By Ryk De Klerk
THE PAST TWO weeks will go down in history as the awakening of US retail investors as a new disrupting force in financial markets to reckon with.
Wall Street was rocked by the so-called Robinhood Redditors who took on sophisticated investors such as hedge funds by calling their hand on their bets.
The retail investors made fortunes off relatively unknown shares as their actions caused hedge funds, wellknown for short-selling, to cover their short positions by joining the Robinhood Redditors in the feeding frenzy.
Short-selling effectively means the selling of equities, which you do not own, with the goal and hope that the price of the asset falls to a level where you can buy it back and make a profit.
Robinhood Markets is an extremely popular no-fee trading app. According to CNN, the WallStreetBets forum on Reddit, a network of communities based on people's interests, fuelled a war on a perceived corrupted mainstream and evolved “into an unprecedented force of retail-investing financial radicalism, offering the allure of get-rich-quick gains”.
The lay-offs, furloughs and being stuck at home due to the Covid-19 pandemic and, according to Bloomberg, users on the WallStreetBets forum jumped past 4 million (others indicate up to 6 million).
Relentless promotions on the WallStreetBets forum saw Koss Corporation, an American company that designs and manufactures headphones, rise seventeenfold since the opening last Monday and GameStop, the world's largest video game retailer, ninefold over the past two weeks.
Express, a fashion retailer aimed at young persons, is up fivefold in the past fortnight. Movie theatre chain, AMC Entertainment Holding, closed the week nearly threefold higher since the opening last Monday.
Such big moves should not come as a surprise though. According to data on MarketWatch.com, on January 15, the short percentage of float, calculated by taking the total amount of shares shorted and dividing it by the total amount of shares available for trade (definition from Investopedia), on GameStop was 120 percent, while AMC Entertainment's short percentage was 79 percent.
The short percentage in Express was 12 percent while Koss's short percentage was only 0.9 percent of float. The shorts in the two shares could be higher as a result of derivative instruments though.
Retail investors' successful actions go back before the pandemic hit.
Tesla shares dropped sharply in March 2019 after the announcement that the electric-car maker was taking orders on a $35 000 (R530 000) Model 3. But users of the Robinhood app, already popular among younger traders, increased their holdings of Tesla by 20 percent.
According to sources, the short percentage of float in Tesla was nearly 20 percent at the beginning of last year, but was cut to 6 percent by January this year. The short-sellers lost billions of dollars over the past year as solid support by the retail investors saw Tesla shares gain more than 700 percent.
It's just simple logic that the chaos of the past two weeks caused by the massive short-squeeze will be over in a few days. A lot of the Robinhood Redditors will be wiped out and lose their boots as the relevant stock prices will eventually come crashing down to more realistic levels. Some will still continue to profit by going short by buying put options on the stocks.
What the happenings over the past two weeks and specifically last week demonstrated is that there is no such thing as an efficient market as professed by the academics. The hedge funds ruled for a long time and effectively dominated the pricing of specific financial markets and left Joe Soap at its mercy. No more!
The US Securities and Exchange Commission (SEC) is already launching an investigation into possible wrongdoings. The SEC was created following the stock market crash in the 1920s to protect investors and the national banking system. It, however, offers no protection against actions by short-sellers, though.
Short sellers' actions could lead to the implosion of stock prices of well-managed but relatively highly-geared companies – those with high debt – that eventuates in credit lines being cancelled and their customer base dry up, resulting in an implosion of the company. Yes, the socio-economic effects are enormous. Jobs are lost and communities that are highly dependent on these companies are left destitute.
One thing is certain, though. The buying power of the US retail investors and their now herd instinct are here to stay, especially when five or six
million investors execute the same action. They are not only targeting short-sellers as their support for Tesla showed. They were also responsible for the surge in the silver price last week. They have a very powerful ally in Elon Musk and avidly follow his calls such as his call on Bitcoin that saw Bitcoin surge last week.
Most of the retail investors are day traders though and are at a major disadvantage to institutional funds as they cannot borrow shares to sell short.
Unlike the US, the short percentage of float data is not readily available to retail investors for stocks with a primary listing on the JSE. It is also impossible for the South African retail investor to observe share lending activities, the core ingredient in short-selling.
The investor can be caught totally unawares if a share price suddenly starts to fall on increased volumes as a result of some of the borrowed stock entering the market. Through their actions the short-sellers even determine the value of your savings. The collapse of Steinhoff is a case in point. If retail investors were aware of the
massive short-position as reflected by the stock out on loan their investment decisions could have been different.
On December 7, 2017, the Wall Street Journal reported before the previous day's announcement of the admission of accounting irregularities and the subsequent resignation of chief executive Markus Jooste that a staggering “40 percent of Steinhoff's Joburg-listed shares and more than a quarter of its Frankfurt-listed shares were on loan to investors betting that the share price would fall, according to IHS Markit.
Robinhood Redditors will soon hit the South African markets and I am sure that the short-sellers of small to medium capitalisation stocks are acutely aware of that. As a result the institutions will continue to put pressure on the JSE to not disclose short percentage of float data and keep share lending under wraps.
Ryk de Klerk is analyst-at-large. Contact [email protected]. His views expressed above are his own. You should consult your broker and/or investment advisor for advice. Past performance is no guarantee of future results.