Got a question from someone today about margin calls and it made my brain go down a path. Sharing some free-flowing thought here.
//This is NOT DD and it is not a thesis...just thinking out loud//
Depending on how you want to count, the big blue chip and crytpo dip started as early as last Wednesday (6/8).
Before I get into what I'm thinking about, we need a quick refresh on how margin calls work. I used to trade on margin (currently have a cash only account and have turned off share lending). I've also written more deeply about margins elsewhere if you want to find that.
When you're margin called you can cover by depositing cash or selling off enough positions to reduce the amount of your portfolio which is covered by debt (margin). You're getting back to a level of leverage your broker will accept.
Let's say you're a big investor with a lot of long and short positions. And say you're leveraged and get a margin call, but you're short on cash (side note...remember adam's "cash is king" tweet? We'll get back to that in a minute). Since you don't have cash, to meet your margin call, you have to sell off some positions. If you close out shorts, you're going to have to "buy to cover". You had previously processed the sale ("Sell short") and borrowed shares to do so. When you sold it short, you collected cash from the sale. Closing a short to cover a margin call isn't going to work for you - it's going to force you to buy back which you ALSO need cash for. And here's the thing - you're greedy and you've been building your empire with leverage. This means you took the cash from the short sale and already invested it somewhere else. So you REALLY don't have cash.
With the margin call, your problem is, if you don't cover the call, the broker will start auto-closing enough of your positions until you've covered. So what do you do? You start selling your longs (not your shorts). Now let's look at some market events...
Take a look at a few tickers (pics posted at end of post...). Look at all of those and what do you see? SPY, Meta, Goog, Nke, Bitcoin, Aaple, Amzn, Msft, what do those all have in common? They're all blue chip investments. Safe bets with a LOT of stored value from the past decade-plus bull run. What else do you see in all of them? They ALL started dipping 6/8-6/9.
Someone asked me, "if they got margin called last Friday, when would we see it?" T+2 is the usual answer, but nothing seems to work normally these days. I looked at all those and my gut reaction was "it's already been happening." First they sold blue chips, then they sold bitcoin. My (non dd) response to all this: They're harvesting cash to cover their leveraged position and avoid auto-closing. This is also bullish for AMC IMO but hold that thought.
The counter-point would be: This is a global event, and driven by inflation. The selloffs were fear based, not margin driven. Sure, that's probably partially true. Macros, pandemic hangover, war, supply chain issues, inflation, are ALL ingredients in the soup. But the logical question is... why the sudden, precipitous drop? We've all known about ALL those issues a long time. Why so sharp and why now?
Consider one more ingredient: AMC has seen about 70 MILLION shares borrowed over the last month and (until today) had only dipped 9 cents in that time. All while the cost to borrow spiked significantly. That's also a drain on your cash as it starts getting pretty expensive to maintain (and to keep opening new) short positions.
Look at the timeline: 6/4, Adam says "cash is king", 6/8, just a few days later, we see the beginnings of some very sharp drops. It's my gut opinion (reminder not DD) margin calls have been ongoing and shorty has been selling off blue chips and crypto in a desperate push to keep liquid. This has always been the thesis and, I believe, we may be seeing it play out.
The hope is, of course, one of three (or all 3) events is next:
1.) Shorty can't sell make enough of their margin calls and starts getting auto-closed (including covering some short positions). Consider as shorty sells their longs, the remaining shares of those tickers are now worth less and cover even less margin. It becomes a self perpetuating problem until the call can't be covered (there's a dead end at the end of this road where they can't maintain margins and their positions get closed..."liquidated")
2.) Shorty uses some of the cash from selloffs to close out shorts (especially as CTB keeps pressing on them harder and harder).
3.) A positive catalyst for AMC (continued improving fundamentals, big whales piling on, etc...) makes shorty's position untenable (mark-to-market losses would add pressure to margins by flipping shorty under water on short positions which are also part of their leverage rn.
Check out the pics below to see what I'm talking about and keep track of the broader market swirling around AMC. I feel incredibly bullish rn and it's still going to take patience. Buy and hodl uses time as a lever on our side. If I'm right, we are already in the throes of shorty losing the liquidity they need to continue their corrupt fight.
Let's go!
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