Hello again folks. I’ve taken some time to do my own DD on GME and sharing it with you, in addition to all the other great DD out there. I’m going to cover shorts, debt, and what I think might accelerate GME’s mission to Mars.
TL:DR; GME is a ticking time bomb. Shorts R Fuk. Buy shares, Sell puts to acquire shares cheaper. Buy leaps on red days. No idea what's gonna happen in the very short term but 2021 will be massive.
About the Shorts
So, updated short interest came out today. If you haven’t seen it, shorts increased their positions through the end of the year:
What. The. Fuck.
I really can’t figure out the macro logic here because from the outside it looks like they’re digging their own graves.
On the day-to-day scale, I think I understand how this is happening. If you look at the days with a high short volume ratio, the narrative is clear: Shorts are actively trying to defend GME crossing 20 significantly, and coming in hard when threatened. Shorts also took advantage of general market selloff on Jan 4 to push GME down.
This is also why GME ended up only ~12% after the recent RC announcement. Short volume was a whopping 4MM shares on that day.
The problem is shorts are doing all this active shorting to defend their existing short positions, but they’re either not able or not choosing to close all of the intraday shorting, so it’s accumulating. As of 12/31 the total short positions (71.2M) exceed total issued shares (69.75M).
The precarious position of the shorter
Shorts find themselves in a very precarious position. Let’s talk about the float and DTC (days-to-close). The DTC number you see above is a lie. There’s an argument to be made that DTC is infinity.
There are a total of 69.75M shares issued by GME. According to this guy who has a CapIQ subscription, insiders hold 22.8M shares. I was able to verify using this nasdaq source that the top insiders hold about 20% of shares:
The thing with insiders is that they can’t easily sell due to lots of restrictions so they’re not considered part of the “actively” traded part of the stock. I.e. They can’t just sell on price action.
In addition to insiders, institutions now own 110% of GME shares. (Thanks shorters!). Some of these institutions may actively trade, but the top holdings (FMR, BlackRock, Vanguard, etc.) will not trade based on price action as they are generally holding for their ETFs / index funds that hold GME.
Now, thought experiment. What happens if shorts decide to cover? They have to buy back 71M shares. Who are they going to buy it back from?
So, 69.75M shares – 22.8M for insiders – 23.43M held by BlackRock/Vanguard/Fidelity = 23.52M shares left. So fuck all other short-to-float ratios out there, the short % of tradable float is at least 300%.
Investopedia tells us that days to cover is “calculated by taking the number of currently shorted shares and dividing that amount by the average daily trading volume for the company in question.”
GME’s 20-day average daily volume is about 10.4M shares, so that’s about 6.83 days to cover. This, however, is a lie. The DTC definition listed by Investopedia stops making sense when short interest exceeds purchasable float.
Math whiz’s out there… if you have to buy 71M shares from a pool of 23.5M shares, and GME’s daily volume is 11M shares a day, how many days will it take to cover?
Answer: Infinity. You can’t. You can never cover. There literally are not enough shares to buy to close your shorts. You can only buy-to-close 23.5M shares, and that’s even if you can convince all of them to sell (i.e. $$$$$). True DTC is Infinity. This is part of the reason shorts haven’t covered. There’s no way out of the burning building they’re in.
How it gets worse part 1) Institutional Buying
Here’s how it gets worse. Besides all the retards like you and me buying GME b/c of Lord Cohen and u/DeepFuckingValue, GME is about to cross some serious thresholds that make it attractive to more institutional buying.
First, in the recent Q4 numbers release:
So, GME is about to cross into the positive EPS category, which in addition to the debt story below is going to potentially unlock more institutional buying that is currently blocked by rules like not investing in companies with negative P/E.
Second, let’s talk about debt.
Businesses leverage debt to scale; particularly true with retail businesses that have to pay for inventory in advance of selling it. High cost of debt -> lower profits -> lower ability to pay debt -> higher debt costs, and the cycle continues. On the flipside, if GME was able to increase its credit rating, you get lower debt costs, higher profitability, which leads to higher credit rating, etc.
I believe we’re seeing a campaign from GME to pay down debt to reduce a) restrictive covenants in the 2021 notes (preventing things like more share buybacks) and b) upgrade their bonds to investment grade.
Not only will a credit upgrade lead to cheaper debt, it will unlock more institutional investment that are currently restricted against buying equities with below-investment-grade debt ratings.
Here are Moody’s actions on GME (source). In particular:
Speculation on debt:
Positive EPS + Debt ratings upgrade = massive institutional buying = shorts further in the hole.
How it gets worse part 2) Passive Buying Feedback Loop
GME is part of 62 ETFs holding about 10.7M shares in addition to a whole bunch in index funds (not ETFs). I couldn’t get a number for index funds but am going to estimate around 10M for them as well given the Vanguard/Fidelity numbers above.
More than 50% of these holdings are passive, market-cap weighted funds. Now here’s the feedback loop that really fucks the short story up.
At $20, GME is already up >5x from its low of ~$4 in 2020. This means that for every $1 thrown into IWM, for example, Blackrock is putting 5x as much of that $1 into GME as it was back at GME’s lows. As GME’s price goes up, any market-cap weighted fund puts more money into GME for every $1 of inflow.
The passive feedback loop has already started. It will really kick into high gear with institutional buying.
At this point, it’s really the endgame for shorts. They have to find a way to exit before Cohen is CEO.