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If you followed the WallStreetBets stock market squeeze (more information Here, Here, Here), you’re probably struggling with around 6,000 paragraphs starting with something like “if I gave you a banana …” That’s because you’ve probably learned more about shorts, options, and margin calls in a matter of days than consuming hundreds of movies and TV broker content. You might have new intimate working knowledge and repugnance online brokerage. Now that you know how stocks go up, it’s time to find out how they go down.
Despite the tale of a bipartisan class war between WallStreetBets and hedge funds – which has now descended into mania on CNBC, where a parade of venture capitalists are suddenly dying to side with the ‘little guy’ – many other people hold the now expensive stocks that WallStreetBets managed to send to Pluto. These include teachers whose pensions are tied to public funds, wealthy people got richer, and the struggling physical businesses themselves.
Who is most likely to suffer? What happens to the economy, if any? What happens at the end of a “short press? We asked the authorities on the ground for advice.
Will GameStop and the dozen other stocks inflated by retail investors ever go down?
Aswath damodaran
Professor of Finance at the Stern School of Business at New York University
It is not inevitable but probable. Nothing has fundamentally changed in these companies, and if the only thing keeping them afloat is trading Redditors, when they move on to other targets, the stock will lose its oxygen.
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Donald langevoort
Thomas Aquinas Reynolds Professor of Law at Georgetown University Law Center
We are far too early to be able to provide answers. Nothing is inevitable, but if the past is any indication, the relevant stock prices will revert to significance. What fuels such a bubble (assuming it is a bubble) is investor overconfidence in past indications that they can move markets indefinitely, which may linger for some time (self-fulfilling prophecy) but that has a natural end point. Obviously, those who got in and out at the right time will celebrate their brilliance, but unless they are disciplined enough to stop before the calculation, there will be losses.
Terrance Odean
Rudd Family Foundation Professor of Finance, Haas School of Business, University of California, Berkeley
I haven’t analyzed GameStop’s core value. However, from what I have read, I expect recent prices to far exceed fundamentals.
This likely means that prices will drop significantly, but not necessarily down to pre-January prices. However, there is no hard and fast rule about how quickly you drop. A stock can remain overvalued for a long time relative to fundamentals. This will likely leave homeowners disappointed with future gains, but it may take some time. GameStop is unusual due to the attention of investors on both sides.
Is there a chance that market makers will end up taking a large chunk of the losses?
Terrance Odean
Market makers are at risk when they hold large temporary positions in extremely volatile stocks. So, yes, they can suffer losses. However, the most risky institutional investors are those with large, unhedged short positions.
What happened when major hedge funds, for example, knowingly inflated a bubble?
Sloan Distinguished Professor of Management and Associate Professor in Economics, Finance and Accounting at MIT Sloan School of Management
We saw it in the late 1990s with the dot-com bubble. As we know from transcripts and interviews, a number of funds recognized that a bubble existed at the time. But what many have realized is that it may be easier to ride the bubble and profit on the upside, exiting before the bubble bursts rather than trying to exert a corrective influence on the market. by pushing prices towards core values.
The people who decided to try chasing and who bought at the end of the bubble in the 2000s ultimately lost. Hedge funds that have tried to influence the market by bringing prices down to fundamentals are also one of the under-sold groups that lost as a result of the bubble. An example are people like the Jaguar Fund, sometimes known as the Tiger Fund, which attempted to exert some sort of corrective force away from the dot-com bubble, taking bets against valuations. They ended up losing and eventually had to close before the bubble burst.
Other funds like Quantum Fund, under George Soros, seemed to hold a position more in tune with the bubble. I should be clear that I don’t know their intentions, but they survived.
So there was a certain disparity between funds that worked well and those that didn’t. It seems to align with those who knew how to overcome the bubble over time versus those who tried to influence the market.
Is there a scenario where the majority, if not half, of the retail investors who bought GameStop or those other stocks end up with a profit?
Aswath damodaran
No.
What are the ripple effects of GameStop Short Squeeze on the global market?
Aswath damodaran
Hedge funds were already struggling, entering this crisis, in terms of performance. The money has shifted from active vehicles to passive vehicles and that will only speed up the process. I think Melvin Capital was already losing money on positions before the GME race.
Short pressures on a stock can force funds with large short positions in that stock to sell other often profitable positions in order to raise funds to cover margin calls. If many hedge funds have correlated positions and receive simultaneous margin calls, this could lead to a situation where these funds all sell the same positions to raise funds, thus causing the prices of those positions to fall, resulting in more margin calls (if the positions are leveraged). Individual hedge funds with heavily leveraged bets could be affected.
Could this harm retirees, such as teachers?
Donald langevoort
[Pension money] This is really going to be a topic of interest – funds need to invest prudently, on a portfolio basis, but we know that some public funds feel pressured to make bets inconsistent with this legal mandate. That said, a diverse portfolio is unlikely to suffer much from events like these, and learning from a painful experience can be a useful fix.
What happens to the companies themselves?
Arun chopra
“Twitter teacher” and founder of the financial market research firm Fusion Capital
If you look at AMC, AMC has taken off, but they’re very in debt and need money. And so they issued shares the minute the stock went down, and it came down again [at the time of interview]. And so, not all small pressures are created equal. It will not bankrupt the industry.
At the grassroots level, we constantly see short pressures occurring in the markets. We have a strategy that takes all of that into account, and there are three to four really good opportunities every year that work. It happened in Tesla at the top. So it’s happening. It’s a bit exacerbated now because we have never seen so much options trading in history.
The real risk is that short stocks will force these fund managers to start selling their quality stocks. And if that happens, then you’re going to bring down Google and Facebook and those, and whatever the Fed is trying to do to keep things afloat will be under pressure. And for me, this problem is up to the Fed, because why are they letting this get out of hand? And then you could even extrapolate that further to explain why this social situation of class war continues.
Final thoughts
Arun chopra
I think what’s going to happen is that the volatility will stay, and message boards like WallStreetBets will stay. Before all that, they were doing research. GameStop has been there for a year, and I’m kicking myself because I wrote it like a dog.
You can see these fantastic spirits on WallStreetBets, in particular [the kind of thinking] of younger people. When you see it a certain way, and you’re not stuck with dogma and textbooks, that’s what creates these tables. There is no doubt about the capabilities of these young people.
I think this account of the common man comes from everything that’s going on. We never dealt with this idea that there was a housing accident in the formative years for much of the generation who are now being asked to pay two hundred thousand dollars to go to college. which does not even guarantee anything. I bet if the system were fairer half of this group would be busy doing other things.
So when I read articles about life through the housing crisis on WallStreetBets, I think, immediately, absolutely. And I’m shocked to watch CNBC, and they say, oh, I love David and Goliath too! But I’m like, no you don’t. Are you introducing yourself, are you kidding?
I just think realism is important and understanding that this will not solve the problem. I’m sure more people lost money on AMC [when it crashed on Thursday] who didn’t even sue GameStop and thought AMC would be next. I think the biggest problem we have is that these real systemic issues – like Congress doing something about student loans – need to be addressed.
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