A speculative frenzy unlike anything we have ever seen

George Kessarios
Chief Economist & Fund Manager

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When 100% of outstanding shares are shorted in any stock, you get a sort of a black hole short interest phenomenon. In other words, even if someone covers his shorts, someone comes on top and shorts even more shares. Very soon more than 100% of all outstanding shares are sold short and covering becomes impossible, because there are no available shares to be covered. More or less, that is what happened in the case of Gamestop.

But Gamestop is not the only heavy shorted stock. There are many more than meets the eye. And it’s not just stocks that are heavily shorted, EFTs are shorted also. For example, according to an article from the Motley Fool site (link here) the SPDR S&P Biotech EFT (XBI) has a short interest of 103%%, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is shorted to the tune of 91% and the SPDR S&P Retail ETF (XRT) has a short-interest ratio of 465% recently. Yes you heard right, 465%. The ETF has 2.6 million shares outstanding with more than 12 million shares short. In comparison, the short interest of Gamestop as f Feb 5 was 89%.

The question is, are seasoned professionals right in shorting these securities so much? The answer is yes and no. Professional investors and managers know all too well that any mania can’t last forever, however a speculative mania can last longer than anyone imagines, and stocks can rise for no reason, or much more than thought possible. In other words, as Keynes correctly said, markets can remain irrational longer than you can remain solvent.

The bottom line is that we are witnessing a market like no other in history. A speculative frenzy I have never seen before, and a market that behaves irrational in every respect. I am not sure how this ends or how long it will last, but I am sure that in the end, irrationality will be punished, and prudence rewarded.

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