Selling America Short
By Todd Strandberg
The website Reddit has caused a great deal of excitement in the public financial markets. The social media site caused several heavily shorted stocks to soar in price, forcing hedge fund managers to suffer huge losses. Melvin Capital, which saw losses from its short positions quickly pile up, was forced to get an emergency loan of more than 2 billion dollars from another hedge fund, Citadel.
At first glance, it appears to be a story of the little guy getting the best of Wall Street fat cats. After a few days, the incident is just more evidence that the financial markets are rigged by the rich and powerful.
The 52-week low for the GameStop company is $2.57. After Reddit users began buying the stock, it rose from the $20 range to a high of nearly $500 per share. This is an insane price level for a company that is almost certainly headed for bankruptcy.
The AMC Entertainment Holdings company is involved in the theatrical exhibition business. The company owns, operates, or has interests in theatres. Because of Covid-19, AMC’s stock has traded as low as $1.91. During the buying spree, its stock ran all the way up to $20.
Short squeezes result when short sellers of a stock move to cover their positions, purchasing large volumes of stock relative to the market volume. Purchasing the stock to cover their short positions raises the value of the shorted stock, thus triggering more short sellers to cover their positions by buying the stock.
When you short a stock, the most you can make on your trade is 100%. Your losses are unlimited if the stock rises dramatically in price. If someone shorted GameStop at $20 and closed the trade at the $483 high, they have to pay out 24 times their original investment.
The Reddit crowd then tried to create a short squeeze in the silver market. In early morning trading last Monday, the price of silver was pushed up to $30. Shares of silver miners surged, and retailers of bars and coins around the world struggled to meet demand.
The ruckus began after posts on the Reddit message board urged investors to buy physical silver. One post encouraged the buying of iShares Silver Trust (SLV), an exchange-traded fund whose shares represent ounces of silver sitting in a vault.
This would force the fund to create new shares and buy silver to back them, exposing a shortage of supply and pushing prices up, said the post under the headline “THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV Silver 25$ to 1000$.”
The problem with buying SLV is that it is likely backed by paper silver contracts that can be created at will. If the price of SLV is driven up past the spot price, the trust can create new shares by buying the physical metal.
Some people promoted the idea of purchasing Comex futures and demanding delivery of the metal when their contract came due. The exchange has changed the rules, which now allow it to settle any contract in cash only. To suppress the price of silver, the Comex increased the margin requirement to $16,500 per contract from $14,000. The increase means those who want to trade silver futures will need to put up more collateral to ensure they can meet their obligations.
The GameStop surge may have caused a few hedge fund managers to spill their coffee when the stock traded in the hundreds. The stock quickly tanked once people realized the company is likely to go the way of Blockbuster. I’m sure there are some hedge funds that shorted like crazy when it hit $480. Now that GameStop is way down, the hedge fund folks are probably out shopping for a new Rolls Royce.
I don’t have a problem with someone taking a short bet against a company. I think it becomes destructive when hedge funds use it to devalue whole industries. Many firms have gone under because they could not raise capital in the market or get a loan because their stock price was too low. We have a deficit in several key metals because big banks have sat on their prices for years.
I know we already have plenty of indications that we are living in the end times. This massive greed on Wall Street is just one more example of the depravity that is the lead-up to the last days.
“Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also…No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and mammon…But seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you” (Matthew 6:19-21, 24, 33, KJV).
— Todd