The Losers Investment Club: Specialty Retail

INT. CONFERENCE ROOM – DAY

Several NFL personalities are sitting in chairs around a conference table. They are all smoking cigars.

KATIE NOLAN: So…yeah.  Now you boys know what it’s like.

JOSH ROSEN: How many is that so far, four?

COLIN COWHERD: Five, I think.

JOSH ROSEN: I’m pretty sure this is the point where we’re supposed to consult a physician.

LAWRENCE TYNES: Oh, do you guys need a recommendation? A urologist is probably the best guy to call, but I’ve got a really good proctologist and he…

JOSH ROSEN: We’re just joking, Lawrence.

BILL O’BRIEN: P-p-p-pretty sure we don’t need to c-c-call a d-d-d-doctor when a stock get halted five t-t-times in one d-d-day.

HUE JACKSON: The halt’s almost over, let’s see what happens next.

The gang resumes clustering around a single laptop, watching the $GME ticker.

COLIN COWHERD: [imitating Tom Cruise’s voice] It’s beautiful, man.  Beautiful!

KATIE NOLAN: I just wish we’d had enough money to buy more than five shares.

COLIN COWHERD: I’m still not sure I understand what’s happening here, though.  Josh, you’re good with this stuff, can you explain?

JOSH ROSEN: Goddamnit, Colin, if you don’t knock that bigoted shit off…

HUE JACKSON: [rubs hands together] Ooh, an NFL quarterback is losing his patience with a radio host…I’ve been waiting for this…

KATIE NOLAN: It’s not that complicated, Colin.  A lot of people thought GameStop was on the path to being the next Blockbuster Video.  Large physical footprint in a market sector that’s consistently moving towards an online space.  So some people shorted the stock.

BILL O’BRIEN: And then more p-p-p-people shorted the stock.

KATIE NOLAN: To the tune of 140% of the available float.

COLIN COWHERD: Wait…

KATIE NOLAN: Let’s say there’s 100 shares of $GME on the market.  People borrowed all 100, and then borrowed 40 more.

LAWRENCE TYNES: Like double-doinking I mean counting?  Is that legal?

KATIE NOLAN: What, you think the SEC was going to do anything to stop them?  But here’s the problem.  When you short a stock, you’re borrowing the shares that you’ve sold.  So until you pay those shares back, you’ve got to pay interest to whoever loaned you the shares.

COLIN COWHERD: Oh, you mean like the vig.

KATIE NOLAN: No, but…sure, whatever.  At any rate, the more time that goes by without you replacing the shares, the more money you bleed due to interest.  And when you short a stock, you’re expecting it to go down.  Every day that doesn’t happen, you lose money on interest.  And when it goes up, it means that it’s going to cost more money to buy back the stock so you can return the shares to your lender.  So a lot of people bet that GameStop was going to go bankrupt.  Not necessarily a bad idea.  But in doing so, they left themselves incredibly exposed, because…what if the stock doesn’t go down?  What if it goes up instead?  So what a bunch of really stupid, really crazy people did was buy up as much GameStop stock as they could afford, and they pledged to hold it until the shorts decided to surrender and take a loss and buy it back at an inflated price.

COLIN COWHERD: What if the short-sellers can’t afford to buy it back?

KATIE NOLAN: Well that’s what you’re starting to see happen.  In order to short a stock, you’ve got to have enough collateral to cover your bet.  If the amount you owe goes up and up and up, eventually you run out of collateral and whoever loaned you the stock is going to close out the trade – with or without your consent – to make sure they don’t get stuck holding the bag.  And when that happens, the price of the stock gets driven up even more, because there’s a lot of buying pressure on it.  And that starts a cascade effect, because as the price keeps shooting up more and more, other people get margin calls, which drives it up even more in a vicious cycle.  It’s called a short squeeze.

— [door flies open] —

DOUG MARTIN: DID SOMEBODY SAY SHORT SQUEEZE? [steps inside the room and gives KATIE NOLAN a big hug, then departs without another word]

COLIN COWHERD: So basically the short-sellers are getting taken to the cleaners?

KATIE NOLAN: That’s right!

COLIN COWHERD: So when do we exit our own position?

KATIE NOLAN: We don’t!  We bought $GME because we saw Ryan Cohen buying in and decided that he was a good bet to turn the company around.  This is a buy and hold for us.  We won’t be selling for at least a year.

COLIN COWHERD: But what if it comes back down?

KATIE NOLAN: [shrugs] $TSLA didn’t.  But this is going to be a fun week one way or another.  Stay tuned.