Gamestonk [GME]? Did Tesla [TSLA] Shorts & Retail Investors Pave The Way?
January 31st, 2021 by Frugal Moogal
I was trying to write the third part in my “Tesla [TSLA] Retail Investors Have an Advantage — Here’s Why” series (if you haven’t done so already, read part 1 here and part 2 here), and I kept getting distracted by reading about the various short squeezes currently being carried out on Wall Street, headlined by Gamestop. On that topic, I am amazed by the parallels that the WallStreetBets subreddit has to a lot of my own research over the past few years.
Before I go on, if you’re thinking “I’m on CleanTechnica, what does this have to do with the future of clean technology,” I’ll admit up front this is less about the technology and more about how important the financial success of cleantech companies like Tesla is. If you’d like more on my reasoning, I have a three-part series on that I wrote too, answering why I feel the financial success of Tesla is hugely important. While this short squeeze may not seem like that big of a deal for clean technology, I think it could have repercussions that resonate for decades and really change trajectories.
Also, I think it’s super important to disclose — I do not own any Gamestop stock, nor any shares of any companies that have been named as being affected by the most recent short squeeze spree, except Beyond Meat, Inc, which I closed out my position on Wednesday. (And, as an aside that you may not care about, when I get interested in a company, I usually buy a super small position before doing research on it so that I can feel like I have some “skin in the game” that justifies my research better, and I add to that after I research it or sell it after I determine it wasn’t so neat. I love the Beyond product. I’m a meat eater, but I prefer it over meat. I bought two stocks for about $70 in May of 2019. By the time I started digging into them a couple weeks later, the stock price had nearly doubled, and I couldn’t justify buying more for that price. So, we’re talking about a $260 gain here, not life changing money or anything. I do intend to research Beyond more if it falls again.)
And as always, this isn’t financial advice. I literally represent myself as a puppet online. If you’re using this for financial advice, you better read through it and decide if I’m crazy or not first, because I’m literally a puppet here.
With that, let’s start by explaining what happened…
The GME Short Squeeze
Simply put, a bunch of hedge funds decided that GameStop shouldn’t be long for this world — and in a traditional way, they have a point. I’m a gamer, and I despise GameStop. The last time I bought three new games from them online, I got three games in the mail, all opened, including one that was missing the online code. Upon emailing customer service, they told me these open games were clearly “new,” and while they would take them back, I should think about if I want the games more next time.
So, their online business has issues, their in-store experience sucks, and it looks like a flea market, and there is a belief that game sales are transitioning to mostly digital, so they have been having issues and closing down stores to try to find a workable solution.
And, while I have some pretty major issues with GameStop, the company has existed for ages and has some decent equity, so it can — hopefully — reshuffle its business and find a new plan that will work for it.
Alas, a bunch of hedge fund managers decided instead the business was dead, and the best way to take advantage of that was to short their shares. They took out an insane short position — literally 148% of the shares — because they were so greedy to bleed the company dry and to pocket all the money themselves.
If you don’t know what shorting is, the quick version is it’s when a fund borrows a share someone else owns and sells it, hoping that it will go down in price so they can buy it later before returning to owner, thus making a profit. This is legal, and while it can once in a great while prove to be valuable by providing a reward for people who dig into a company’s financials and find something amiss (like what happened to a certain trucking company which shall not be named), it causes an incentive for these hedge funds to spread falsehoods about these companies to drive down their share price even further.
For the companies, this makes things a lot more difficult, as it limits the options a company in trouble has to get out of trouble. It’s traditionally very difficult to raise money when you have tons of money bet against you.
In this case, a bunch of people on Reddit discovered that these hedge funds had shorted GameStop so heavily that a small increase in demand could cause a massive short squeeze — basically, if prices rise on a shorted stock, the entity holding the shorted stock needs to have money to cover the potential loss in case the price doesn’t drop again. If that becomes too high, or they don’t have the money, they are forced to buy back their shares at a higher price. This creates additional demand on the buy side, pushing the share price higher, and keeping the process going until the majority of shorts have covered.
These redditors saw a company they felt was fundamentally undervalued and started purchasing shares. The same thing was done with other stocks that these hedge funds have massively shorted, such as Bed, Bath and Beyond, AMC, Beyond Meat (although, this one I see less often listed), KOSS, and a handful of others.
These hedge funds, which for years have been manipulating the market, especially on the short side, suddenly saw their bets giving them massive losses. One source recently stated that Melvin Capital, which is one of the hedge funds being the most “hurt” by this, loses $1 billion dollars for every $7 increase in GameStop stock.
Melvin Capital supposedly only has about $12.5 billion dollars of capital. As I write this, in the past 10 days, GameStop is up more than $150 per share, meaning that unless GameStop’s price drops quickly, Melvin Capital is on the hook for around $7.5 billion more than it has if these numbers are correct. I’ll admit these numbers seem fanciful, but I for one honestly hope they are true.
On Thursday, a lot of the trading apps —headlined by Robinhood and Ameritrade — decided to stop allowing people to buy these shares (the reasons and intent are debated), while hedge funds could still do whatever they wanted.
Incredibly, after an early signal that perhaps the Biden administration would prop up these greedy hedge funds — again, like in 2008 — AOC suggested that Robinhood and Ameritrade’s actions weren’t fair for retail investors and they should be investigated. Shortly after posting this, Ted Cruz agreed with her.
I’m shocked because both sides of the aisle in the government often work more for their donors than their constituents. Remember 2008? These hedge funds and giant banks that took on tons of risk got bailed out. The people who got screwed by their market manipulation at retail got left holding the bag. This time, it seems like they are aware, and even the media narrative, that started as a straight, “Oh no, stop the crazy redditors!” has shifted to more of a, “the redditors used a loophole the hedge funds usually only get to use” narrative.
And let me not understate this — I think this week could be one of the most consequential in my life for how the market operates in the future. There is now a tool by regular people to stop and punish companies doing underhanded financial manipulation and leaving them with the bag. In the past, if you liked GameStop, looked at it’s financials and figured that it was undervalued — because on the surface, it was — as far as I’m concerned these hedge funds were stealing your money by using manipulative tools that they had access to so they could pick winners and losers.
Where Does Tesla Come In?
If any of this sounds familiar to you, I agree. Reading about this has felt like déjà vu all over again from when I was first starting to research Tesla stock. I discovered a company that sure seemed to be fundamentally undervalued compared to what I felt it would do in the future. If you look at my previous articles, one of the big things I did was look at the arguments against Tesla as an investment — when I had started writing, I owned 8 shares of Tesla but felt that was a massive risk. Since I was doing the research anyway, I figured, why not publish what I could find? CleanTechnica Chief Editor Zach promised that even if I uncovered something that wasn’t positive, we’d run it.
I never did.
In fact, on October 7, 2019, I wrote a sort of apology called Tesla FUD: I Was Wrong, where I felt compelled to explain why, after the research I did, I went against my early declarations that I didn’t intend to add any more stock. I instead started adding to my position due to what I found.
The thing is — Tesla is the first stock to, on a massive level, prove to retail investors that the big hedge funds didn’t know what they were doing. The biggest thing that I felt that I uncovered, which, quite frankly, I was surprised didn’t get much play, concerned one of the early “bear theses” about Tesla was that it was purposely not putting away almost any money for warranty work, and that this would cause a giant cash crunch when the warranty work came due.
This seemed reasonable, so I dug into the publicly available data for Tesla warranties and found out that it sure seemed like Tesla didn’t have a warranty accounting problem … except that it was holding onto too much money and not paying out much at all for warranty work. I published my first article on that here, citing the website WarrantyWeek.com and showing that it seemed like Tesla was doing just fine. This caused Eric Arnum, the editor of WarrantyWeek, to reach out to me, and we chatted back and forth about what we could determine from those financials to see if I was on track. That led to a second article.
I’d really suggest going and reading those articles, but here is the main takeaway I remember, directly from Arnum:
“Note that the only [companies] with higher months in reserves than Tesla are Cummins and Boeing, and both of them have massive warranty crises on their hands right now — Cummins with the diesel engine emissions and Boeing with the 737 MAX. In other words, Tesla is positioned like its peers who are in crisis, even though Tesla is not in a crisis.“
To me, this was a watershed moment. The stock analysts were either lying to manipulate the market, or were incredibly stupid. I think it was a combination of both, honestly — some were probably trying to manipulate the market because, at the time, Tesla was the most heavily shorted stock on the market. It didn’t matter that the publicly available information and the experts in the field were saying it was wrong. Heck, a few of the comments even claimed that Arnum and I didn’t really understand warranty accounting but these shorts on Wall Street did.
Warranty accounting was a great thing for the shorts to aim at because it sure sounded scary, and it’s a relatively complex financial maneuver, and as I pointed out in one of my articles, it is one of the places where a company can stash money or pull money from legally to make themselves look better or worse. It took me a few hours of research to ensure that I wasn’t looking at something wrong for the first article, and I wanted feedback to see what I missed. Getting in touch with Arnum was incredible, and just confirmed that I was right.
It, to me, was the point that I realized the fix was in. When I could research a company and find things to directly contradict bearish claims within a few hours, that really opened my eyes to how manipulative Wall Street analysts and hedge funds are. Most financial analysts only cover a couple handfuls of stock at most, all from the same industry. I remember finding, while working on another series that I did that looked at Gordon Johnson’s issues analyzing the stock, that he only had recommendations for somewhere around 10–15 stocks, all of which were in the same sector. Which means, quite frankly, that in a week he should be able to churn out actual data to prove that the warranty stuff he was claiming was wrong if he cared to look.
And Johnson was just one of many. Another firm that was happily flaunting its Tesla short position?
Yup, that’s right — the same group that is apparently being the most damaged by the GameStop short position it held was one of the biggest cheerleaders for Tesla’s demise.
And here’s the thing — such hedge funds could have their analysts go on CNBC or whatever and proclaim that Tesla was making completely fraudulent warranty claims, and the SEC did nothing. These statements had material impact on the stock. Shorting a ton of shares had a material impact on the stock.
But when Elon Musk decided to tweet that he was thinking about taking Tesla private, specifically due to these market manipulations, he was forced by the SEC to step down from Tesla’s board and pay $40 million in fines to “harmed investors” (a.k.a. short sellers who lost money due to his tweet).
It’s a clear double standard, but one the SEC has had difficulty (to put it nicely) figuring out how to police.
Tesla Short Seller Lies Brought Us Here
So here’s what I think, strongly: Thanks to the things that Tesla does to give retail investors equal footing to financial institutions, retail investors saw through the garbage that these short sellers were spewing. With a little bit of research on our own time, we discovered the lies, and we saw how the game was being played.
I think, in large part, this led to these redditors realizing that they too could hold “diamond hands” by using the market to work against hedge funds in the same way that they for ages had been using against retail investors for their own advantage. If anything, the ones who manipulated the share price for GameStop were not redditors, but the hedge funds, by trying to suck the company dry.
I can’t guarantee that the SEC will see it this way. I can’t say that I feel like they work for me as an investor. But retail investors have now developed a weapon to fight back against any greedy hedge funds when try to pull this garbage in the future.
Okay, But … Cleantech?
I promised that I’d bring this all back around to cleantech, so here goes. I believe and have believed for a while that a big part of the reason that Tesla was so strongly shorted is that these hedge funds were very comfortable looking at their traditional markets and determining how to value them and advise people, and they didn’t want new technology rising up and disrupting things. The climate crisis wouldn’t be solved by some crazy upstart like Tesla — it would be solved by great companies like Exxon and GM, on their own timetable. Or so they believed. An upstart like Tesla was just dangerous to the system they profited so heavily from.
Tesla’s rally, as well as the current short squeeze rally, are built on discovering new fundamentals. I feel like the current one is more about sticking it to these hedge funds because the script has flipped — retail investors are smarter than them, and we proved that with Tesla. How many Tesla-like companies did we miss because they were smothered by hedge funds before they were allowed to grow? How much power could we as retail investors have if we decided to reshape the world how we want it to be, and started investing in the companies we want to take us there?
This is the natural end to what I really feel Tesla’s stock journey sent us on. A new paradigm has arrived. People have used the internet to discover tools to allow us to rise up and rewrite the future, one in which greedy scumbags that are only in it for the money will find themselves with less and less power.
There appears to be no reasonable way to justify GameStop’s stock at the prices it’s at, just like these hedge fund managers have been crying for ages that Tesla is a broken growth story that is about to go to zero … while it added 50% capacity a year. The future is going to stop believing in this — and I for one am ecstatic to know this is where we’re headed, and think it’s a signal that we’re going to see a massive shift into clean technology in the near future.
If you own shares in GameStop for this ride, congrats, and I’m there with you spiritually. Like I said earlier, I think this week may be the most consequential week for evening out the playing field for all investors, and could be incredibly important to determining what we want our future to look like. Kudos to you.
Who knows if my work writing about Tesla has ever helped anyone to look into things more themselves and change how they view Wall Street, but I know it’s worked for me. I feel like the last couple of years have been leading to this, where we now are all waking up with new eyes. It’s going to be one heck of a journey.
*Disclaimer: I am a Tesla [NASDAQ:TSLA] shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article is published in which I discuss matters that I feel may materially affect stock price. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.
I do not hold any shares in GameStop or any other companies cited within this article other than Tesla. I cannot promise that I might not get excited to join in and grab a share of GameStop after writing this article, but I won’t do it within 48 hours of writing this article, and I’ll be doing it for the meme more than the investment, so if you’re taking that as investment advice, remember … I’m literally represented by a puppet.
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