Don’t Bet Against Trump or his Media Startup, is that the message from market?: Despite its recent surge, shares of Donald Trump’s media startup, Trump Media & Technology Group Corp., remain a risky proposition for short sellers. The company’s valuation, volatility, and limited availability of shares for borrowing make it an expensive stock to bet against.
Don’t Bet Against Trump despite Soaring Borrowing Costs is that the message?
As of May 2024, the annual financing costs for borrowing Trump Media shares have skyrocketed to a whopping 600%, up from around 100% just a few weeks ago. This surge in demand has led to a high daily fee of approximately 75 cents, including weekends, for short sellers.
This surge in borrowing costs reflects the intense demand for Trump Media shares among short sellers. With limited availability of shares for borrowing, lenders can charge exorbitant rates to those seeking to short the stock. This creates a significant barrier for short sellers, making it increasingly expensive to maintain short positions in the stock.
Difficult Entry Point for Profits
To stay out of the red, a Trump Media short seller must see the stock drop by roughly $5.25 per week, which represents a 12% decline. This creates a difficult entry point for profit, as contrarian traders have limited upside potential while facing the risk of infinite losses if the stock skyrockets.
Short sellers face a challenging dilemma when shorting Trump Media. The high borrowing costs and significant decline required for profitability make it difficult to generate returns from short positions. Additionally, the risk of infinite losses poses a significant threat to short sellers, especially if the stock experiences a sudden and sharp increase in price.
Don’t Bet Against Trump or his Media: Short Sellers’ Struggles
Despite the high fees, short sellers have taken significant losses on Trump Media. As of May 2024, their mark-to-market losses total roughly $121 million, while the S&P 500 Index has returned 5.7% and risk-free high-yield savings accounts have provided consistent profits.
This disparity in performance highlights the challenges faced by short sellers in betting against Trump Media. Despite the high borrowing costs and potential for significant losses, short sellers have struggled to generate profits from their short positions. The outperformance of the S&P 500 Index and risk-free investments further underscores the difficulties faced by short sellers in profiting from declines in Trump Media’s stock price.
Similarities to Meme Stocks
Trump Media’s valuation and volatility bear striking resemblance to meme stocks like GameStop and AMC. These stocks saw their shares soar and market values inflate in 2021, despite their struggling businesses. However, many short sellers were unable to turn a profit, as the stocks remained elevated for longer than they could afford.
The similarities between Trump Media and meme stocks raise concerns about the potential for short squeezes and heightened volatility. Like meme stocks, Trump Media’s stock price may be driven more by speculative trading and investor sentiment than by fundamental factors. This poses additional challenges for short sellers, who may face significant losses if the stock experiences a sudden and unexpected surge in price.
Insider Strategies
Trump Media’s CEO, Devin Nunes, has been urging retail investors to make their shares unavailable for borrowing. He has also written to Congress and Nasdaq, claiming “naked” short selling is taking place.
This strategy of restricting share availability aims to create a shortage of shares for borrowing, driving up borrowing costs and making it more difficult for short sellers to maintain their positions. By mobilizing retail investors and raising awareness of alleged short selling practices, Trump Media’s management may be attempting to manipulate the market and protect the company’s stock price.
Trump’s Wealth on the Line
Former President Trump’s stake in Trump Media has ballooned to nearly 115 million shares, worth an estimated $5.3 billion on paper. However, insiders face a lock-up period that prevents them from selling until September. To expedite their ability to cash in, the company’s board would need to waive or pull forward the expiration of the lock-up terms.
Trump’s significant stake in Trump Media aligns his financial interests with those of other shareholders. The potential for a massive windfall from the sale of his shares provides Trump with a strong incentive to protect the company’s stock price and prevent a decline that could erode his wealth. The decision to waive or shorten the lock-up period would signal Trump’s confidence in the company’s prospects and could have significant implications for the stock’s performance.
Don’t Bet Against Trump or his media is that the Conclusion?
Shorting Trump Media remains a risky bet for investors, given the high financing costs, limited availability of shares, and the stock’s potential volatility. Short sellers face steep odds in profiting from a decline in the stock price, while insiders could potentially benefit from a waiver or expiration of the lock-up period. The company’s valuation and behavior echo those of past meme stock surges, making it a potential trap for investors seeking easy profits.
