It feels wrong to hope that a company will go out of business and its stock craters to zero, which is why short sellers – traders who make money when stocks are booked – are treated with contempt in many corners of Wall Street and now from what more and more in Washington.
But the devil in this case deserves some sympathy. Without missing sellers, the investing public is truly doomed. And as proof, look no further than a one-time stock of money that goes back to nasal bleeding levels.
The stock is GameStop, of course, a video game retailer that is in a corporate restructuring that includes closing stores and, according to many analysts, an outdated business model, as more and more people buy online video games in store place.
As we all know now, GameStop has become a market lover for novice traders for reasons that defy logic – sending the stock to a maximum value of almost $ 500 per share a few weeks ago before it collapsed and returned in this week.
Initially, the stock was supported by an unusual number of factors, including conversations on Reddit message boards that the company was forced to increase. Adding fuel to the fire were novice traders armed with a Robinhood-free trading app and a deep desire to stick it with the big boys betting on the decline of the stock.
Unsecured sellers borrow shares, sell them and repay the loan at a later date, the betting shares will decrease. That’s why they make a lot of money when stocks are stored. But they can lose a lot of money when they stock up short, 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 settle and process all transactions.
Finally, the House Financial Services Committee held a hearing to resolve the matter. But the committee mainly tried to blame the hedge funds that shortened the stock.
What was largely ignored during the hearings was that even though hedge funds lost money, they ultimately proved to be right. As predicted, GameStop shares have plummeted. Small investors who ignored the short sentence and engaged in Reddit-induced mania by buying close to the top (sometimes with borrowed money) were crushed, while the stock fell below $ 50.
Just last week, GameStop shares rose again to nearly $ 200 a share before settling at just $ 100, which is still light-years above its penny levels below $ 4 last summer. . And that creates small investors to be deceived again.
I took a walk through the beat on Reddit’s “r / wallstreetbets” thread, the epicenter of GameStop tout, to see what, if anything, is pushing for GameStop’s business model. The answer: very little, although I found a post from a user who promised to “tattoo the wallstreetbets logo on my right cheek if we get GME for $ 1,000.”
Remember the language here: “If we get GME at $ 1,000.” It is typical for stock selling, where traders make stocks for weak reasons. Stupid money rushes, pushing stocks up before skilled traders sell their holdings for a profit.
Of course, it’s impossible to know if GameStop will match $ 1,000 a share or even the $ 500 mark it almost hit during the height of rage at the end of January. But this time there is reason to believe that losses for average investors could be even more pronounced: there is an absence of missing sellers that provides a much-needed second opinion.
The decline in interest in GameStop, which had exceeded 100% of the float in January, has dropped dramatically.
Short Pressure Hammer and Congress (during finance committee hearings, committee chair Maxine Waters used the term “predator” to describe short selling), shorts are now being covered. The flow of information is dominated by advertisements.
As we reported to Fox Business, legendary short seller James Chanos is concerned about the market implications of the anti-short mania that plagues retail investors and now possibly Congress.
Chanos, a friend of President Biden, contacted White House businessmen to convince them that missing sellers are needed more now than ever. The recording of low interest rates, tax-free trading applications and forum advertising creates a perfect storm for small investors who capture speculative stocks that could implode when reality strikes again.
Of course, Chanos is one of those bad short sellers who has won a fortune, the bets will fall, so consider the source. Recently, he did what many plaintiffs consider to be a mistake, claiming that Tesla was a “traveling insolvency”, given where the stock is traded and how the carmaker is facing today.
Time will tell if he is wrong.
But about 20 years ago, he made history with research that uncovered one of the biggest corporate frauds ever: 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 greater transparency.
Consider me someone who thinks we need to hear more from Chanos as markets reach new highs, while low interest rates and tax-free trading apps draw more novice investors to believe that trading is a situation of loss, because this is you read again on Reddit.