It feels bad to expect a company to stop working and its stock market craters to go to zero, which is why short sellers (traders who make money when stocks are stocked) are treated with contempt in many corners of Wall Street and now every again in Washington.
But the devil in this case deserves some sympathy. Without short sellers, the investing public is really doomed. And, to prove it, look for no more than a penny that goes back to your bleeding levels.
The stock is GameStop, of course, a video game retailer in the process of corporate restructuring that includes store closures and, according to many analysts, an outdated business model as more and more people buy video games online instead. in stores.
As we all know now, GameStop has become a beloved market for novice traders for reasons that defy logic – sending stocks to a high of nearly $ 500 per share a few weeks ago before falling and then rebounding this week.
Initially, the shares were fueled by an unusual number of factors, including chatter on the Reddit message boards that the company was forced to have greatness. Adding fuel to the fire were novice traders armed with a free-to-trade Robinhood trading app and a deep desire to adhere to the big ones who were betting on stock declines.
Short sellers borrow shares, sell them and repay the loan at a later date, the bet shares will fall. That’s why they make a lot of money when stocks are closing. But they can lose a lot of money when stocks rise in the short term, which is what happened with GameStop.
The mania caused a brief squeeze and the hedge funds were crushed. Robinhood had to stop trading because it did not have the capital to liquidate and process all trades.
Ultimately, the House Financial Services Committee held a hearing to resolve matters. But the committee mainly tried to blame the hedge funds that reduced the shares.
What was overlooked during the hearings was that even though the hedge funds lost money, it was finally shown that they were right. As predicted, the shares of GameStop collapsed. Small investors who ignored the short thesis and engaged in Reddit-induced mania buying near the top (sometimes with borrowed money) were crushed as shares fell below $ 50.
Last week, GameStop shares rose again, to about $ 200 per share before settling at just $ 100, which is still light years above its penny levels of less than $ 4 during the year. last summer. And that is to establish small investors so that they are screwed up again.
I took a walk through the thread of Reddit’s “r / wallstreetbets” thread, the epicenter of GameStop tout, to see what’s driving on GameStop’s business model. The answer: very little, although I found a message from a user who promised to “tattoo my wallstreetbets logo on the back of my right cheek if we get GME at $ 1,000.”
Note the language here: “If we get GME at $ 1,000.” It is typical of stock promotion, where traders advertise for weak reasons. Narcotic money is accelerating and pushing stocks until smart traders abandon their stakes for profit.
Of course, it’s impossible to know if GameStop will match $ 1,000 per share or even the $ 500 it nearly hit during the height of the craze in late January. But this time there is reason to believe that losses for average investors could be even stronger: there are no short-term sellers giving a much-needed second opinion.
Short interest in GameStop which had surpassed more than 100 per cent of the fleet in January has fallen sharply.
Hammered by the short press and Congress (during Finance Committee hearings, committee chair Maxine Waters used the term “predator” to describe the short-term sale), short films are now to be covered. The flow of information is dominated by promotions.
As I reported on Fox Business, legendary short seller James Chanos is concerned about the market implications of the anti-short mania that is sweeping retail investors and now possibly Congress.
Chanos, a friend of President Biden, has contacted White House economic aides to convince them that short-term sellers are needed more than ever. Low interest rates, no-commission trading apps, and message board hype are creating a perfect storm of small investors accumulating speculative stocks that are likely to implode when reality hits again.
Of course, Chanos is one of those evil short sellers who have made a fortune, betting stocks will fall, so keep in mind the source. Recently, he committed what many advertisers consider a mistake in claiming that Tesla was a “traveling insolvency,” given where stocks are listed and how the electric car maker is doing today.
Time will tell if he is wrong.
But about 20 years ago it made history with investigations that uncovered one of the biggest business frauds ever: the Enron accounting scandal. Investors who listened to him made money; those who did not lose money. Regulators who ignored it were forced to reform accounting laws for greater transparency.
Count me as someone who believes we need to hear more things like Chanos as markets reach highs, while low interest rates and no-commission trading apps lure more novice investors to think that trade is a loss situation because that is what they do ”. Reading on Reddit.