| Author | Source |
|---|---|
| u/Freadom6 |
Obligatory: Not financial advice. I am merely pointing out some items I have stumbled across during my late nights reading regulatory documents. Much of what I will discuss is my speculative opinion on information I am reading and using deductive reasoning to put this information together.
TL;dr FINRA confirms calls/puts used to create “synthetic shorts”. I have pointed this out in a prior DD but used a bad title on the post. See my profile or this link for my past DD on this…
Margin Debt has rocketed up just prior to the previous two recessions since 2000 (DOTCOM/Housing crashes) and it is currently on its largest rapid increase since the 2008 crash, but this time it is going substantially higher in a very short amount of time. When did this rapid margin debt ascent begin? When GME share pricing started turning glorious green in August of 2020. I believe Market Makers/Hedge Funds have been leveraging short sales in margin accounts on GME and other meme stocks and that is the cause of the current levels of margin debt. Don’t want to read anymore? I don’t blame you in the slightest. Look at the charts at the end of the post.
SKIP THIS PART IF YOU SAW MY LAST POST.
PUTS/CALLS Used as SYNTHETIC SHORTS and are NOT REPORTED, Confirmed by FINRA:
As my previous DD showed, FINRA has confirmed that synthetic shorts are being created through Call/Put Options and that information is not included in the current short interest reporting numbers. My apologies as I should have titled the post that way, so it got more visibility for those who wanted to see it. Direct quote from regulatory notice:
“enhanced short interest reporting could include synthetic short positions achieved through the sale of a call option and purchase of a put option (where the options have the same strike price and expiration month) or through other strategies.”
For additional information on Regulatory Notice 21-19, see my previous DD or go to the link above for the actual Regulatory Notice.
OKAY, ON TO THE SUBJECT AT HAND:
What are Margin Accounts?
“A customer who purchases securities may pay for the securities in full or may borrow part of the purchase price from his or her securities firm. If the customer chooses to borrow funds from a firm, the customer will open a margin account with the firm. The portion of the purchase price that the customer must deposit is called margin and is the customer’s initial equity in the account. The loan from the firm is secured by the securities that are purchased by the customer. A customer may also enter into a short sale through a margin account, which involves the customer borrowing stock from a firm in order to sell it, hoping that the price will decline. Customers generally use margin to leverage their investments and increase their purchasing power. At the same time, customers who trade securities on margin incur the potential for higher losses.” FINRA Defines Margin Account
My Interpration of Current Margin Debt Levels and Why Levels are Rapidly Elevating
Steady, slow increasing margin debt is expected in a robust and flourishing economy. It means the consensus is that the economy is strong and heading in the right direction and investors are willing to take on the risk associated with borrowing in a margin account because they feel the reward outweights the risk. Steadily declining margin debt would indicate the potential for a bear type sentiment or recession as investors are not willing to take on the risk of borrowing.
I have not been able to find many well written articles on rapid increases or decreases to Margin Debt from reputable sources, so I have taken it upon myself to chart the monthly reported margin debt numbers compared to the monthly (1st of the month) S&P 500 share prices. As you will see below, we have had two recessions since 2000 with the DOTCOM/Housing crashes. Prior to the crashes, Margin Debt RAPIDLY increased just like it has been doing since August of 2020. However, the increase this time is even more rapid and at substantially higher levels.
In prior years, Market Makers (MM), hedge funds (HF), etc. found that brick-and-mortar stores were a dying breed with the increase in online shopping and they realized they could make mountains (not piles) of money from naked shorting these businesses into a “Death-Spiral” where the ultimate result is the bankruptcy of the company, which means the borrowed shares do not need to be returned to the lender because the stock ceases to exist, which in turn leads to full profitability for the MM/HF aside from the fees associated with borrowing the stock to short.
If you were a MM or HF and you have found it to be highly lucrative (especially when fines for naked shorting are peanuts compared to profits) to bury companies in a death spiral scenario EVERY TIME YOU DO IT (Blockbuster, Toys-R-Us, Sears, etc.) would you feel comfortable using margin to continue doing this to other businesses? Maybe shorting more than 140% of the available float of a company’s stock? I would not, but that is only because I am NOT a GIANT bag of shit. Remember, money sitting in the bank does nothing for these guys, it is best to have all your cash in play so you are making a profit on it versus losing value to inflation while sitting peacefully in a bank account. Some people would think that is a stupid idea (myself included), but if you had the ability to control a lot of the share pricing regarding securities through illegal and manipulative tactics, like MM’s do, you are not overly concerned with the risk. Especially when death spiraling has worked every time before.
But what would happen if a company so severely shorted reimagined itself, found a large and dedicated shareholder base, and became profitable when the short interest is this high? Enter GAMESTOP. As you will see from the charts below, GME began showing significant positive share price movement in August of 2020. What happened to Margin Debt when Gamestop share prices went up? Margin Debt abso-fucking-lutely EXPLODED.
Margin Debt 1997 - Current (Source: FINRA)
S&P Share Price 1997 - May 2021 (Source: https://www.multpl.com/s-p-500-historical-prices/table/by-month)
June margin debt numbers will be interesting to keep an eye on if we haven’t begun our long awaited journey by that time. The numbers should be released by the 15th of this month.
My head hurts.
Hedgies R Fuk’d.
Tanks fo’ readin.