Oh my God ! The hedge fund managers have just been screwed, it’s a real shame for them to lose billions of dollars in a few days! But the reality is very different, individual investors have been failing these morons for decades!
You may already know what’s going on with Gamestop and AMC stock. Not only these two, there are many others including Nokia, Blackberry, and tons of other stocks on the short selling radar.
The reason for the huge price surge is short pressure hedge fund managers.
This is what the WSB lawsuits are for (WallStreetBets is all that matters)
Or hedge fund managers versus retail investors.
It can also be Robinhood versus WeBull.
You lend your friend your car and he promises to bring it back next week and, by the way, he’ll pay you $10 a day as long as he has it.
Your friend quickly sells your car to someone else for $5,000, but thinks he can buy it back for $4,000 and return it to you… pocketing the profit.
Except the next guy sold the car with the same plan.
And it happened again. And again.
Now you want your car back, but no one knows who had it last or what just happened. It’s a shit show and now the cops are involved.
Short Squeeze, brokerages and retail investors
GameStop’s short float currently sits around 250%.
For a second, let’s pretend there are only 100 total shares of GameStop.
This means that person A owns 100 shares. Person B sells short and borrows them, sells them to person C who buys them. At this point, the stock is 100% short.
Person C then lends these shares to person D who is a short seller who then sells them to person E who buys them. The stock is now 200% short.
Person E lends 50 to person F who is a short seller who sells them to person G who buys 50. The stock is now 250% short.
So now people A, C and E all own the same 100. Brokerage sites are limiting purchases because they are trying to unwind this!
If everyone demanded their actions now. Brokerage sites are expected to pay $34.5 billion for stocks that don’t exist.
It’s fucked up but that’s where it gets crazy.
There was never a check to monitor whether a person’s stock had been sold short twice.
When a short seller sells stock. They are paid immediately. The money is therefore in their accounts.
When a person buys stock, they pay money and theoretically own stock. But because the short sale was not followed, the brokers do not own the shares they were putting on the market.
If everyone demanded his actions, he would default and withdraw. This means they only have 100 shares and people A, C and E all have a right to those shares. This means buyers are fighting over who owns the shares. And short sellers keep the money they raised.
It gets super complicated.
Hedge fund and Robinhood problem
If Robinhood failed. Short sellers win. It is then very likely that the Fed will intervene and save buyers from spending tax money. This is why the Fed is getting involved.
By limiting stocks and removing the ability to continue short selling, they are trying to untangle this mess without it causing panic.
This is why the market as a whole is down.
Not because of short covering…but because of the risk of brokerage houses collapsing.
My guess is that Robinhood, TD, IB, and E-Trade are responsible for the vast majority of stocks that don’t actually exist but are owned by multiple people.
Imagine if person A said they don’t want to lend their shares. The broker and clearinghouse have to figure out how to balance the BG person sourcing shares elsewhere.
If the brokerages don’t go bankrupt. Short sellers, hedge funds, are struggling with the situation.
If they suffer… an economic recession.
Retail investors have once again walked away with the bag.
Institutions don’t use these little guys. They use IB to trade, then have the physical shares transferred to 5/3 accounts. If IB were to go through his fund, that would be good. But most brokerage accounts are only insured up to $250,000.
This is a failure of the system as a whole. This is a problem created by the top 0.001% and they are trying to call it a Reddit Rebellion. Damn that.
This is totally a short selling fault. I think the result is that short selling is prohibited.
Example of a short squeeze for a hedge fund
For example, Hedge A sells XYZ stock to Hedge B for $390.
Coverage B sells XYZ shares back to Coverage A for $380.
They move back and forth at an extremely rapid pace, making it appear as if the new price per share is much lower than the previous market value. This scares people who fear losing their entire investment and sell (probably at a loss).
Then the hedgers recover the stocks they shook and the price goes back to its usual level once they are done.
Jim Cramer’s Days as a Hedge Fund Manager (Host of the Mad Money Show)
“What’s important when you’re in hedge fund mode is not to do anything vaguely truthful. Because the truth is so against your point of view that it’s important to create a new point of view, to create a fiction.”
“Then you call the (Wall Street) Journal and find the idiot reporter from Research in Motion and tell him that (rival) Palm has a killer he’s going to expose. Those are all things you need to do on a day like today, and if you don’t, maybe you shouldn’t be in the game.”
“It might cost me $15 or $20 million to take down RIM, but it would be fabulous because it would besiege all the morons who are also interested in Research in Motion.”
“Often when I was short my hedge fund…which meant I needed bearish action, I would create a level of activity in advance that could drive the futures. It’s a fun and lucrative game.”
“Who cares about fundamentals? The great thing about the market is that it has nothing to do with the stocks themselves.”
– Jim Cramer, hedge fund manager from 1987 to 2001, December 2006
References:
https://www.reuters.com/article/cramer-interview-idUKN2036292620070320
Direct link to the video of the interview since the old links in the article do not work
Dealbook NY Times article on Cramer interview
Investopedia Article: Stock Manipulation in the Short and Distortion Bear Market
Thanks for reading. Let me know if you have any questions/comments below.
