Short sellers feel the pain in the stock market’s 2023 rally, says the Wall Street Journal.
The market’s comeback in 2023 has been difficult news for one group of investors: short sellers.
Short sellers profit from the declines in the market, which we saw much of in 2022.
However, the stock market has been performing surprisingly well this year despite talks of a looming recession.
The Wall Street Journal reports that short sellers are down $81 billion this year alone as the markets begin to bounce back.
“Short sellers who have incurred hefty losses are actively trimming their positions”, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.
“Investors betting against stocks have racked up $81 billion of mark-to-market losses on short positions this month through Thursday after accumulating $300 billion in gains in 2022”, Mr. Dusaniwsky said.
Experts are expecting heavily shorted stocks to squeeze as more short sellers begin to close their positions.
Is short squeeze season here?
Investors and analysts say the rally appears to be driven by a few things.
Signs that inflation is cooling have stoked bets among investors that the Federal Reserve will pivot from raising interest rates to cutting them as soon as the second half of the year.
That has helped risky assets across the board rise.
Especially risky corners of the market, such as stocks with high short interest, have rallied even more.
Analysts say that has likely forced short sellers to close out bearish positions to cut their losses — resulting in what is known on Wall Street as a short squeeze.
Retail favorites such as AMC stock, MULN, and others seem to have bottomed out earlier this year.
“We’re seeing a mirror image of the performance within the equity market. The worst performers last year have been leading this year,” said David Lefkowitz, head of Americas equities at UBS Global Wealth Management. “It does look like some re-risking and short covering.”
“A lot of these stocks rallying were highly shorted, long duration names with earnings way out in the future. With a significant decline in the discount rate, those earnings are now worth more,” said Sameer Bhasin, principal at Value Point Capital, a New York-based family office.
Every retail investor holding a position in AMC wants to know, when will shorts close their positions?
And I don’t blame you.
This one is a little tricky.
See, it’s like saying, “when will retail investors sell their positions?”
Welcome to Franknez.com – the blog that fights for you, the retail investor. Today I want to discuss shorts closing.
Let’s get started!
Retail investors have been waiting patiently for AMC Entertainment stock to rip.
You’ve been holding through the ups and downs and even buying the dips.
And although we did see AMC’s share price surge in 2021, the short sellers are still here in 2023.
So, why aren’t shorts closing their positions yet?
What do retail investors need to do to squeeze hedge funds out of their money?
Let’s discuss it.
Are shorts obligated to close their positions?
Let’s start with the fundamental question.
Are shorts obligated to close their positions?
Now, there are currently no rules regarding how long a short can hold before closing out their position.
However, lenders do have the right to demand the seller closes their position with minimal notice.
This is rare and only occurs if the the seller isn’t paying the interest fee, or the interest fee is ridiculously high.
“A short position may be maintained as long as the investor is able to honor the margin requirements and pay the required interest and the broker lending the shares allows them to be borrowed.” – Investopedia
When an interest fee is extremely high, it makes a stock difficult to borrow which obligates the short seller to close their positions.
Short sellers are burning big money to keep these positions open in 2023 though.
You’ll want to keep an eye on this interest as it will determine just how much shorts are bleeding.
I update AMC’s short interest data (and others) here daily.
Why does the “Cost to Borrow” fee matter?
The cost to borrow fee is an interest that short sellers must pay for borrowing AMC shares to short the company stock.
These fees are currently at an all-time high.
Short sellers will hold in hopes to drive AMC’s share price right back down to the floor.
However, AMC is trending upwards now and has absolutely no intention of going back down.
Analysts data and AI predictions all point towards a high possibility of a short squeeze.
Even Fintel’s short squeeze score has been as high as 80-90% in recent weeks.
This short borrow fee is going to continue to go up as AMC stock becomes harder to borrow.
For short sellers, a low short borrow fee is in their favor.
Hedge funds much rather pay the fee and stubbornly continue to hold their positions against retail investors.
But, if the short borrow fee is high enough to hurt the borrower, they will be more inclined to close their positions before losing an excruciating amount of money.
Addressing shareholder concerns is important, whether you agree or not.
Does It Even Matter?
Some of you care about your money, your finances, your investments, and some of you simply don’t.
To some, being part of an embracing community, being known in a community, and embracing the movie theatre industry, but more specifically AMC Entertainment, is more important than monetary gains or financial abundance at this point.
And is that even a bad thing?
You just want to be heard; you want to fight evil in the markets without a care about money.
Or maybe you’re simply in the middle.
Let us know who you are – leave your story down in the comment section below.
Tiger Global Management is down 34% this year through March.
The speed of the reversal has shocked just about everyone, considering that Coleman is celebrated as one of his generation’s brightest stars, a standout among the elite money managers mentored by the famed Julian Robertson, Bloomberg.
Tiger Global Management treads rocky waters
The bad run has been fueled by massive bets on stocks that have been hammered, such as fast-growing tech companies in the U.S and China.
Tiger Global hedge fund lost 7% last year, its first annual drop since 2016 and its third total, according to Bloomberg.
Tiger Global told clients in a letter that it’s opening up both its hedge and long funds to a limited amount of capital from existing investors to bolster positions in stocks that underperformed
However, we see the results in the first quarter of 2022 has not been what the hedge fund anticipated.
Built by Coleman and his partner Scott Shleifer, Tiger Global has long been seen as a throwback to the industry’s glory years, when double-digit returns were the norm and ‘hotshot managers’ unerringly backed winning companies and shorted the losers.
Across the firm’s $35 billion in funds focused on public companies, this year’s losses have triggered a more than $10 billion hit to investors that include foundations, endowments and pension funds, as well as Tiger Global insiders.
Coleman’s personal wealth has dropped by $1.3 billion, according to calculations by the Bloomberg Billionaires Index.
Coleman’s hedge fund headed towards worst year
Tiger Global hedge fund may be on track for one of its worst years yet.
The blue in this chart indicates the hedge fund’s losses in 2008, 2016, 2021, and 2022.
The firm’s first serious bump was during the 2008 financial crisis, when it lost 26%, followed by a 1% gain the next year.
While markets were already jittery this year due to high inflation and expectations of rate hikes, Russia’s war against Ukraine triggered a flight from risk.
The Russia-Ukraine conflict has affected every corner of the financial sector.
“We expect that each of these companies will grow their revenues and profitability over the long term, regardless of recent events and the various other challenges that the world will face over the short, intermediate, and long-term,” Ackman said.
What do you think led to Ackman’s complete business remodel?
After all, Pershing Square was one of the hedge funds that benefited from Fannie Mae and Freddie Mac half a decade ago.
Short sellers made approximately $100 million according to S3.
In a time where short sellers are under extreme scrutiny, do you think it’s possible this billionaire is trying to stay away from the likes of the Justice Department?
There are new SEC rules coming into play that could very well lift suppression imposed on so called ‘meme stocks’.
The SEC just released a report outlining the variety of ways they intend on protecting retail investors from market manipulation.
Heavily shorted stocks such as AMC and GameStop will skyrocket if these SEC rules are enforced.
And I’m going to break down why in this article below.
Welcome to Franknez.com – the SEC is proposing new rules that call for short seller transparency. In their report, they acknowledge what retail investors have been saying and have now come up with a plan.
Regulators acknowledge market manipulation in report
The SEC said in their report, “while short selling can serve useful market purposes, it also may be used to drive down the price of a security, to accelerate a declining market in a security, or to manipulate stock prices.”
This statement alone is very significant for many reasons.
The SEC doesn’t need to be convinced of market manipulation anymore, they’ve acknowledged it.
They understand exactly what’s happening in the markets and how it’s affecting retail investors.
Now it’s just a matter of finding solutions to lift the suppression being imposed on heavily shorted stocks such as AMC and GameStop.
Disclosure of short sell positions and activity could very well be the start of it too.
If you were slacking off at work but now have your boss micromanaging you, you’d be more inclined to refrain from slacking off, correct?
It’s this type of micromanaging we need to see regulators impose on short sellers so that the demand from retail orders accurately reflect on the price of a security.
However, there has been no way of identifying overleveraged positions or short sell activity to enforce no such acts are carried throughout the market.
That’s where rule 13f-2 comes into play.
13f-2 provides the commission for public disclosure:
The name of the issuer
CUSIP number (a unique identification number assigned to stocks and registered bonds in the United States and Canada.)
and number of short sales of each security
When enforced, this SEC rule will allow regulators to identify everything there is to know about a hedge funds short selling activity.
Community, this is quite big.
Public disclosures will occur every month.
“Buy to cover” rule and CAT firms
Proposed Rule 205 would establish a new “buy to cover” order making requirements for certain purchase orders affected by a broker-dealer.
The Proposal to Amend CAT would require CAT reporting firms to report short sale data not currently required that would enhance regulators’ understanding of the lifecycle of a trade – from order origination and through order execution and allocation.
This means the SEC will now have eyes on where a short sell comes from and where it gets processed and moved to.
Here is where naked shares may be exposed, recorded, and become obligated to get closed.
This Proposal to Amend CAT holds every party during the trade of a short sell accountable.
How do these rules lift suppression on heavily shorted stock?
The SEC says these proposals could help to advance the policy goal of investor protection by deterring market manipulation.
This means that when enforced, hedge funds will now be forced to play by the rules since all data is being recorded through a variety of parties, making it complicated to report inaccuracies.
The SEC on illegal short selling and “Bear Raids”
The SEC’s report is filled with information retail investors have been raising awareness about for over a year now.
They briefly go over the spread of false information from which short sellers profit from the decline of a stock’s share price.
“Market manipulators may seek to spread false information about an issuer whose stock they sold short in order to profit from a resulting decline in the stock’s price.”
This is something Elon Musk just recently spoke to CNBC about.
Hedge funds and corporate media have played a big role in “Bear Raids”.
Bear raids are an illegal practice to plummet a stock’s price through concerted short selling and the spread of false or negative information about the target.
This influences public sentiment and opinion.
We’ve seen this illegal practice too many times with AMC and GameStop.
Platforms owned by News Corp. attacked AMC and GameStop by publishing articles to derail retail investors from purchasing the stocks.
As millions of retail investors bought ‘meme stocks’, hedge funds shorting the stocks lost billions of dollars.
CEO and founder of hedge fund Citadel Ken Griffin coincidentally has a stake in News Corp.
The SEC warns short sellers of “Short Squeeze” risk
A short squeeze poses massive risk to not only hedge funds and market makers but also to small short sellers.
The SEC did not miss outlining the risk a short squeeze has on short sellers in their market transparency report.
AMC and GameStop’s current reported short interest is more than 20% each.
This is more than enough short interest to squeeze shorts from their positions.
And because hedge funds have been overleveraging their positions, this is no ordinary play anymore.
Hedge funds now have a ticking time-bomb that may cause systemic risk.
Will AMC and GameStop experience a managed short squeeze?
Leave your thoughts below.