A higher-stakes battle lurks beneath the GameStop kerfuffle and the “Rocky”-like victory of the little guy outsmarting savvy hedge fund billionaires on Wall Street. This could be the start of a war on short sellers. It’s about time.
Capitalism is optimism monetized—we invest because we believe great things can happen. Short sellers are the destroyers of investing. They trade in destruction, pessimism, and cynical hopelessness. A few of them do a great job of unearthing corporate chicanery and accounting malfeasance. Too many of them are bad guys—really bad. They are fear-mongers and rumor-slingers, and some are outright liars, shysters, and criminals.
Short sellers operate with impunity and beyond the ken of regulators, and they will stop at nothing to damage the reputations of the companies they attack. They use the financial news media to help them do it, as I saw many times in my 30 years at the Journal, Forbes, CNBC, and Fox Business. This is especially true these days at CNBC.
Quick definition: short selling entails borrowing shares of stock from a brokerage firm and selling them instantly to pocket the cash. Then you wait for the stock to plunge in price, and you buy newly cheap shares to replace the ones you borrowed earlier. Pocketing the profit.
There’s the catch: you now have great incentive to bash the company and send the stock tumbling down. In my experience, the short sellers’ tactics have included planting untrue rumors that a CEO was absconding with suitcases filled with cash; spreading false whispers that a company founder had been charged as a pedophile; paying other parties to publish negative reports on a company without disclosing it; raising specious questions about positive results of new drug trials; and filing anonymous, bogus complaints about a company to the SEC and then “tipping” reporters that the company is under investigation.
The shorts have always ganged up to attack a company, just as the day traders on Robinhood have ganged up to support short targets. Now the short sellers have lost billions of dollars betting against GameStop, and AMC theaters, and the most epic short of all time, Tesla. And they are being a bunch of crybabies about it, squealing for bailouts and trading halts.
By late last week [FRI 29th], short sellers had lost $20 billion year-to-date by selling GameStop stock short, in a bet that its price would plummet. The Robinhood renegades bet the opposite way and sent the stock roaring upward, inflicting great pain on the over-exposed hedgies. Who are supposed to be so good at hedging risk; go figure.
The ranks of day traders on the Robinhood app have an unlikely ally in Tesla founder Elon Musk, the world’s second-richest person (net worth: $167B). On Thursday afternoon [JAN 28th] Musk was on Twitter agreeing with Sen. Elizabeth Warren that recent events require investigation—and taking aim at short sellers:
“Here comes shorty apologists
Give them no respect
And five minutes later, this:
“u can’t sell houses u don’t own
u can’t sell cars u don’t own
u *can* sell stock u don’t’ own!?
This is bs – shorting is a scam
Legal only for vestigial reasons”
The man has a point. Musk has battled and bested the shorts for the past year and then some, taunting them at times. Last year, he started selling pairs of red, silk short-shorts to celebrate Tesla and smite his adversaries; the backside is emblazoned with “S3XY,” for the four models in the Tesla line (the Tesla S, the 3, the X, and the Y).
Musk is seconded by two other “billies”: Chamath Palipitiya, an ex-Facebook billionaire who reaped half a million dollars on GameStop options in a day and donated it to Barstool Sports for covid grants to small businesses; and Larry Ellison of Oracle fame.
Ellison joined the Tesla board in December 2018 and a month later bought a $1 billion stake in Tesla. He noted that his friend Elon is “landing rockets on robot drone rafts in the ocean. And you’re saying he doesn’t know what he’s doing. Well, who else is landing rockets?”
Tesla stock was at $60 back then, and it’s near $800 a share now. Ellison’s stake now is worth $13 billion. That enormous $12 billion net gain came out of the hides of the shorts: they have lost $40 billion this year shorting Tesla. Some would say it serves them right.
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