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Updated: Jul 20, 2023

It has only been a couple weeks of nonsense, but I already feel the same talking about Gamestop and AMC as I do talking about coronavirus. The reason for that is because so much has already been said by people far smarter than me; the situation is the most over-analyzed thing of 2021. It’s just too odd and too telling for me to leave it alone.

Plus, just as with coronavirus, a lot of what turns up on the internet is either conjecture or just 100% demonstrably false. I think the part of this narrative that’s so misleading for retail investors is this idea that a bunch of little guys are putting some major hurt on Wall Street. That is false; Wall Street loves this.

Melvin Capital doesn’t like this, but they’re not Wall Street. In fact, they were so obscure (until last week) that it’s difficult to determine why they were targeted by this mob of Reddit-readers at all. Was it because the store’s social-media savvy clients are kind of nostalgic about the place? It’s not like any of them have actually shopped at a Gamestop in ten years, so what’s the deal?

No, Melvin Capital is not Wall Street. Citadel… now that’s Wall Street.

And I’ve got to believe they’re pretty happy about things this week. Citadel is a giant market-maker, which was a pretty valuable service to provide for a firm like Robinhood until it couldn’t. After all, the total short interest in Gamestop stock grew to far outsize the entire float-- where else were those Robinhood pajama traders going to find stock? The bottom line is that the outstanding short interest was way too big for the levels of daily turnover, so it was already primed for a liquidity disaster.

And then millions of random people started trading stocks for the first time, without regard to spreads, prices, time of day, order routing or anything. High frequency traders and market makers, the typical bad guys of Wall Street, make their money from volatility and volume, and that’s exactly what they got last week. Ca-ching.

How about the private equity guys? Not usually winning popularity contests, right? Silver Lake Partners, a private equity firm with $72 billion of assets under management, converted their debt from AMC into equity and dumped their equity holdings into the market while also ridding themselves of their $100mm 10.5% first lien notes. They saw their AMC position go from a loss of $200 million to a gain of $100 million in a week.

Silver Lake basically severed its entire relationship with AMC; unlike a bunch of small traders on Robinhood who are still long the stock. So, we’ve now got a bunch of Davids in a crowd-funded ponzi scheme that literally requires more new money from new investors to come in behind them to absorb all of the dumping that’s still to come by the Goliaths.

That’s the point of my column today: Don’t buy the “little guys” narrative. It is false.

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