Investing

The House of "Special Purpose" Acquisition Company

SPACs: Worthless Wealth Transfers at the Expense of Retail Investors

The acronym SPAC stands for Special Purpose Acquisition Company. By now, you’ve probably heard the term SPAC bandied about as much as crypto or any other fad in business and investing circles. They’ve really burst onto the scene in recent years. SPACs have raised more money than ever, selling $26B worth of shares in January.

If you detect any theme in my writing, it’s a highly contrarian and skeptical one. I consider myself keen to detect what the oily trend setters are hiding from the masses they’re trying to rip off. Maybe I’m suffering from confirmation bias, but once again, I see malintent masquerading as the next big thing in the form of SPACs.

Interesting but totally unrelated fact; Tsar Nicholas II and his family were kept in the Ipatiev house in Yekaterinaburg. It’s the house in the featured image. It was dubbed “the house of special purpose” before they were murdered by the Bolsheviks in 1917. Wanted to point that out to help set the tone.

What is a SPAC?

SPACs...So Hot Right Now

The name, though somewhat cryptic, does contain the important detail about what a SPAC is. According to Investopedia “A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.” In other words, it’s a company that doesn’t do anything other than raise money to buy another company to merge with. The result being a publicly traded company that does do something.

Seems simple and innocuous enough. Step 1: Raise a bunch of money, Step 2: Buy an existing company, Step 3: ????????, Step 4: Profit! And with all of the ultra rich hype men and self-declared “SPAC Kings” out there heavily implying it’s the path to riches akin to what they have, who wouldn’t get swept up in the resultant mania? It’s a cool new way to go public that more and more companies are using!

The Devil is in the Details: How SPACs are Formed

As PwC points out, SPACs are formed by founders with a nominal investment in return for 20% equity in the blank check company. The remaining 80% of the company is sold in an IPO. You might expect the cost of obtaining that 20% equity to be 1/4 the cost of the remaining 80%, as basic arithmetic implies would be fair, but such is not the case. That 20% equity stake could come from 4-5 people at a total cost of $1M, and the remaining 80% sold for $99M at IPO. These are random numbers, but that’s the general idea.

After the SPAC IPOs, it typically has eighteen to twenty four months to find a company to acquire. The money raised is held in an interest bearing account until an acquisition is made. For various regulatory reasons I don’t understand the SPAC can’t have a deal secured when it’s formed. Should a deal fail to materialize, the money raised at IPO is returned to investors.

So, when the clock is winding down and desperation to find a deal sets in, what do you supposed happens?

How the SPAC Parasites Really Siphon Your Money From You

There seems to be an inherent conflict of interest in acquiring a company with a SPAC. The ROI is heavily imbalanced in favor of the SPAC creators. If $100M is raised through a SPAC with the equity distribution I’ve described, and a deal is struck to buy a company for that amount, the founders $1M becomes worth $20M, while the $99M raised from investors through the IPO becomes worth $80M. Sure makes investing in a SPAC IPO seems like a terrible idea.

The true conflict of interest comes from what I alluded to early. That is, the narrow window through which the SPAC must find an acquisition target. If the SPAC founders know they’re running out of time, they get desperate to complete a deal to magnify the value of their equity. It’s not hard to see how easily this can result in a very poor acquisition being made. By poor acquisition, I mean a company that isn’t worth what the SPAC pays to complete the merger. One that is, to simply put it, a bad business.

Granted, the investors who own SPAC shares do exercise a vote over the deal. Presumably, they can protect themselves this way from potentially disastrous acquisitions. However, they too are likely feeling some duress as the expiration date looms. They did, after all, invest in the first place in hopes of striking a deal. And they’re counting on the celebrity and supposed expertise of the SPAC sponsors. So, why wouldn’t they believe the deal being put to vote is a good one?

The Results…

Are not great. While SPACs seem to consistently enjoy a post-IPO pre-merger “pop” in value, largely due to hype, it’s not something retail investors can often take advantage of. As the article points out, retail investors tend to buy open market shares. That means they get in after the first day pop resulting from the IPO.

The next bit of information is even more disconcerting. From 2012 to 2020, the average returns of all SPACs post-merger equaled -15.6% after one year. The three year average was hardly any better at -15.4%. The “buy and hold” strategy that has served retail investors with the most steady, reliable way to increase net worth and prepare for the future doesn’t work with SPACs. This data helps to validate my theory that SPACs look for acquisitions that aren’t very good.

Another sobering fact the article points out, it’s the hedge funds and institutional investors making advantageous trades that profit from SPACs. They get in at discounted prices which they quickly turn around for a profit. This sends share prices of the merged company down as a glut of supply tends to do. Many of these institutional investors are the ones who form SPACs. They often get that 20% equity for 1% investment I spoke about. Like GameStop, anyone trying to sell you SPACs as a great equalizer is full of shit.

Case In Point About SPAC Lovers

Chamath Palihapitiya, SPAC lover and scumbag extraordinaire.

In case you don’t recognize this cretin with the totally punchable face, his name is Chamath Palihapitiya. He was an early Facebook employee and minority owner of the Golden State Warriors. He’s also a successful venture capitalist. By successful, I mean he shamelessly promotes SPACs he sponsors to the witless on Twitter to bleed them dry. People act like this guy walks on water. And he takes advantage of that slavish devotion he’s somehow managed to cultivate to separate fools from their money.

Perusing Wikipedia makes it easy to find some basic facts about his history that should set off alarm bells for any discerning individual. He’s most well known for his VC fund, Social Capital, which he immediately “burned down” as Axios put it. Turns out he enjoys cavorting around Italy with his girlfriend more than working, and ultimately returned investor capital and converted the fund into a family office. Probably because investors got fed up with his shit.

Also worth noting “During the GameStop short squeeze, Palihapitiya repeatedly attacked Robinhood and its founders for being unethical by selling payment for order flow to high frequency trading firms like Citadel Securities and pushed his fans to switch over to SoFi, which was merging with his SPAC, yet failed to mention that SoFi employs the same practice of selling payment for order flow to HFT firms (including to Citadel Securities) and owns a 16% stake in Apex Clearing Corp, a clearing house involved in the controversy.”

He was so committed to rabble rousing during the GME saga that he telegraphed his purchase of call options. He quickly profited and donated the money to David Portnoy’s relief fund for small businesses. A noble deed, but a cynical one meant to further cultivate his Robin Hood image (no pun intended).

More SPAC-y Bullshit

Why am I so sure of that? One of his latest shady endeavors, Clover Health, a medical insurance company he made $290M off of going public through a SPAC, is undergoing a short squeeze of it’s own. You may not be convinced by now that SPACs are inherently scammy, and not agree as of yet there was anything wrong with Chamath taking Clover public this way. But maybe you’ll change your mind when you learn he lied to investors about the company about not only how it obtains sales, but also the fact that its business model is under investigation by the Justice Department.

If you check out his pinned tweet, you’ll see droves of future bag holders lining up to help him pump up Clover stock to “stick it to the hedgies.” Using the cultish loyalty of his impressionable fanbase, he’s set to drive up the value of a dog shit investment in order to profit tremendously at said fanbase’s expense. It should be pretty transparent what he’s doing. Convince everyone of your faux-heroism by supporting the GME short squeeze. Donate the proceeds and convince users to switch to a platform you own. Profit! Leverage that heroic image to drive another short squeeze. Profit again! All the while gaining users without disclosing a conflict of interest and leaving a lot of regular folks holding bags when the stock rallies you got them behind come crashing back to earth.

Stick it to the hedgies all you want. All of this is engineered to enrich someone who has no use for the riches he obsesses over.

Final Thoughts

In case you’re wondering how this all might come full circle, Chamath’s SPAC record recently has been abysmal. The hit SPACs have been taking across the board has been more profoundly felt by none other than the SPAC king himself. And if you need any more information about his ethics, or lack thereof, the Bloomberg article points out he said he’d sell shares only in the rarest of circumstances, and proceed to sell his Virgin Galactic shares a month later.

Does this sound like the type of guy you’d trust with your money? If there’s one takeaway you should have from my ramblings, it’s not even that SPACs are so awful per se. They are. But what’s most important to learn, is that if some billionaire is hawking something and actually saying it’s good for regular folks with a straight face, he/she thinks you’re one of the suckers born every minute that PT Barnum warned the world about. SPACs are pretty much created to screw people out of money, and the people who create and evangelize them have only that in mind as their end goal.

Cryptocurrency, Bitcoin, and Fiat

Crypto: Everything Wrong With, and Right About it

I’ve held off on weighing in on the crypto craze because I was a little concerned about rabid internet trolls tearing me a new asshole. But no longer. I feel in order to be true to my principles, I must always display my favorite entrepreneurial trait, courage (thank you Peter Thiel), so it follows I have to give my unsolicited opinion regardless of how many petty arguments may ensue. So, here goes nothing, my take on all things cryptocurrency and Bitcoin.

Crypto: The Good

It does increasingly seem like cryptocurrency’s legitimacy as a store of wealth and investment vehicle is here to stay. Kevin O’Leary of Shark Tank fame has come around to investing in Bitcoin after spending a good amount of time being critical of crypto in general and Bitcoin in particular. His colleague on Shark Tank, Mark Cuban, has recently done the same with Ethereum. Wall Street firms have helped legitimize crypto investments. Morgan Stanley has begun offering Bitcoin funds to its wealthy clients, and Goldman Sachs has followed suit.

And why not? None of the criticism I’ll discuss, or any you might hear (it’s not real, it doesn’t do anything etc) really get in the way of it being an asset. Gold has all but ceased to have any actual function since the world got off the gold standard (and no libertarians, we’re not going back), and that hasn’t stopped it from being a highly sought after investment. Bitcoin, and crypto in general, just seem to be the next technological iteration of commodities investing.

I’m no techie, but from my surface level understanding, Bitcoin transactions are incredibly secure. As a payment system, it has no problems with fidelity, and fraudulent transactions are all but impossible.

Crypto: The Bad

Let’s get one thing out of the way. My critical take on Bitcoin and the cryptocurrency craze doesn’t come from a place of envy or malice. If you’ve made a lot of money investing in crypto, more power to you. I don’t have energy to waste being jealous of people who make tons of money. I’d die from exhaustion given all of the overnight uber-wealthy folks being minted daily thanks to insane IPOs and crypto.

Now that that’s been said, I must point out, I’m utterly unconvinced the “decentralized revolution” in currency, a greater economic movement away from fiat currency resulting in unprecedented freedom, financial independence from state overreach, peace and goodwill on earth, and all the warm and fuzzy feelings you can think of, is on the horizon.

One thing Bitcoin, nor any crypto for that matter, has evolved into yet is a functioning currency, which is the point. It’s volatility is the most obvious reason why. It’s not altogether very surprising why when you think about it. Bitcoin enthusiasts continue to point to its massive increase in valuation-in fiat currency terms. If it’s supposed to move us off of fiat currency, how does becoming worth more fiat equate to freeing us from the constraints of government issued currency? If anything, it only ties us down further to fiat.

Actually Buying Things With Crypto: Who Does it?

As it stands, about 2.3K businesses in the US accept Bitcoin as payment, just over 15K worldwide. In the U.S., there are about 7.7M businesses with at least 1 employee. The number increases to about 32.5M if you include freelancers, sole proprietorships etc. That means about .029% of U.S. businesses, if you accept the lower estimate, accept Bitcoin as payment. That’s not even a rounding error.

What most people don’t realize about Bitcoin is that merchants who accept it usually convert it to fiat, which not only gunks up the works a bit, slowing down the transaction and minimizing the advantage of speedy transactions some cryptocurrencies have, but also demonstrates their apprehension about using crypto as an unbacked currency, like fiat. The same is true for PayPal. They don’t send any BTC to merchants who use it for their own purposes. It all just gets liquidated and the fiat is forwarded to the merchants. Unless those same businesses accept crypto through their own channels, I see no reason to include them as businesses that formally accept cryptocurrency as payment.

In 2010, a guy named Laszlo Hanyecz bought two pizzas with 10K Bitcoins. This was of course when Bitcoin was still a novelty, long before its price skyrocketed. As of this writing, Bitcoin trades for $58,245.60, meaning Mr. Hanyecz paid $582,456,000 for two pizzas. He says he has no regrets, I say he’s full of shit.

Therein lies the problem with Bitcoin and crypto in general, the aforementioned volatility. Everyone keeps talking about how much more it’ll be worth next week, next month, next year etc (again, in fiat currency terms). If that’s the case, why would you actually *spend* it? You know, that thing you do with currencies? Sorry Elon, I’m not buying your $38K Model 3 with Bitcoin that’ll be worth $50K later this year. Makes no sense. Makes even less sense to buy Mavericks tickets with Dogecoin, for a variety of reasons.

…And The Ugly

This is akin to what economists are nearly unanimously united in saying is a bad thing: deflation. Deflation is an across the board drop in prices of goods and services. Seems great, who doesn’t like cheaper stuff? But deflation kicks off a deflationary spiral. People hoard money expecting further drops in prices, which leads to further drops in prices to try and incentivize purchases. The price of debt increases as its buying power increases, which isn’t good for business. As a currency, crypto can never work if it’s volatile in general, and certainly not if the expectation is for the buying power to increase. The economy would not function.

Ultimately, the underlying problem with crypto as the new way to transact is it’s supposed main strength, its decentralization and lack of government mandate. It’s certainly appealing to think we can have economic freedom independent of government constructs, but no amount of fetishizing such freedom and its implications, like no longer being burdened with the specter of Johnny Law coming to take your guns and make you gay marry an illegal immigrant or whatever, is going to make cryptocurrency work.

Fiat currency is a collective delusion. In and of itself, it isn’t worth anything. And that’s why people think crypto can work, since the same is true. But, paradoxically, despite the illusory nature of fiat currency, it is in fact, real. The reason why is the law. In order to do business in the U.S. you must accept U.S. dollars. You can’t refuse to. The U.S. also guarantees the payments of its public debt in dollars, not cryptocurrency.

Last Thoughts

None of that really raises any cause for alarm. One thing that is truly tragic about Bitcoin and crypto in general is the massive energy requirements for the compute power need to complete the calculations to mine Bitcoin. It seems like the use of countries as a benchmark for the scale of energy input into worldwide mining keeps rising in population, Argentina being the most recent. Should the price continue to increase, which is likely as it becomes harder to mine and the supply continues to approach its limit, this problem is only going to be exacerbated, as is the concurring problem of global warming. Even though more than 18 million of the total supply of 21 million Bitcoins have been mined, the rewards for successful mining will dwindle until all have been mined in 2140. So, we’ve got a long time to go.

Maybe there’s a silver lining to be found. Perhaps crypto will inadvertently spur a clean energy revolution that will save the world from cooking to death. If so, I’ll be eternally grateful. Let’s hope that, and not something far worse, is the main externality of the cryptocurrency “revolution.”

GameStonk: Why This Isn't Some Morality Tale

GameStonk: Why This Isn’t Some Morality Tale

I’ve been kicking around a lot of thoughts about GameStop(GameStonk-thanks Elon and Reddit) lately. Who hasn’t? This time, there’s no exception to the fact that my thoughts tend to run contrary to popular sentiment. Normally, when droves of people get excited about something, I tend to get worried. Since I value contrarianism as an exercise in courage, I have to share my thoughts in the interest of consistency. I’ll be using GameStop and GameStonk interchangeably, since the former is the name, obviously, and the latter is fun.

By now you’ve heard of terms such as short selling and short squeeze. There’s been plenty written about what these terms means, but in the event you aren’t familiar, it’ll be helpful for me to define them so everything else makes sense.

Shorting a stock simply means to bet against it. Traditionally, people hold long positions in equities. They buy the stock expecting the value to rise. A short is the opposite. They sell shares expecting the value to drop and profit accordingly. There are many ways this is accomplished. What hedge funds have done with GameStop stock is borrow the stock and sell it. They expected to buy it back later, after the share price dropped, return the shares to their owners, and pocket the difference.

What’s driven the share price up is the short squeeze. I’ve written previously about short interest, the percentage of all outstanding shares being borrowed and sold in this post for the top 50 companies in the world by market cap. At the time at least, Danaher had the highest short interest at just under 10%. GameStonk, by comparison, was at ~140% at its highest.

How is this possible? Simple; someone borrows a share, sells it, then someone else borrows it from whoever they sell to. One share can theoretically be borrowed an infinite amount of times.

The GameStop Short Squeeze

A short squeeze occurs when, picking up on outrageously high levels of short interest in a company, investors rapidly accumulate long positions (buy shares) of that company. The resulting demand raises the price of the stock. As a result, the shorts position rack up losses. Short sellers are essentially extended loans in the form of the shares they borrow, and while their positions are still open, meaning they haven’t bought back and returned the shares they owe, they need to pay interest on these loans. It not only becomes costly over time to keep short positions open for this reason, but also as losses mount, the short sellers need to put up additional collateral to prove to their creditors they can repay what is owed when they want it.

As a side not, anyone who loans shares to short sellers can demand their shares back when they please, though normally they don’t do so provided the interest payments are made.

So, when short sellers see the price move upwards, they get spooked and scrambled to close their positions. Since so many shares are being bought by the long holders, it creates a lack of supply relative to the demand, which only drives the price up even more. The short sellers become increasingly desperate, and the losses mount as the price continues to rise.

What Are GameStonk Long Holders Trying to Do?

The overarching narrative since this has begun is that this is a concerted effort by regular people, if you will, to stick it to the Wall Street titans who have been screwing over, well, everyone else in their pursuit of obscene profit they have no real use for. Most of these guys had more than enough money to buy all the toys they could play with a long time ago. That hasn’t stopped them from continuing to manipulate markets, exacerbate risk using extensive leverage, and spread it around the financial system with exotic and esoteric securities. A lot of people are angry with them, and by them I don’t just mean hedge funds. I’m talking about all institutional investors.

Frankly, I agree with these sentiments. Fuck them. Again, them meaning the institutional investors. They are in large part responsible for much of the economic catastrophes we’ve suffered through. And when I say we, I don’t mean that to include them, because, like true parasites, they always make out like bandits. Rarely any comeuppance or accountability.

The GameStop buyers, the guys from Reddit are really trying to stick it to the institutional investors that are in their crosshairs. They intended to keep their losses mounting, doing as much damage as possible to the culprits behind the world’s many economic woes. By driving the share price higher and higher, they hope to compound the hedge funds losses and misery, and make them pay for their malfeasance.

Clearing Up A Few Misconceptions About Short Sellers and Brokerages

Like anything with a wide variety of inputs, there are going to be glaring misunderstandings about what’s going on. A lot of the resentment aimed at the Wall Street overlords overlaps with a general resentment towards short sellers. This resentment is predicated on the notion that short selling causes stocks to fall, hurting companies, 401Ks, small investors etc. While institutional investors certainly manipulate markets to their advantage, and the deck is heavily stacked in their favor, short selling in and of itself does not manipulate markets. Not anymore so than taking a long position does. Short selling serves an important purpose; maintaining market equilibrium.

Bubbles, as we know, are really not good. Some people laugh all the way to the bank on the way up. But, they’re mostly those who are already well to do. The little guys are usually bag holders when the dust settles. While bubbles still exist and likely always will, short selling serves as a counterbalance to irrational exuberance, which feeds into bubbles. By counteracting this exuberance, shorts can help make bubbles less commonplace.

Unless regulators find more information about brokerages, particularly Robinhood’s, decisions to limit buying of GameStop, it would seem there wasn’t anything fishy going on. It reeks of impropriety because they earn money on what’s called Pay for Order Flow for Citadel Securities, who was invested in Melvin Capital, a hedge fund with a heavy short position in GameStonk. Pay for Order Flow means Citadel pays Robinhood to execute trades RH’s customers make through the app. People jumped to the conclusion they were protecting Citadel from the mounting GameStop short losses, and by extension, helping them wage class warfare.

It Gets Worse…

Idiotic swing and a miss on the GameStonk saga.

I made the mistake of getting into something of a row with this class A idiot on LinkedIn, all by making the apparently hubristic mistake of asking for evidence of his contention in the screenshot. After steadfastly refusing, he posted an SEC disclosure on a different thread, which had records of Citadel’s PFOF to RH. What the meme trading Einstein didn’t realize is that makes Citadel a customer of RH, not an investor. It’s the difference between the McDonald’s franchise owner and the people standing in line. Goes to show how easy it is to get tripped up about everything going on.

“Caesar’s wife must be above suspicion”, Julius Caesar once said. I won’t go in to the exact anecdote this quote comes from, but it means the mere appearance of impropriety is bad enough, which RH is learning the hard way. But they, like WeBull, Public, and many other brokerages have explained they had to stop processing orders because the clearinghouses that settled these trades demanded more collateral from the brokerages. Brokerages are required to put up collateral in order to guarantee the faithful execution of trades. It helps support the necessary fidelity markets require to operate effectively.

With so much activity going on around GameStop, the clearing firms companies like WeBull use, Apex Securities, or RH’s clearing firm which it owns and operates, didn’t have the necessary collateral the clearing houses demanded. That’s why RH drew on credit lines after first stopping trading. That money was used as collateral for when trading on GameStonk began again.

If it had been only Robinhood that halted trading, I would certainly understand the suspicion. But they weren’t alone in doing that. They just stood out by having Citadel as a customer.

Is Shorting GameStonk Working?

The obvious place to look for the answer to this question is at the most notable GameStop short sellers. Some of the results are promising. Citron, which has been publishing research about which stocks to short for 20 years has decided to end that practice. I don’t agree with trying to end short selling, but for those who do on WSB and in the greater world, they’ve scored a success here.

As for successes with hurting the hedge funds, that’s a bit more limited. Melvin Capital, founded and run by Gabriel Plotkin, a Steve A Cohen protege, has mistakenly been described as having been “taken down.” Melvin capital did lose 53% of its investments, but never declared bankruptcy. Nor will it as a result of the GameStop kerfuffle. Citadel and Point72, Cohen’s fund, bailed it out with $2.75B. The squeeze also won’t affect it anymore. Plotkin confirmed on CNBC that Melvin’s short positions had been closed by January 26th, and that rumors of it going bankrupt were false. And apparently, it’s lining up more investors.

Point72 has apparently lost 15% and D1 Capital Markets, a hedge fund invested in Robinhood, has lost 20%. As of the time I’ve started writing this, the overall short interest in GameStonk has plunged to 39%, so not nearly as much potential to do damage anymore, especially as the short positions continue to get pared back.

How Much of A Role Did Retail Investors Play in GameStop’s Rise?

There’s no doubt that WallStreetBets over on Reddit got the ball rolling on this. However, it’s unlikely WSB and retail investors in general are responsible for the entire run up. Just like people have been saying retail investors in RH have been inflating today’s epic bull market, it probably isn’t true. ~80% of all equities in the U.S. are owned by institutions. It stands to reason far less than the full ~20% of retail investors got involved in this. That likely being the case, it’s hard to imagine retail investors were a true force to be reckoned with.

On the other hand, there may be some sad irony in this whole sordid saga. Famous billionaire Chamath Palihapitiya billionaire bought calls early on for $115 and donated the profits to David Portnoy’s fund to help small businesses during the pandemic. Following suit was Justin Sun, another billionaire, telegraphing his move into a long position on GameStop.

Billionaires are fueling this revenge fantasy against short sellers, for their own nefarious purposes.

These anecdotes on their own are not enough to prove big money and institutions were pumping up GameStop’s stock, but they indicate it was more than retail investors. 1.7M of the outstanding 69.7M shares are owned by Michael Burry. Doesn’t seem like a lot, but it is for one person. The largest individual shareholder, MUST Asset Management owned 4.7M shares. I use the past tense because that was before they locked in ~$3B in gains by selling on January 27th. We may never know just how much retail investors had on driving this up, but I see the indicators saying the effect wasn’t as profound as its most adamant cheerleaders believe.

Hedge Fund Update

I wrote the above before discovering what I’m including below, but I’d like to leave it there since there’s some interesting information. Learned through my TDA account that some hedge funds profited massively by timing this bubble. Include a screenshot of the article below. Has a few hedge funds going on record talking about the gains they made.

Turns out hedge funds are the big winners with GameStop

Can’t link to it since it’s behind a credential wall. May be hard to read, so I’ll point out the highlights. Hedge fund Senvest Management LLC profited $700M from long positions in GME.

Another hedge fund, Mundrick Capital Management, made $200M off of AMC, which is relevant since what’s happening with that stock is a similar phenomenon.

As you can see from this thread, plenty of the “little guy” retail investors left holding the bag. So, some hedge funds got burned and lived to see another day. And others laughed all the way to the bank. The cost was several bandwagon enthusiasts losing money that could, at the very least, be put to better use. All I see is failure in their mission to balance the scales. The dragon they were trying to slay turned out to be a windmill. What sets this apart from all of the times hedge funds screwed over regular people is that the regular people did this to themselves.

What’s it All Coming to for Short Sellers and Hedge Funds?

Thinking about this bothers me. Despite all the screaming about a new dawn, a revolution that will upend the world of finance and user in egalitarianism in financial markets, everything that’s happening here has happened before. Usually, this sort of thing ends badly.

The vitriol towards the hedge funds, as I said earlier, is understandable. They deserve it. But the reason why they’ve earned such wrath is because of the impacts of their behavior. That is, it’s all bad for people with significantly less power than them. The kinds of people they step over as they climb the ladder of obscene wealth even higher.

But this whole thing is just a revenge ploy, and while that’s tempting to anyone with a sense of justice, it tends to make those seeking it into the same sort of monsters they seek to destroy. It’s like the freedom fighter who becomes a tyrant after a successful revolution. It’ll be business as usual for Melvin, Citadel, and Point72. They may not be so bold in their short positions, but they’ll continue making gobs of money. The people who will ultimately suffer, like with all asset bubbles, is the little guy. The people the supporters of this bloodlust induced mania are supposed to be sticking up for.

How are the GameStop Enthusiasts Responsible for This?

Many have said they will hold GameStop even if it becomes completely worthless, without heed for the cost. That’s fine if you can afford it, but this sort of thing spills over. There will be many bag holding people who cannot afford to lose when this comes crashing down to earth. And crash it has. The short sellers have cut their losses, so there’s nothing left to squeeze, and GameStop sure as hell can’t justify it’s rally led valuation. The big long positions on GameStop are going to close, like with MUST, as those institutions seek to lock in their gains. This will all dampen the rally by increasing supply and lessening demand for the stock.

And if this had all actually worked, and the short sellers went belly up, then where would the demand for GameStop shares come from? Whichever way you look at it, GameStonk’s market cap has to come back down to reality. When it does, everyone holding out for another rally is going to suffer losses. As will all of those who got in late on the way up. No matter how you slice it, the smaller investors will get burned for playing with fire. And if everyone cheering on this rally is heedless of that fact, they can’t claim any moral high ground. They’re guilty of much of the same malignance as the hedge funds they despise.

Who Else Has Profited Similarly to GameStonk?

An additional anecdote demonstrating how the wave of short squeezes is rewarding people who don’t deserve it is Koss. They’re currently plummeting back down to earth, but not before the Koss family hurriedly sold off shares, which may have kicked off the current readjustment. Koss has razor thin margins on revenue that’s been plunging for years. The shorts were justified as they were with GameStonk. In other words, incompetent business people running a shit company enriched themselves at the expense of regular people they left holding the bag.

Koss, a GameStop clone with more bad actors.

What Does the Future Hold for GameStonk, Robinhood, and Short Sellers?

As for GameStonk, I’ve covered that mostly. Other than the market cap coming back down to a reasonable level, GameStop will continue doing what it does, which isn’t good. GameStop has been losing money for years, and it’s not a hyper growth startup. It’s just a bad business, and short selling wasn’t driving the price down. Short sellers just realized it would go down, under normal conditions. Perhaps GameStop will go into bankruptcy eventually. Seems like an inevitable outcome for a company that continues to hemorrhage money. If GameStonk enthusiasts actually care about helping the company, they should buy games and not stock.

I’m not an authority on the law, but it doesn’t appear Robinhood actually manipulated markets. The SEC may take a look and find they did. Also, they may not, in which case many people will howl for blood as they’ve already settled on the notion RH is guilty of something and refuse to be convinced otherwise. As for the lawsuits cooking up against it, doesn’t seem like they’ll go anywhere. Robinhood is not bound by its user agreement or by law to execute any trade. Unless regulators do in fact they were manipulating markets or favoring certain investors, these lawsuits will likely not succeed.

As far as the short sellers are concerned, I’d be surprised if they didn’t learn anything from this. Leeches they may be, but they didn’t get where they are by being stupid. They won’t stay away from short selling, they’re just going to be more surreptitious about how they go about it.

And for Everyone Else?

It’s kind of silly to think this is really going to usher in a new paradigm by tearing Wall Street tycoons down from their pedestals. Melvin Capital lost ~$8B.. The overall value of the U.S. equities market is over $50T. The total losses for short sellers in GameStonk won’t even amount to a rounding error. There was something of a sell off of long positions by hedge funds to cover their losses that the market felt. But that was probably more a result of panic about the general direction of the public. Considering the size of the short sellers losses compared the stock market, it’s hard to fathom plugging that hole is what brought equities down across the board.

Petitions have been floating around Reddit to get short sellers to disclose more about their positions. If that does result in some kind of change, the cynic in me believes the rowdy mob will be happy with its window dressing solution and turn its limited attention span elsewhere.

From what I’ve gathered, regulators believe the market infrastructure held up pretty well. If that’s their sentiment, I wouldn’t see too much reform coming out of this.

Again, the cynic in me rears its ugly head. I feel like there’s nothing the institutional investors can’t work around. If anything, regulators will probably try to prevent future short squeezes out of fear very large ones might actually cause a real problem. We’ve been trading shares of companies since the Dutch East India Company, and though much has changed, much remains the same. Some obscenely wealthy people hoard most of the gains, leaving crumbs behind. I’m not confident GameStop’s legacy will change that.

If GameStonk is a Revolution, it’s the French Revolution

Only King Louis XVI is keeping his head, the Robespierre brothers still lose theirs, and some even more belligerent asshole will likely come along to ruin things for everyone in a few years.

Case in point, u/deepfuckingvalue aka Roaring Kitty may be asked to testify in front of Congress. Congress probably wants to know if this is all some pump and dump scheme he concocted. He shouldn’t have to worry too much, since he lost $19M in two days. If this was a scam, guess he forgot about the dump part. This is what you can expect from obstinately holding onto a stake with an implausible valuation.

Updates

As of 2/9/2020, short interest has declined in GameStop to 42.24% according to TDA and 42.27% according to Finviz.

More disturbingly, Yahoo! Finance and The Harris Poll surmised that as many as 28% of all Americans invested in GameStonk or other viral stocks making the rounds in the news. Needless to say, for reasons explained above, this is disconcerting.

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