GameStop

Michael Frazis, Frazis Capital Partners

31 January 2021

Well, that was one of the more engaging weeks in finance I can remember!

I recorded some views on iTunes and Spotify. Slightly new format so please have a listen and let me know what you think.

Here is one of the original posts on r/wallstbets outlining the case before the stock went up over 100x. 

This story had everything, including the juicy villains of SAC/Point72 (caught multiple times for insider trading), Citadel and Robinhood.

Robinhood marketed themselves as by the people/for the people, while cynically selling their order flow to Citadel for the express purpose of front-running their own clients. Robinhood indeed.

They largely got away with this, but will never by the same after they halted purchases of heavily shorted stocks last week, severely harming their users who were net buyers. 

It's uncertain whether this was due to pressure from their real client Citadel, or whether they were simply running out of cash, which given the emergency cap raises late last week, is almost certainly true. As politicians from all sides are sensing opportunity in the moment we may well find out. 

There are also some new heroes, specifically the hive mind of reddit. There are 7 million people on r/wallstreetbets. If they have $5k each, that's $35 billion of dry powder. That's more than enough to push around a heavily shorted stock.
 
We've noted before that when bearish investment professionals heavily short a widely loved company, the love tends to win out. This has happened time and again across our portfolio with Tesla, Afterpay and Carvana et al. The r/wallstbets crowd was generally very bullish in 2020, again forming an opposing view (and position) to the 'smart' money. We know how that played out. 

We were observers the Gamestop saga, rather than participants, but before you ask, January went OK. The rotations that ripped through the long/short community were largely neutral, though whether the short losses trigger a market sell-off remains to be seen.

The long term consequences are profound. Long/short funds may never be the same. Certainly, institutions should think twice about allocating pension money to long/short funds that:
- did not perform in the crisis of 2020, and
- can toast billions of dollars in days with a single misjudged trade. 

It's a familiar irony that long/short strategies sound like sensible risk-managed approaches, but so often prove the opposite. 

This is all very positive for cryptocurrency: people will long remember the manipulative moves of Citadel and Robinhood. 

One final point: it's important thing to remember that all short squeezes end in the same way: a collapse in price. Once the forced buyer folds at the top, there is no reason for anyone else to buy. Best keep that in mind.

Having said that, this may not be over. The memes and use of language over the past week has been second to none. In fine form comes the phrase: 'is the squeeze squoze?' 

According to the website, with Gamestop short interest still at over 100% by some measures, the squeeze has not, in fact, yet been squozed.

Michael

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