But if the stock declines, you must have collateral worth $2X the margin debt. When you buy stock on margin and the stock goes up, there is no problem. The DTCC stepped into the GME manipulation and said Robinhood was insufficiently capitalized to underwrite the thousands of retail investors who were buying GME call options and stock on margin. It monitors all brokerage firms, including firms like Robinhood, for activity injurious to the safety and soundness of the capital markets. This is a private monopoly on the capital requirements, trading restrictions, clearing and custody of almost all the stocks and bonds in the world. Major Wall Street firms own the Depositary Trust & Clearing Corp (DTCC). In 2020 I wrote about Hertz (HTZ, NYSE) demonstrating that a bad company cannot access the public markets. But a “pump and pump” strategy, where you become a long term holder only makes sense if you can sustain the new valuation and then do a public offering or another capital raise at the new, nosebleed market cap. Here is a chart from “The Daily Shot” on Februshowing historical sales and earnings:Ī “pump and dump” strategy makes sense if you can organize a “Captain Crunch” wolf pack of concerted day traders who buy, squeeze, inflate the stock price and then sell to a greater fool. It has had 5 CEOs in 4 years, and it restated its audited financials for 20. It has declining revenues, declining earnings, declining free cash flow, declining dividends and insistent creditors who have removed more than $1.0 billion of capital, but are still owed $1.5 billion. Looking over the last 4 years, its fundamentals are bad. Game Stop (GME, NYSE) had a $30 billion market capitalization as of January 28, 2021. What are its fundamentals? If its fundamentals are bad, how will the legion of retail investors ever get out of their position? I had two immediate questions about Game Stop. Because the short sellers in Game Stop (GME, NYSE) had sold 110% of the outstanding stock they were actually creating a “naked short” position making them vulnerable to the Captain Crunch of All Squeezes. As the short seller is squeezed by the rising prices it must buy stock to cover its margin account deficit positions or add new capital to a trade going awry. Find a lousy company with a massive short position and coordinate a “short squeeze” by convincing thousands of followers to buy call options on the stock or the stock itself on margin. However, nothing in my experience prepared me for the “pump and pump” crowd that creates fools gold from spinning straw like Hertz, Game Stop and AMC. These might be stocks with good revenue growth, low debt, high cash flows, a defensible position relative to other competitors and few financial analysts following their story.
For most of my investment life I have tried to discover unseen gems among the trash heap of abandoned stocks. Someone’s investment gyroscope is completely out of whack.
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