A Short Squeeze

A short sale occurs when an investor sells a stock they don’t own to hopefully buy it back later at a reduced price. Recently, Gamestop and AMC have seen a short squeeze. When you short a stock, if the stock price increases, you must make a margin deposit, that is, make an additional deposit of cash into your account, or repurchase the stock and take the loss. In a short squeeze, a group of investors buy the stock, forcing short sellers to make more deposits or take a loss. In the past two weeks, Gamestop has gained about 1,800 percent, which in our opinion, means the stock is in a bubble.

Buyback Increase

During the COVID-19 lockdowns, corporate cash flows dropped dramatically, which led to a decline in both dividends and stock buybacks. Now, companies are beginning to discuss an increase in buybacks. Buybacks in the fourth quarter of 2020 were $116 billion, up from $102 billion in the third quarter. For 2021, buybacks are expected to reach $651 billion, a big jump from 2020's $505 billion.

COVID-19 Bankruptcies

As we mentioned in the textbook, financial leverage is a double edged sword. With the COVID-19 lockdowns, the economy slowed dramatically and the effect on highly leveraged companies was immediate. During 2020, 244 U.S. companies with liabilities over $50 million filed for bankruptcy. This was a 70 percent increase from 2019, and the most since 2009's 293 filings. In what may be more telling, during 2019, 62 percent of companies reported being a net investor. However, by the fall of 2020, only 52 percent of companies reported being a net investor.