It feels wrong to hope that a company leaves its business and its stock craters to nil, and so short sellers – the traders who make money when they hold a stock – are in many corners of Wall Street and now increasingly in Washington with contempt. treat.
But the devil deserves sympathy in this case. Without short sellers, the investment public is truly doomed. And as proof, look no further than a one-time penny stock that returns to nosebleeds.
The stock is, of course, GameStop, a video game retailer undergoing a corporate restructuring that closes stores and, according to many analysts, an outdated business model, as people increasingly buy video games online instead of in stores.
As we all know by now, GameStop is a market lover of novice traders for reasons that defy logic – to send the stock to a high of almost $ 500 a share a few weeks ago before crashing and then recovering again this week.
Initially, the stock had an unusual array of factors, including through a chat on Reddit message boards that the company would be bound for greatness. Fuel at the fire were novice traders armed with a Robinhood app without compensation and a deep desire to keep it with the big boys betting on the stock’s decline.
Short sellers borrow shares, sell them and repay the loan at a later date. This is why they make a lot of money as the stock tank. But they can lose a lot of money if their shares fall short, which happened with GameStop.
The mania caused a short while and hedge funds were crushed. Robinhood had to stop trading because he did not have the capital to settle all the transactions.
Finally, the House Financial Services Committee held a hearing to rectify matters. But the committee in particular tried to place the blame on hedge funds that shorted the stock.
What was largely overlooked during the trials was that, even though the hedge funds lost money, it was eventually proven right. As they predicted, the shares of GameStop collapsed. Small investors who ignored the short thesis and kept themselves busy with the Reddit-induced mania by buying near the top (sometimes with borrowed money) were crushed when the stock fell below $ 50.
Just last week, the share of GameStop climbed again, to almost $ 200 per share before reaching just $ 100, which last year was still light years above its penny share of less than $ 4. And it’s setting up small investors to get back on track.
I took a walk through Reddit’s “r / wallstreetbets” thread, the centerpiece of the GameStop tout, to see what, if anything, is being printed on GameStop’s business model. The answer: very little, although I found one message from a user who promised to ‘tattoo the wallstreetbets logo on my right cheek when we get GME up to $ 1,000.’
Note the language here: “If we get GME at $ 1,000.” This is typical of stocks that trade, where traders reason for thin reasons. The dumb money comes rushing in and pushing stocks further before smart traders dump their possessions for a profit.
Of course, it’s impossible to know if GameStop will reach $ 1000 per share or even the $ 500 mark it almost reached at the end of January. But this time, there are reasons to believe that the losses for average investors could be even stronger: short sellers are delivering a much-needed second opinion.
The short-lived interest in GameStop, which exceeded more than 100 percent of the fleet in January, has dropped dramatically.
The shorts and the Congress (during the Finance Committee hearings, the chair of the committee, Maxine Waters, used the term ‘predatory’ to describe short sales). The information is dominated by the touts.
As I reported on Fox Business, the legendary short seller, James Chanos, is concerned about the market implications of the anti-short mania that is spreading to small investors and now possibly Congress.
Chanos, a friend of President Biden, helped economic aid in the White House to convince them that short sellers are needed now more than ever. Record low interest rates, programs without compensation and a hype from the message board create a perfect storm of small investors taking up speculative stocks that are likely to implode when reality starts again.
Of course, Chanos is one of the evil short sellers that has earned a fortune that the stock will crash, so consider the source. Recently, according to many touts, he made a mistake by declaring that Tesla is a ‘current insolvency’, given where the stock trades and how it is doing with the electric car manufacturer.
Time will tell if he is wrong.
But about 20 years ago, he made history with research that discovered one of the biggest corporate scams ever: the Enron bookkeeping scandal. Investors who listened to him made money; those who did not lose money. Regulators who ignored him were forced to reform accounting laws for greater transparency.
Consider me someone who thinks we want to hear more from Chanos as markets reach new highs, while low interest rates and fee-free trading apps entice more novice investors to think that trading is a no-loss situation, because that’s what they read on Reddit again.