this caused Saunders to go bankrupt and forced him to depart from the Piggly Wiggly company.
The infamous “Pharma Bro” Martin Shkreli engineered a short squeeze in a penny stock biotech company called KaloBios.
KBIO’s money-making drug had failed and didn’t have the cash to pay its debts. This caused short sellers to swarm on the stock, but due to the low float and high short interest, Shkreli orchestrated a squeeze of 10,000% in just five days.
A retail trader named Joe Campbell had a small short position in KBIO, and the squeeze turned his $37,000 account balance to -$106,000. The poor SOB started a GoFundMe to help pay for his losses.
Ignore the Noise
The entire short squeeze frenzy is a nice distraction from the market’s deteriorating fundamentals. It is just one event and not the whole picture that investors should focus on.
Stock valuations are at nose bleed levels, and all foreseeable bullish catalysts are priced in.
The market cap to GDP ratio is a gauge of long-term valuation for stocks. This indicator is one of Warren Buffett’s favorite ways to measure market value. It illustrates the current overvaluation of stocks quite well.
Investors who lived through the dot-com bubble have sited many similarities between the mania back then and the mania we are seeing today.
January 2021 US Market Performance
January 2021 Market News Highlights
Big tech censorship is here. Due to a bizarre and unfortunate riot at the country’s capital, Twitter, Facebook, YouTube, and other social media giants banned former President Donald Trump. The platforms have also censored a swath of conservative accounts, and all the tech giants banned the republican version of Twitter known as “Parler.”
China has passed the US as #1 for foreign investment. Foreign direct investment in the US fell 49% last year, making China the leading receiver of foreign inflows for the first time.
Bitcoin reached a record high of over $40k earlier in January. The price has since dropped to the low 30s. The European Central bank released a statement reminding traders that the speculative asset can go to zero.
$1,400 stimulus check? The new Biden administration is pushing for a $1.9 trillion “coronavirus relief plan” The package would include another round of stimulus checks in the amount of $1,400. Biden is also pushing for a $15 federal minimum wage, which could be devastating for small businesses and overall employment. The stimulus plan is being negotiated, and nothing is definite of if, when, or what will pass.
Janet Yellen confirmation hearing comments. The new and first female Treasury secretary had several words about markets last month. She believes the US should “act big” with the next economic relief package. The statement is contradictive of her recently stating she does not seek a weaker US dollar. Yellen also mentioned that cryptocurrency is mainly used for illicit and illegal activities, hinting regulations could be on the way. She down played the fear of increased taxes by saying the administration’s current focus is on programs to help the US through the pandemic and not taxes.
Economic Indicators Recap
GDP rose by 4% in Q4 of 2020, meeting median forecasts.
M2 Money Supply
Core Inflation Rate increased by 1.6% from last December 2020. The increase was in line with market expectations.
PPI – Producer prices increased .80% from last December 2020, matching the November and market expectations.
Consumer Confidence slightly increased in January from December’s reading of 87.1 to 89.3.
Housing Starts rose by 5.8 percent month-over-month from 1578.00 to 1669.00 in December 2020. The increase beat market forecasts of 1560.
The Federal Reserve left the target interest rate for federal funds unchanged at 0-0.25%. Quantitative Easing is still ongoing with $80 billion in Treasuries and $40 billion in MBS.