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Expert Financial Analysis and Reporting

Wall Street is Poised for Disruption, Part 2, February 1, 2021

The Current Media Narrative That Retail Investors Trading on Robinhood Were Primarily Responsible for the GameStop Short Squeeze Appears False. It Was More Likely Orchestrated by Hedge Funds

Key Thoughts

  • Mainstream media is treating the GameStop short squeeze as a new phenomenon in which free online trading on platforms like Robinhood has led to excessive speculation by retail investors. They portray this as dangerous to retail investors and proper functioning of the markets.
  • However, all Robinhood trades go through Citadel Securities. The Wall Street Journal reported Citadel as saying  that during the past week, retail orders pouring into its systems for GameStop were roughly balanced between buyers and sellers, casting doubt on the predominant narrative that small investors drove the stock to its record close of $347.51 on Wednesday, January 27.
  • So if Robinhood is not to blame, who is? We can only speculate because settlement and clearing data for stock trades is the closely guarded property of DTCC which is owned by Wall Street firms. The DTCC is purposely opaque in releasing trading data so we can only hypothesize. Here is what I think likely occurred.
  • The factor setting the stage for this squeeze was that some hedge funds took unbelievably reckless short positions in GameStop. As the stock began to move against these shorts, I speculate that other hedge funds smelled blood in the water, manipulated buying in the stock and orchestrated a short squeeze that eviscerated the shorts. If so, it was hedge funds and not Robinhood traders that were primarily responsible for the squeeze.
  • Supporting my hypothesis is that history clearly shows that this type of short squeeze is by no means a new phenomenon as mainstream media and Wall Street executives seem to be so eagerly portraying it. In this report I go over a short squeeze involving KaloBios in 2015 in which the short squeeze resulted in its stock going from $0.44 to $45.00 in just seven calendar days, a 100 fold increase. GameStop surged from $19.99 to $347.51 in fifteen days, a mere seventeen fold increase. In 2015, Robinhood was not even a small factor in the market. Importantly, the play book for both squeezes was almost identical.
  • I think claiming that "the retail trading in Robinhood" narrative is just a cover for a bloody short squeeze in which one group of predatory hedge funds gouged another group of predatory hedge funds. I say, a curse on both their houses and kudos to those retail traders who took advantage .
  • Virtually all mainstream reporters and commentators are minimizing or ignoring the culpability of hedge funds. Most of the reporting is echo chamber quality regurgitating over and over that it is speculative retail trading on Robinhood that caused the squeeze. Au contraire.
  • I have been crusading against manipulative and often criminal trading activity of hedge funds and investment banks for five years (others have been doing it for longer) with no one paying attention.
  • Perhaps GameStop will be the catalyst that leads to an understanding of the criminal behavior of some (many) hedge funds and will lead to a disruption of Wall Street practices in which Corporate and Main Street America are screwed in virtually every minute of every day by Wall Street elites. However, to do this we need mainstream media to delve into the hedge funds business practices and to properly change the narrative toward hedge funds. I am not confident that this will happen as most main stream journalists seem to have been captured by hedge funds.
  • By the way, I predict that by February 15, 2021 GameStop will trade close to $20.

Overview of GameStop Short Squeeze

There has been a frenzy in reporting about the short squeeze in GameStop. Most of the commentary centers on the premise that this is MainStreet versus Wall Street. The story goes that for once Main Street stuck it to the man as short sellers as of Friday had suffered through both real and unrealized losses of $20 billion in GameStop in about a week. They go on to discuss whether this short squeeze is good or bad and more often than not conclude that we need regulatory intervention to curb retail enthusiasm. I have a different take on the GameStop situation. I think that Main Stream media and politicians have no grasp of what actually happened.

I strongly disagree that the short squeeze was primarily caused by retail investors trading on Robinhood. I think that this at most was a pretext; I believe that much of the jaw dropping price rise in GameStop required sophisticated market manipulation skills to drive the price to the incredible levels that have been seen and so far, maintained. I believe that most of the squeeze was by other hedge funds that smelled blood in the water.

I do see the potential for great societal benefit if the media and politicians can get themselves out of the echo chamber they are now in and soberly address what really happened. While I am skeptical that they can do this, hopefully I am wrong. If so, the most important outcome could be to educate America about corrupt/ criminal, inordinately speculative short selling practices routinely practiced on Wall Street. I would be excited to see these issues gain prominence. I see Charles Paine on Fox News, one of the very few anchors on CNBC or Fox News that ever has anything meaningful to say, questioning the role of hedge funds in this. Then I see an inane article on the left hand side of the front page of the Sunday edition of the New York Times that looks at this issue only from the standpoint of placing blame on Robinhood and retail investors with almost no mention of the role of hedge funds. In fact, the article could have been and indeed might have been written by hedge funds. Like so much of the mainstream media in the battle between corrupt hedge funds and Corporate and Main Street America, the Times comes down on the side of hedge funds being victimized by sinister retail traders.

I have been crusading against illegal naked shorting and the criminal stock manipulation it facilitates for the last five years. I have been dismayed that mainstream media and regulators have not dug into the practices of hedge funds. Their lack of interest in looking at how hedge funds operate is indicative that the power and money of hedge funds has captured both.

GameStop is Nothing New; Just Look Back at KaloBios in 2015

The central argument of this article is that the GameStop short squeeze is by no means a unique situation. The only thing unique about it is the amount of news coverage that it has received. Contrived short squeezes by hedge funds are a treasured practice just like short selling using illegal naked shorting. Let me take you back to the KaloBios short squeeze in 2015  which actually makes GameStop’s price movement look modest.

KaloBios was a biotech whose lead drug failed in a pivotal clinical trial and it had no other source of revenues. The Company slashed its head count by 60% and chillingly announced that its attempts to attract capital had failed. Cash on hand of only a few million dollars was not sufficient to payoff $7 million of debt. It was in a head long rush toward bankruptcy. The stock had been heavily shorted and short sellers were licking their chops that this stock was going to zero. Even a few new short sellers eagerly jumped in feeling that it would soon go to zero so that shorting the stock at any price looked like a sure fire way to make some quick money. But it wasn’t.

With the dismal news, shares of KBIO traded lower and on November 16, 2015 were trading at $0.44 per share and it seemed just a matter of time until they were at zero. However, by November 18, 2015, the share price had spiked to over $2.00. Although unexplained, many investors involved in KaloBios saw this as a short lived short squeeze that provided an even better shorting opportunity at $2.00 than $0.44. Then the bottom fell out.

After the close of markets on November 18, 2015 the Company announced that an investor group led by Martin Shkreli had just acquired “more than 50%” of KBIO’s shares. This seemed to explain the spike to $2.00. Predatory hedge funds rushed in and on November 19, 2015 the stock surged to $14.00 on incredible volume. After the close on November 19th, KBIO made another announcement that the Shkreli group had increased its position to 70% and that Shkreli had been appointed as KBIO’s new CEO and Chairman.  The Shkreli group announced that it would inject $3 million in cash with an additional $10 million following shareholder approval.  By November 23rd, KBIO briefly hit $45 per share.  The stock lingered at very high price levels through the early part of December. Then on December 17, 2015 just one month after KBIO hit $0.44 per share and the Shkreli scheme took hold, Shkreli was arrested by the FBI on federal fraud charges. The fraud charges were totally unrelated to anything to do with KBIO, but with no ability to access financing KBIO immediately sought Chapter 11 bankruptcy protection. Of course, the stock ultimately did hit zero, but some “clever” hedge fund and retail investors who were short the stock prior to the scheme suffered horrendous losses as they were forced to cover.

So ladies and gentlemen, GameStop is by no means a one off situation. The rise in KaloBios from $0.44 to $45.00 was a 100 fold increase. GameStop closed at $19.99 on January 12, 2021, by January 25 it had quadrupled to $76.79 and then exploded to close at $347.51 on January 27. Over this period, it increased a mere seventeen fold; chickenfeed as compared to Kalo Bios

GameStop and Kalo Bios are extreme examples of short squeezes. However, many occur each year that are less extreme. Here is how I summarize the Kalo Bios situation which so eerily parallels GameStop. Kalo Bios was heavily shorted stock by hedge funds. By November 2015 they were close to achieving the holy grail of short selling and that is seeing a stock go bankrupt. Shrkeli saw the opportunity to squeeze the shorts with his scheme. Other hedge funds saw blood in the water and jumped in. Clearly this was not caused by retail speculation and certainly not by Robinhood which was a non-factor at the time.

GameStop differs from KaloBios in the degree to which it flared headlines in mainstream media who framed it as retail speculation. While there is some retail speculation, this whole episode reflects two separate hedge fund schemes, the short sellers with the holy grail of bankrupting a company and rival hedge funds executing a short squeeze. Both highlight the sleazy, likely criminal stock manipulation that is routine for many hedge funds. What excites me is that the news coverage could lead to exposing hedge fund criminal stock manipulations. We have to get past the Robinhood narrative and focus on the real issue that there is enormous stock price manipulation by hedge funds.

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