July 9, 2021 Sign Up

By Overheard on Wall Street

"My working habits are simple: long periods of thinking, short periods of writing." — Ernest Hemingway

Good morning and Happy Friday! We have an exciting Sunday ahead as Richard Branson attempts to become the first billionaire to escape to the moon (sorry Jeff Bezos) and England take on Italy in the Euro 2020 final, eyeing a first major tournament win in 55 years.

If you have not subscribed to Short Squeez yet, now is the time and this is the link.

1. Story of the Day: Wallstbets Enemy #1 Down

Reddit's WallStreetBets' enemy #1, Melvin Capital, ended the first 6 months of 2021 down 46%, thanks to the ruthless attack by the Reddit traders on its short positions in January of this year. The hedge fund rebounded 22% in February but has lost its way in recent months.

Mevlin Capital was founded in 2014 by 42-year-old Gabe Plotkin, a former star portfolio manager for hedge fund titan Steven Cohen. Up until 2021, it had one of the best records on Wall Street: 30%+ annualized returns and 50%+ returns in 2020. The fund's assets under management ballooned to $12.5 billion. In 2019, Plotkin bought a stake in NBA team, Charlotte Hornets and in 2020 he personally made $850 million.

Melvin was known for its aggressive short positions, which made up majority of the fund's gains. Their biggest strength turned into their biggest weakness earlier this year. Melvin Capital had started building a short position in GameStop in 2020 when shares were below $10. On October 27, Melvin Capital's shorts were first mentioned on r/WallStreetBets, in a video titled: “GME Squeeze and the Demise of Melvin Capital." Over the next few months, retail traders declared war on the hedge fund, promising to ride $GME stock price to the moon.

That's exactly what happened and Melvin Capital nearly imploded in the greatest short squeeze of the century. In a short squeeze, heavy buying forces short bettors to buy back shares to limit their losses. On January 27, GameStop shares jumped to $350 and Melvin had to cover its short position to avoid completely wiping out the fund. Melvin Capital lost a cool 53% in a few eventful days in January.

Short Squeez Takeaway: In the new world of meme stocks investing, hedge funds need to be extra careful about their short positions, which can result in uncapped losses. Hedge funds are adapting by hiring data scientists to scour the internet to better gauge retail investor sentiment. One thing is for sure, the short-selling game done changed forever. (In case anyone was wondering, yes, the name of this newsletter was inspired by the infamous Melvin Capital Short Squeez)

2. Markets Rundown

• US stocks logged their worst daily decline in three weeks as fears of uneven economic growth from the COVID pandemic rattled the bullish mood on Wall Street.

Movers & Shakers

• (+) Virgin Galactic ($SPCE) +17% shares are soaring as the company prepares to launch Richard Branson into space. The move appears to be a case of 'buy the rumor, sell the news.'
• (+) Gan Limited ($GAN) +15% on better than expected Q2 earnings.
• (–) Kansas City Southern ($KSU) -8% on news that the Biden administration is targeting consolidation among railroads and ocean shipping companies.

3. Top Reads

4. Book of the Day: The Art of Impossible: A Peak Performance Primer

What does it take to shatter our limitations, exceed our expectations, and turn our biggest dreams into our most recent achievements?

We are capable of so much more than we know. That’s the message at the core of The Art of Impossible.

Building upon cutting-edge neuroscience and over twenty years of research, bestselling author, peak performance expert and Executive Director of the Flow Research Collective, Steven Kotler lays out a blueprint for extreme performance improvement.

If you want to aim high, here is the playbook to make it happen!

5. Daily Visual: Top Fitness Metrics Tracked by US Users of Wearable Devices (% of respondents)

Source: Insider

6.  Daily Acumen: Precautionary Principle

The Precautionary Principle is not acting until you have a good idea of all the adverse consequences. When we’re faced with risks, it’s natural to want to wait until there’s a 100% certainty about it.

Unfortunately, that’s impossible. The best that can be achieved is that given all our current theories, logic and facts that we’re reasonably confident something is safe.

Waiting for more information is useful but waiting for that unattainable 100% certainty prevents anybody from doing anything.

The Precautionary Principle preaches the use of scientific understanding to take action, thinking about the pros and cons of that action and making sure that the effort behind it is reasonable given the benefits.

7. Memes of the Day

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