[ad_1]
It is wrong to hope that a company will go bankrupt and its shares will collapse to zero, which is why short sellers – the traders who make money when stocks fall – are treated with disdain in dejection. many corners of Wall Street and now more and more Washington.
But the devil in this case deserves some sympathy. Without short sellers, the investing public is truly doomed. And for proof, look no further than a one-time stockpile of pennies that boils down to nosebleed levels.
The action is GameStop, of course, a video game retailer undergoing a corporate restructuring that includes store closures and, according to many analysts, an outdated business model as more and more people are buying video games in Canada. online rather than in-store.
As we all know by now, GameStop has become a darling of the novice traders market for reasons that defy logic – sending the stock to a high of almost $ 500 per share a few weeks ago before plummeting and then crashing. to bounce back this week.
Initially, the stock was supported by an unusual array of factors, including chatter on Reddit bulletin boards that the company was doomed for greatness. Novice traders armed with a no-cost Robinhood trading app and a deep desire to stick with the big bettors on the decline of the stock added fuel to the fire.
Short sellers borrow stocks, sell them and repay the loan at a later date, betting stocks will drop. This is why they earn a lot of money when stocks are down. But they can lose a lot of money when short-term stocks go up, which has happened with GameStop.
The mania triggered brief pressure and the hedge funds were crushed. Robinhood had to shut down as it did not have the capital to settle and process all transactions.
Eventually, the House financial services committee held a hearing to settle matters. But the committee mainly tried to blame the hedge funds that short-circuited stocks.
What was largely overlooked in the hearings is that while hedge funds lost money, they were ultimately right. As they predicted, GameStop’s shares collapsed. Small investors who ignored the short thesis and got into the Reddit-induced mania of buying near the top (sometimes with borrowed money) were squashed as the stock fell below $ 50.
Last week, GameStop’s share climbed again, to nearly $ 200 a share before settling at just $ 100, which is still light years above its levels. subtitles under $ 4 last summer. And this is once again enticing small investors to fuck off.
I walked through the mud on Reddit’s “r / wallstreetbets” thread, the epicenter of all GameStop, to see what, if anything, is being pushed about GameStop’s business model. The answer: very little, although I did find a post from a user who promised to “tattoo the wallstreetbets logo on my right cheek if we get GME at $ 1000”.
Note the language here: “If we get GME at $ 1,000.” This is typical of selling stocks, where traders exaggerate stocks for fragile reasons. Dumb money rushes in, pushing stocks even further before savvy traders ditch their holdings for a profit.
Of course, it’s impossible to know if GameStop will match $ 1,000 per share or even the $ 500 mark it nearly hit during the height of the mania in late January. But this time around, there’s reason to believe that the losses for average investors could be even greater: There are no short sellers who provide a much needed second opinion.
Short-term interest in GameStop, which had exceeded more than 100% of the float in January, has declined significantly.
Hammered by short-term pressure and by Congress (in finance committee hearings committee chair Maxine Waters used the term “predator” to describe short selling), shorts are now under cover . The information flow is dominated by touts.
As I reported on Fox Business, legendary short seller James Chanos is worried about the market implications of the anti-short mania sweeping through retail investors and possibly now Congress.
Chanos, a friend of President Biden, has reached out to White House economists to convince them that short sellers are needed more than ever. Historically low interest rates, no-cost trading apps, and message board hype create a perfect storm of small investors who grab speculative stocks that are likely to implode when the real world returns.
Of course, Chanos is one of those evil short sellers who made a fortune betting the stocks will collapse, so consider the source. Recently, he made what many touts see as a mistake by declaring Tesla a “walking insolvency” given where the shares are trading and how the electric car maker is doing today.
Time will tell if he’s wrong.
But twenty years ago, it made history with research that uncovered one of the biggest corporate frauds: the Enron accounting scandal. Investors who listened to him made money; those who have not lost money. Regulators who ignored it were forced to reform accounting laws for more transparency.
Count me as someone who thinks we need to hear more from people like Chanos as markets hit new highs while low interest rates and free trading apps encourage more novice investors to thinking that trading is a lossless situation because that’s what they’re reading on Reddit.
[ad_2]
Source link