Tag Archives: Short squeeze

Short Sellers Lose $1 Billion on AMC

AMC stock has doubled in just ten days, extending a 13-fold rally this year:

Investors shorting the meme stock AMC Entertainment are estimated to have lost $1.23 billion over the last week as the shares rallied more than 116% since Monday, according to data from S3 Partners.

AMC was the most active stock on the New York Stock Exchange by far on Friday as more than 650 million shares changed hands. Its 30-day trading volume average is just above 100 million shares, according to FactSet.

With 450 million shares outstanding, the entire company changed hands nearly 1.5 times during Friday’s trading.

More here.

Some of the interest in AMC may be coming from traders rotating out of cryptocurrencies as those markets have fallen:

Pierantoni observed that just as selling of bitcoin and ethereum picked up, retail purchases of AMC jumped — as did the number of people buying risky but bullish call options popular among Robinhood investors.

The rally isn’t tied to fundamentals: AMC’s business is still struggling, with a net loss of over $400 million in the first quarter of 2021 and rent nearly three times as high as ticket revenue. But in a market where armies of retail traders suddenly band together to push up heavily shorted stocks, shorting anything is a fool’s errand. If a trader wanted to express a negative view, put options, where the downside is limited, are likely to be a safer bet.

I do wonder how long it will take the hedge funds to absorb this lesson. Numerous funds got torched on GameStop, with some losing a majority of their capital. And yet others seem to be lining up to get punched in the face on AMC stock. They would do well to remember the (perhaps apocryphal) words of John Maynard Keynes:

The markets can stay irrational longer than you can stay solvent.

Happy Memorial Day to my US readers, and a thanks to our brave veterans!

Dig into these posts for more on AMC:

Photo: “Police Stationed outside AMC Theater showing Joker film 4573” by Brechtbug is licensed under CC BY-NC-ND 2.0

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Short Sellers Have Abandoned the Stock Market

Short sellers have abandoned the stock market after massive losses in GameStop shares, among others:

According to data from Goldman Sachs, median short interest as a percentage of float across the S&P 500 has fallen to 1.6%, near the lowest reading since 2004.

More here (see the April 19 post.)

But that’s not all. As downward pressure on stocks from short sellers has all but disappeared, upward pressure via margin buying is exploding. Margin buying lets traders borrow money to buy more stock than they could otherwise afford. All those buy orders push up prices:

While the bears head for the hills, the bulls double down. Data from FINRA released today (thank you, Kevin Duffy) show that margin debt among member firms reached a record $822.5 billion in March. That’s up 35% from the average for March across 2018 and 2019 and 82% above last year’s virus-influenced figure.

These are worrying signs for stocks. True believers mortgaging themselves to the hilt along with a lack of skeptics looks like an excessively frothy market to me. I cut back my allocation to stocks several weeks ago, buying beaten-down Treasury securities instead. Especially if your portfolio is out of balance, with stocks accounting for a share that’s above your target due to recent gains, it may be time to take some profits.

Especially if your portfolio is out of balance, with stocks accounting for a share that’s above your target due to recent gains, it may be time to take some profits.

For more on the stock market, check out these posts:

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There Could Be Another GameStop Short Squeeze, But Beware Weak Fundamentals

GameStop shares have come back to earth since the short squeeze a few weeks ago:

But this story may not be over. GameStop remains one of the most heavily shorted stocks in the entire market:

This tells me that the epic short squeeze could happen again. Many short sellers still have their position. Maybe they’re wary of closing it out for fear their buying would set the stock on another upward tear? (If you’re not familiar with short squeezes, see this post for a brief explanation.)

But Redditors should be careful because the fundamentals of this business are weak. And you don’t want to be stuck holding a rotten stock if the squeeze doesn’t happen.

GameStop has 5,000 stores. Why? Where do you buy toilet paper, pillows, or plates today? Probably online, and videogames are going the same way. Publishers are selling them directly to the public online, and in general, people are losing the habit of going to physical stores.

If you got your games virtually or delivered from Amazon when stores were closed, why would you go back to the store once it’s open? You’ve already been forced to build a new habit by the lockdowns, and people don’t change habits readily.

And let’s not blame the lockdowns for everything. COVID only accelerated an existing trend. GameStop’s business has been shrinking for some time, and losses were actually even bigger in 2019. From Nov 2019 to Oct 2020, sales dropped from $4.3 billion to $3 billion, per their latest financial report.

Management talks about increasing online sales, and has had some very real success in growing that business:

…e-commerce sales, which increased 257.4% and 432.9% in the current quarter and year-to-date periods, respectively, compared to the prior year periods.

But where is the discussion of abandoning all physical stores? Why do those 5,000 stores make any sense in today’s environment? It’s a business model created in another time that made sense then, but doesn’t today.

When one part of your business is growing very fast (e-commerce) and another is producing consistent losses (stores), it’s pretty clear what you need to do. But I don’t see a willingness at GameStop to make those hard choices.

I get the impression management is really trying. When things got really tough in spring 2020, the top executives and the board took big paycuts of 30-50% (generally larger than those taken by hourly staff) and sold the corporate jet. That’s the kind of self-sacrifice you want to see from top leadership in a crisis. But can they bring GameStop to a new business model? I don’t see a lot of evidence of that yet.

Two months ago, before it attracted the attention of Wallstreetbets, GameStop was trading around 15. It could easily return there, based on the fundamentals. Wallstreetbets better hope for that short squeeze, and soon.

P.S. Another big focus for the Reddit crowd has been pot stocks. See more info about why their position is weak, how favorite Sundial Growers may be headed for bankruptcy, and how insiders are taking big loans at Sundial.

P.P.S. Don’t you love that sign?

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