This means that memes could really be an untapped trillion dollar industry if they’re able to drastically raise the social capital of damn near anything, which can be used for profit purposes.
Remember the Hertz story in June? They were thinking about issuing shares.
I dunno, it seems like meme stocks are in that position because they're small-cap companies facing significant headwinds and either got overshorted or have enough brand recognition that retail investors seem convinced they'll survive. I'd rather not be in the position of facing the headwinds and hoping a bunch of suckers show up who will give me money.
What's funny is this is pointing out big holes in the "but it's 150% shorted" story. The retail buy/sell order flow seemed pretty balanced on Thursday according to Citadel, so there isn't much HODL. If the price holds for much longer, Gamestop can issue more shares, and holders of convertable debt are converting, likely selling the shares ASAP.
I guess they squeezed some shorts, some more shorts probably moved in, and some of the money goes to debt holders, and some might go to the company. Some of it makes for a good story, but I wouldn't be surprised if PE and hedge funds quietly come out ahead in aggregate.
The SEC stopped Hertz from issuing shares because the prospectus was basically "even with this infusion of cash we're going to go bankrupt and you'll lose all your money." The ideal meme stock would be one where the company has short-term cashflow problems and so is heavily shorted by investors expecting it to go bankrupt, but which aren't actually just doomed money pits.
Gamestop is actually profitable. Their stock has taken a hit because people believe there is little future. But its financial situation is not nearly as dire as Hertz or other highly leveraged companies.
> What's funny is this is pointing out big holes in the "but it's 150% shorted" story.
Not sure I follow. The hedge funds are shorting the stock, debt holders are converting to stock, Retail (and plenty of big players) are buying and holding. 3 different parties.
The "150% shorted" narrative has been deliberately misrepresented. WSB wants everyone to think that there are 150% short positions and only 100% long positions. In reality, each short creates a synthetic long, so there are always more long positions than short positions.
WSB also seems to misunderstand the short interest. They're pushing the idea that short interest must start going down to indicate the squeeze has started. They're not accounting for (or deliberately ignoring) the fact that new short positions can be initiated at $360 which will be profitable when the stock inevitably falls. Reddit can't keep the stock high forever with a never-ending stream of buyers. That's why they've now shifted to pushing the narrative that everyone should buy and hold $GME to hurt Wall Street, which isn't really true either.
WSB is also pushing the narrative that everyone is holding (or hodling) $GME shares and refusing to sell. This is perhaps the strangest claim of all, since it's so easily debunked by looking at the huge daily volume of shares traded. Shares can't be traded unless a buyer and seller agree on a price. The volume is extremely high, which means plenty of people are selling their $GME all day every day.
WallStreetBets has devolved into a blatant pump-and-dump megaphone.
I agree with everything you said. Just want to add one more point:
> Reddit can't keep the stock high forever with a never-ending stream of buyers
If keeping the price high is dependent on a never-ending stream of new buyers, you've devolved into a ponzi-scheme.
The fact that retail brokerages temporarily limiting new buyers "caused the price to crater" speaks at least a little bit to this interpretation as well.
At this point, it's almost indistinguishable from a pump-and-dump. WSB is pushing every narrative they can come up with to convince Redditors that they should buy! buy! buy! Meanwhile, earlier Redditors are selling off their positions so they can take some profits.
I agree with you, but how it this different from large companies that publish their target prices or reports that cause people to buy/sell stock and in the end its the same - those who were in good position before report have gains and those who came later lose money? To me it looks pretty much identical, and that has been around since the very beginning of wall street.
> If keeping the price high is dependent on a never-ending stream of new buyers, you've devolved into a ponzi-scheme.
Not buyers, holders. The buyers are guaranteed for a while due to the short interest.
> The fact that retail brokerages temporarily limiting new buyers "caused the price to crater" speaks at least a little bit to this interpretation as well.
It cratered and then rocketed back up within the hour. GME has been super volatile and yeah, cutting off the people interested in buying is going to temporarily lower demand which lowers the price, no surprise there.
> In reality, each short creates a synthetic long, so there are always more long positions than short positions.
I feel like this should have led to more interesting problems already.
Like, suppose there is a company which is going down the drain and two of its competitors are willing to pay a few peanuts for its carcass and nobody else wants it at all. It's e.g. 50% shorted, so they each end up buying 51% of the company because 102% is less than 150%. What happens now?
> They're not accounting for (or deliberately ignoring) the fact that new short positions can be initiated at $360 which will be profitable when the stock inevitably falls.
That's still a risky bet given the amount of media coverage this story is getting. The volatility of that stock right now is absurd. And if it goes high enough, even shorts who got in at a crazy price could get busted by an even crazier price.
> Reddit can't keep the stock high forever with a never-ending stream of buyers.
It's a war of attrition at this point, isn't it?
You have the shorts who would really like to wait until the price crashes before closing their positions, but the higher the price goes the more collateral they need to continue shorting the stock. So they end up having to borrow money from people willing to risk losing it in exchange for (presumably) a high interest rate. If the price gets high enough for them to run out of willing creditors, they go bust and anybody who tried to bail them out loses the money they put in.
On the other side is everybody who is holding the stock and is going to keep hyping it until that happens, because if there is a short squeeze they make a mint but if it crashes first then they end up eating it instead of the shorts.
Anybody who thinks they know who is going to come out on top has a better crystal ball than me.
Not trying to say you're wrong, but what's the typical short borrow fee? Isn't the WSB argument that if the price stays high long enough, the shorts will have to exit their position rather than pay their fees?
Also, can anyone explain to me why there are so many short positions rather than just buying puts?
Realistically, WSB can only rally the general public to pour money into $GME for so long before people get tired of being used to prop up a stock. It will come back down.
Short squeezes are short, temporary events. Even with borrow fees in the range of 30-50% (per year), it's a small price to pay for a short-term play. It's not realistic to expect the general public to continue pouring money into Gamestop stock to keep the price propped up.
Keep in mind that shorts can also exit and re-enter their short positions with high frequency. Not all of the shorting activity is long-term shorting that started <$10
And of course, the original Melvin Capital claims to have exited their original short position. WSB wants us to believe they're lying, but I'm inclined to believe them.
Correct me if I'm wrong but isn't the hypothesis that if there are enough people holding (clearing price + X), you can trigger a cascading buying frenzy (the short squeeze) as those who are clearly underwater and/or margin called try to get out at ever increasing prices? And while the little guy narrative gets everyone in the feels, undoubtedly there are some Big Swinging D**s on Wall St who are also hodling to inflict financial ruin upon their competition. There are a few billionaires who've shown up to the party, after all.
Short squeezes aren't just theoretical. They're very real.
However, consider this: If this short squeeze was as easy as WSB wants you to believe, why didn't a well-capitalized hedge fund cash in on it already? It's not like WSB planned this in secret. It was literally headline news on a top-10 website for weeks.
As you said, the hedge funds are certainly making a lot of money here. Early investors are making a lot of money. However, we don't actually know how many of the short positions entered at $2 or $200 or even $400. Smart hedge funds will make a lot of money by taking short positions on this stock, selling their borrowed shares to Redditors looking to get rich, and profiting by exiting their short positions when this finally crashes. Those shorts will cause the "short interest" number to stay high, or even increase, as this situation goes on.
All of this is the symptom of a deeply troubled economy that has been propped up by low interest rates for far too long. There's nothing to learn from this, because there is no way to fit the deeply irrational notion of "meme stonks" into an ideally rational market.
Memes are definitely used for profit already. Just ask any marketing department of a major company. They probably spend as much on astroturfing as they do on traditional advertising.
And not only for marketing, memes are a powerful tool used by agencies and governments for propaganda.
This means that memes could really be an untapped trillion dollar industry if they’re able to drastically raise the social capital of damn near anything, which can be used for profit purposes.