The legendary investor who anticipated the Enron collapse 20 years ago has two new short positions.
Jim Chanos said he’s betting against food-delivery app DoorDash and sports-betting firm DraftKings.
DoorDash’s net losses caught Chanos’ attention. For DraftKings, it was the marketing spend.
Legendary short seller Jim Chanos has two new companies he’s betting against: DraftKings and DoorDash.
In an interview on CNBC, the founder of Kynikos Associates revealed the two companies as short-selling opportunities. Chanos is well known for anticipating Enron’s historic collapse, which happened 20 years ago today.
For DraftKings, the sports betting firm that went public via SPAC in 2020, Chanos said the company has high marketing costs relative to its actual revenue. In tweets on November 30, he posted a screenshot of the company’s third-quarter revenue and expenses, which showed sales and marketing spending of $303 million compared to revenue of $212 million.
“You can believe in sports betting, but this business model is flawed,” he told CNBC.
As for food-delivery app DoorDash, Chanos told CNBC that even with more people ordering meals to be delivered, the company is still struggling to make a profit. In the third quarter this year, the company reported a net loss of $101 million, wider than the year-earlier loss of $43 million, according to a regulatory filing.
“You’re not making money in the pandemic, when everyone is ordering food and everyone is staying at home and you have a captive audience,” Chanos said. “If not now, when?”
The companies did not immediately respond to Insider’s request for comment.
DoorDash went public a year ago in an epic debut in which it nearly doubled its offering price. But since the IPO, the stock has dropped about 12%. As for DraftKings, the stock has slumped about 30% so far this year.
DraftKings stock dipped just 0.1% ahead of the close Thursday, while DoorDash stock rose 3.5%.
The SEC proposed a new rule that would make short selling more transparent
The rule requires lenders to report transactions within 15 minutes to a governing body, like FINRA.
Short selling came under scrutiny earlier this year after retail traders drove the price of GameStop higher.
Regulators want to make the practices behind shorting stock more transparent under a new rule crafted in response to the GameStop short squeeze in January.
On Thursday, the US Securities and Exchange Commission proposed a new regulation that would “provide transparency in the securities lending market,” a market that SEC Chair Gary Gensler said is currently opaque.
Short selling is a bet that a company’s shares will decline. To do it, an investor borrows shares from a counterparty willing to lend, and then sells them. If the stock falls, as hoped, the investor buys the shares back and returns the shares, pocketing the difference.
The new rule requires firms lending securities to report the “material terms” of each loan to a governing body like the Financial Industry Regulatory Authority within 15 minutes of the transaction. That information would then be made public.
“This proposal would bring securities lending out of the dark,” Gensler said. The public has 30 days to comment on the proposal.
In January, short-selling came under scrutiny when hordes of retail traders loosely organized on Reddit to drive up the share price of meme stocks, GameStop included. The video-game retailer was shorted more than 100%, according to Reuters, meaning more shares were shorted than were available to trade. Retail traders noticed, and aimed to create what they called a “MOASS,” or the mother of all short squeezes, to cause short-sellers to take losses on their bets.
In its statement, the SEC said its new rule is in line with the Dodd-Frank Act, legislation that was passed following the 2008 market crash. The SEC’s rule ensures “market participants, the public, and regulators have access to timely and comprehensive information about the market for securities lending.”
Jim Chanos has blasted retail investors as greedy and entitled, warned the current market boom dwarfs the dot-com bubble, and sounded the alarm on cryptocurrencies in recent months.
The veteran short seller and Kynikos Associates boss has also criticized Tesla CEO Elon Musk, dismissed China’s regulatory crackdown as predictable, and compared Warren Buffett’s business model to short selling.
Here are 14 of Chanos’ best tweets, lightly edited for clarity:
1. “Asset prices are up across the board in 2021 (even bitcoin), and the S&P 500 is less than 3% off its all-time high. The sense of entitlement that investors have today is … something.” (July 20, 2021)
2. “$GME is up 780% and $AMC is up 1,470% this year. $AMC has tripled in the past three months. This is not outrage, it is greed. The newest generation of entitled retail ‘investors’ must win all the time, or they cry and blame ‘them.'” (August 5, 2021)
3. “The $AMC apes are openly discussing shorting the Robinhood IPO to ‘stick it to them.’ Anyone else see the irony there?” (July 2, 2021)
5. “I was there as well … what is much crazier now is that the concept and fraud-y stocks are 5-10x the market cap today than in early 2000. And burning much more cash now. Also, no crypto/housing speculation in 1999-2000. Finally, there were no $20-30 billion ‘short-squeeze’ plays then.” (July 31, 2021)
6. “If only we could combine the worst aspects of the the 1997-99 dot-com bubble with those of the 2003-06 residential real estate bubble…” “Hold my beer!” – commenting on companies helping people buy homes through crowdfunding or using their parents’ investments as collateral. (June 29, 2018)
8. “God save us from yet another 16-year-old crypto CEO in a hoodie claiming they are changing the world.” (August 12, 2021)
9. “You mean to tell me that a totalitarian Communist government can change industries by edict overnight? Interesting. $BABA $DIDI $EDU $GOTU $TAL” – commenting on the Chinese government reining in Alibaba, Didi, and other major companies. (July 23, 2021)
10. “Do you know which companies don’t rally 27% after successful product tests? Companies that people trust. $SPCE” – commenting on Virgin Galactic’s stock soaring after a successful test flight (May 24, 2021)
11. “Tesla ‘FSD’ does not exist. Hundreds of billions of market cap depend on $TSLA and Musk maintaining this fiction. Their driver-assist software remains at Level 2, by their own admission. And despite all the miles-driven everyone points to. These are facts.” – questioning the reality of Tesla’s full self-driving system. (April 3, 2021)
12. “All hail the infallible God of Mars … all unfavorable outcomes are due to the efforts of his technically incompetent knights. Further developments shall come forth in two months, three months maybe. $TSLA” (July 10, 2021)
13. “Lol, Toyota unveiled their robot four years ago. And it wasn’t a man in a leotard.” – ridiculing Tesla for unveiling its humanoid robot using a person dressed up as a robot. – (August 20, 2021)
14. “Buffett’s main business (insurance) is short-selling. It’s the biggest short-selling business there is.” – Chanos explained in a previous tweet that shorting is borrowing money at an uncertain cost, and Buffett’s Berkshire Hathaway invests the premiums it collects from its insurance operations without knowing exactly how much it will pay out in claims. (February 5, 2021)
Iceberg Research revealed a short position on AMC on Friday, staking out a claim against one of the buzziest retail stocks to date.
Arnaud Vagner, the main short-seller behind Iceberg, told Insider that AMC’s current stock price, hovering around $50, has been unsustainably inflated by call options activity in the already-tough theater business.
“The volatility of the meme stocks is largely driven by call options, and their ‘gamma squeeze effect,'” Vagner said – referring to a situation where a stock’s sharp price increase forces market makers to buy more shares, accelerating the stock’s ascent.
“However, this effect is temporary and the correction is inevitable. The volume of call options has substantially declined,” he added.
In a series of tweets announcing the short, Iceberg described the AMC “pump” as “increasingly shaky,” calling the weaker fundamentals of AMC “obvious.”
“We don’t accuse the company of fraud. There is a price for everything and we believe the pump has exceeded its average life,” Iceberg tweeted.
In previous years, Vagner’s Iceberg made headlines for knocking some 99% off the share price of Noble Group, a big commodity trader once worth nearly $12 billion, after Iceberg alleged massive accounting fraud.
More recently, the short-seller released a report in April on Diginex, a crypto exchange that went public via SPAC, alleging corporate governance “red flags” and noting the founder had sold 96% of his shares. Since the report, Diginex shares have fallen 23%.
AMC stock has undergone a disorienting run-up in recent months. After spending 2020 in the single digits, it has skyrocketed to as high as $72.62 in early June. AMC was trading at $49.40 as of 12:45 p.m. ET.
DraftKings plunged as much as 12% Tuesday on allegations by a short seller of illegal activity.
A report from Hindenburg Research published Tuesday morning, which unveiled the firm’s short position in the online sports betting company, claimed DraftKings had “systematically skirted the law” via two Bulgarian subsidiaries. Meanwhile, insiders made use of market froth to sell more than $1.4 billion in DraftKings shares, Hindenburg alleged.
In a statement, DraftKings downplayed the findings.
“This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price,” the company told Yahoo Finance. “We conducted a thorough review of [one of the Bulgarian subsidiary’s] business practices and we were comfortable with the findings.”
Released ahead of market open, the report sent DraftKings shares sliding, bottoming out at $44.65 a share versus a previous close of $50.62. But by 11 a.m. New York time, the stock had recovered around two-thirds of the initial drop, and had remained stable as of this writing.
Since the Supreme Court legalized sports betting nationwide in 2018, DraftKings has leaned on partnerships with high-profile brands, like the NFL and NBA, to stand out in a crowded, sometimes opaque market.
The firm went public through a SPAC in 2020, combining with one of the Bulgarian subsidiaries, called SBTech, that Hindenburg accuses of criminal conduct.
The DraftKings drop continues a rough stretch for the stock, which has fallen 28% since mid-March.
Shares of the company were trading 4.65% lower at $48.26 as of 3:29 p.m. ET on Tuesday.
Hedge fund Mudrick Capital lost 10% in just a few days of trading as shares of meme stock AMC Entertainment spiked to record highs, the Wall Street Journal reported, citing people familiar with the matter.
The losses were driven by call options sold by firm founder Jason Mudrick, according to the WSJ. The position, intended to serve as a downside hedge, ended up backfiring as the stock surged too much, too fast.
The runaway share spike occurred on June 2, when AMC shares rose as much as 127%, to $72.62, well beyond the strike price of $40 for Mudrick’s options.
Just one day prior, Mudrick had disclosed a $230.5 million purchase of new AMC stock, then immediately sold those shares at a profit, according to a Bloomberg report. Despite the success of that leg of the overall AMC trade, Mudrick’s calls on the stock were still held short, leaving them vulnerable to the June 2 surge, the WSJ found.
Mudrick did close out all options and debt positions on June 2, albeit too late to avoid the squeeze. While the fund did earn a roughly 5% return on the debt, it ended up absorbing a net loss of 5.4% because of the options trade.
Though the fund took a hit amid the surge, it’s still up about 12% for the year, the Journal said. Meanwhile, AMC, the world’s largest movie theater chain, is up more than 2,000% year-to-date.
Retail traders have been dealing blows to short sellers and hedge funds this year as they’ve poured into stocks with high short interest rates in order to force a short squeeze. Earlier this year, investors on Reddit’s Wall Street Bets led a share price surge in GameStop, which caused short sellers to lose billions.
Amid the renewed meme-stock interest in recent weeks, short sellers have continued to lose money in retail-trader favorites like AMC and GameStop. The meme stock trade has scared off many short sellers from heavily betting against certain stocks.
Melvin Capital, the hedge fund that dug itself into a hole during the GameStop saga, extended its first-quarter losses to 49%, according to a Bloomberg report.
The firm, founded by portfolio manager Gabe Plotkin, saw a 53% decline in January, reversed some of that loss by gaining 22% in February, but slid another 7% in March, Bloomberg said, citing sources.
Melvin was among a handful of short-sellers that got torched by the Wall Street Bets army that bid up GameStop’s shares, leading to massive losses for those that wagered bearish bets against the video-game retailer.
The fund closed its short position against GameStop on January 27. It started out this year with $12.5 billion in assets under management, but ended January with about $8 billion. Steve Cohen’s Point 72 and Ken Griffin’s Citadel injected a $2.75 billion investment in Melvin to support its battle against the Reddit army.
Plotkin racked up about $860 million through 2020 after his firm returned 53%, but January’s deep decline left him with an estimated personal loss of $460 million, Bloomberg reported.
Plotkin was grilled before a congressional panel in February, where he defended his short position and said it was never part of an effort to “artificially depress, or manipulate downward, the price of a stock.”
A spokesperson for Melvin didn’t immediately respond to Insider’s request for comment.
GameStop said Tuesday that its stock is -and continues to be – “extremely volatile.”
Moreover, that volatility is “due to numerous circumstances beyond our control.”
The statement in a regulatory filing is the first such statement from GameStop leadership on its ongoing stock price fiasco that’s seen its shares rise as much as 1600% in a matter of weeks.
Under the “risk factors” section of the annual report, the company’s stock volatility is listed as the primary risk factor related to the company’s stock. It specifically cites “short squeezes” as a primary reason for that volatility.
“The market price of our Class A Common Stock has been extremely volatile and may continue to be volatile due to numerous circumstances beyond our control,” GameStop said in the filing.
GameStop’s stock value has been explosively unpredictable since mid-January.
Between January 15 and January 27, the price leapt from around $35 to just shy of $350. It’s seen similarly huge dropoffs, but months later it’s still in the $180 range.
The reason, of course, is the much discussed “short squeeze” from a large group of individual investors driving up the company’s stock price in an effort to defeat short sellers betting against the stock. It’s been a major topic of discussion for the past several months for loads of people in media and on Wall Street – except for GameStop leadership.
The company has more or less stayed mum for weeks, and even declined to discuss it on its quarterly earnings call this past week. Instead company leadership focused on the company’s ongoing “transformation” led by Chewy cofounder and former CEO Ryan Cohen.
Since Cohen joined the company’s board in January, taking charge of a “strategic” committee soon after, the company made a string of high-profile hires from the likes of Amazon and Chewy.
It is unclear what Cohen’s specific plans are the future of the company, but he broadly outlined plans in an open letter to the company’s board in late 2020.
GameStop, “needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences,” Cohen wrote in the letter, “not remain a video game retailer that overprioritizes its brick-and-mortar footprint and stumbles around the online ecosystem.”
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SPAC IPOs have been all the rage since the COVID-19 pandemic began, and the trend has only accelerated in 2021. Now short-sellers are beginning to take notice.
The group of investors has tripled bearish bets against SPACs to $2.7 billion, from $724 million at the start of the year, according to data from S3 Partners first reported by The Wall Street Journal.
Short-sellers have a lot of SPACs to sift through, given that the $166 billion raised by SPACs in the first quarter of 2021 exceeds all of the SPAC deals formed in 2020. But high-profile short-sellers seem to be having no problem finding their targets.
Muddy Water’s Carson Block released a report earlier this month on XL Fleet, a recent SPAC IPO that, according to Block, misled investors on an inflated revenue backlog for its retrofitted hybrid vehicles. The share price of XL Fleet has yet to recover from Block’s short report.
Short-seller firm Hindenburg Research, which rose to fame last year after it released a damaging short-report on Nikola, has also had success targeting SPAC firms. Hindenburg released a report on Lordstown Motors last week, alleging that the SPAC-merged company has “no revenue and no sellable product.” Shares of Lordstown dipped more than 20% and have yet to recover from the decline.
Even the SPACs led by billionaire investor Chamath Palihapitiya have been unable to avoid the scrutiny of short-sellers. Palihapitiya’s recent Social Capital SPAC merger with fintech firm SoFi has more than 20% of its share float sold short, according to data from Finviz.
Besides the underlying business concerns raised by short-sellers for SPACs, underlying trends in interest rates could be helping their bets against SPAC mergers. A majority of the companies going public via SPAC merger are not profitable, and don’t forecast profitability until years down the road.
The dearth of profits hasn’t jived well with investors as interest rates have risen over the past few months, sparking a rotation out of high-tech growth companies and into cyclical stocks in the energy and financial sectors.
Now, Congress and US regulators are reviewing what happened to see if there are any vulnerabilities in the stock market that need to be addressed. Regulators are considering rule changes on everything from options trading, to short-selling and gamification practices by investing apps like Robinhood.
On Tuesday, Senator Elizabeth Warren shared the responses to her previous letters that asked the SEC and FINRA how they planned to respond to the volatility in GameStop. The responses revealed a list of issues the regulators are now examining.
The SEC said it is evaluating if there are any gaps in its market manipulation rules. The agency also said it will “seriously consider” increasing the requirements for brokers that offer options trading, and increasing disclosure requirements for brokers that deal with payment for order flow and for hedge funds and investors that engage in short-selling.
FINRA, meanwhile, said its looking into the gamification of the stock market by investing apps like Robinhood, and whether its current rules adequately address the risks presented by these practices. Both FINRA and the SEC said they are still investigating if there was any wrongdoing related to the meteoric rise of GameStop earlier this year.
“The GameStop controversy revealed how the Wall Street game is rigged in favor of big hedge funds and giant corporations – and how this hurts individual investors and the economy. I’m going to keep fighting for answers, a level set of rules, and a transparent and open market for everyone,” Warren said.