• Small investors organize themselves via Reddit and let GameStop shares rise
• High losses for short sellers
• Already similar events in the past
“WallStreetBets” vs. hedge funds
Short squeezes have received significant attention from the January 2021 hype surrounding video game retailer GameStop. The ailing US retail chain has fallen well behind its online competitors in recent years, which is also reflected in the company’s share price. As a result, the share certificate increasingly became the focus of short sellers who bet on falling GameStop share prices. Small investors then organized themselves on Reddit and Twitter to start a short squeeze and drive the price of GameStop titles far into the plus. This forced professional short sellers to liquidate their short positions against the shares and buy them at the current market price. With the mass of shorted GameStop papers, this triggered another price jump and brought investors further profits. At the beginning of January 2021, the GameStop share cost just under 18 US dollars on the NYSE, the price climbed to 483 US dollars over the course of the month and was therefore more than 2,700 percent higher. According to the “Bloomberg” news agency, the hedge funds affected had to accept total losses of more than six billion US dollars.
In the course of the GameStop hype, the Reddit community “WallStreetBets” also urged short sellers to short squeeze shares in the struggling US cinema chain AMC.
Although the topic received increased attention due to the WallStreetBets movement, there have already been some short squeezes in the past. The following mentions are characterized by the fact that particularly large sums of money were involved and the share prices in question shot up to dizzying heights, but were usually unable to maintain these profits.
Almost 100 years before GameStop hype: Piggly Wiggly-Short Squeeze panicked hedge funds
Almost a century before private investors organized via Reddit to boost the shares of GameStop and AMC, Wall Street was already experiencing an incredible short squeeze. The businessman Clarence Saunders founded the first branch of the self-service grocery store Piggly Wiggly in 1916. In the years that followed, the company expanded rapidly and was already able to look back on a huge branch network in the USA. In 1922, the retail chain’s shares made their way to Wall Street and were allowed to trade. According to the portal, in the fall of the same year, bankruptcies among large franchise dealers increased. While no evidence of a similar fate could be found in Piggly Wiggly’s company data, some traders nonetheless initiated short positions against Saunders’ company. Apparently enraged by this move, the chain’s founder took out a $10 million loan and bought more than half of all outstanding shares on the stock market, sending the share price skyrocketing. By March 1923, Saunders owned 198,000 shares of Piggly Wiggly, or 99 percent of the stock. After some of the short sellers complained to the New York Stock Exchange about the CEO’s actions, the New York Stock Exchange launched an investigation. In order not to lose influence on the short sellers, Saunders sold some of the shares to the public at a fixed price – without going through the stock market. On March 20, 1923, he finally launched the short squeeze: He demanded that short sellers return 42,000 shares in his company. They rushed to the stock exchange to buy shares, which drove up the price of the stock and caused dealers’ buy prices to rise well above their sell prices.
A few hours later, however, the stock exchange suspended trading in the paper. This gave traders time to service their positions and cut their losses. Although this gave Saunders complete control of Piggly Wiggly stock, he was unable to sell it on the public market and was deeply in debt. Eventually he gave up his shares and filed for bankruptcy.
Bill Ackman bets against Herbalife shares – and misjudges
Herbalife is a dietary supplement manufacturer that brings its products to consumers through its own Wellness Advocates. Hedge fund manager Bill Ackman of Pershing Square Capital Management criticized the provider in December 2012 for over a Ponzi scheme to function and predicted bankruptcy for the company. In the process, he started a short bet against Herbalife. Back then, a Herbalife share was worth about $45.
Ackman’s assessment was met with resistance from hedge fund managers Carl Icahn, Dan Loeb, George Soros and more. Icahn alone then took over 26 percent of Herbalife, making it the company’s largest shareholder. In the years that followed, the stock soared significantly, giving the investor billions in profits while Ackman’s short position didn’t pay off. In 2018, the Pershing Square founder sold his short position in Herbalife, at which point the stock was valued at around $90. According to The Street, Ackman sold short 200 million shares, costing the investor $20 million for every $1 rise in Herbalife stock. According to “Investopedia”, the total loss – in addition to the cost of the initial loan – is said to have amounted to around one billion US dollars.
Alibaba checkmates short sellers
The Chinese Amazon competitor Alibaba has also been a popular target for short sellers in recent years. According to analyzes by S3 Partners, available to the market portal “Insider Monkey”, Alibaba short sellers are likely to have suffered losses of more than 10 billion US dollars in 2017. This made the tech group from the Middle Kingdom the second most shorted share in the year under review – right after Tesla. Despite hedge funds’ pessimistic expectations, the company beat its revenue and earnings expectations, which pushed its share price higher.
Volkswagen temporarily the most expensive company in the world after the short squeeze
But even in Germany, the phenomenon of short squeeze is not completely foreign. In 2008, the fact that there was a significant difference in value between preferred and common stock in carmaker Volkswagen attracted short sellers who then bet against the common stock. In October of the same year, the announcement that the sports car manufacturer Porsche increased its stake in the Volkswagen Group to 42.6 percent and secured options for a further 31.5 percent of the shares caused VW shares to rise. At that time, the federal state of Lower Saxony also owned 20 percent of the shares in Wolfsburg. As a result, there were not enough shares available on the free market to cover all the short-seller positions. The price of the VW title shot up to more than 1,000 euros per share, making the car manufacturer even the most expensive company in the world at times. Meanwhile, panic was spreading among hedge funds – rightly so, as it soon turned out. While VW investors were able to sell their shares at large profits, the short sellers suffered losses of around $30 billion, according to Value of Stocks. Meanwhile, the jump in the price of the VW notes was short-lived. In the days that followed, the value of the shares fell sharply again, and the diesel scandal also weighed on the share price in the years that followed. Despite the takeover rumours, Porsche has been part of the Volkswagen Group since 2009.
Tesla’s stock rally made 2020 short sellers look old
The year 2020 was excellent for the shares of the electric car manufacturer Tesla. With the general tech rally after the Corona crash in spring, the increasing demand for electric cars and the upcoming inclusion in the US index S&P 500, which includes the 500 largest listed companies in the USA, the Tesla share was able to the NASDAQ increased in price by a whopping 743 percent for the year as a whole. Due to the strong price gain of the share, the company was considered a jack of all trades Elon Musk However, many market voices considered it to be significantly overvalued, which for a long time earned the share the status of Wall Street’s most shorted stock. In the meantime, the price level has come back again, but in the rally year 2020 numerous Tesla short sellers are likely to have suffered from heavy losses. According to trading platform IG.com, investors who bet against rising Tesla stock prices were down $40 billion by the end of 2020. One of them may have been “The Big Short” investor Michael Burry, who predicted a crash of the paper for a long time. Last year, however, the size of the market liquidated all short positions against the Musk group.
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