Only A,B,C,D and me are all divisions of the same mother company? All 5 of us report a tidy profit and E the brokerage, also owned by the same club, can report a nice commission and nobody is using real money so nobody gets hurt (only the price of GME goes down–BECAUSE we are “selling” so much of it) only now some outsiders from WSB came and stole all the chairs while we were still playing musical chairs? And now because we were creating real money from thin air we need real money to keep the illusion for the IRS and SEC intact?
There were several posts along these lines, but they miss the point.
If people are gambling based on a mistaken belief that they can beat the odds, then they are similar to the Reddit crowd and will be (for the most part) disappointed when that doesn’t come to pass.
The poster who introduced the gambling motif was making the point that people are willing to pay for momentary thrills, citing gamblers as an example. So too, his point went, the Redditors are content to pay for the momentary thrill of beating the hedge funds, even if it costs them in the end. My response was that it would appear that these Redditors genuinely think they are WINNING, and will be disappointed in the end when that turns out to be untrue, in contrast to the gamblers who pay knowing they will likely lose in the end. But again, if there are gamblers who genuinely think they are WINNING too, then yes what applies to the Redditors applies to them too.
There are no such deterministic metrics for stocks. There are metrics to assess things like cash flows, earnings, and dividends but they are not deterministic because they rely on predictions of the uncertain future. Furthermore, they rely on investors in the market fundamentally agreeing that these are the metrics by which the stocks should be judged. And since there is more than one metric, clearly not all of the market agrees on the relevant metric all the time.
I don’t assume they are all idiots but the truth is there are piles of academic research that show that individual investors do a terrible job of picking securities, that they time their purchases terribly, that they pay more in taxes, that they pay more in implicit trading costs, that they take on uncompensated risk, etc. etc. The truth is, individual investors are dumb money that are basically shoveling their earnings into Wall Street’s hands through their bad decisions. Even if we accept that traders in GameStop are making a killing here, they would have to earn a few trillion dollars in GameStop to offset their collective poor history of trading decisions.
This is true for actively-managed money but most institutional money is indexed. Those firms owned GameStop shares before it skyrocketed and they will own those shares all the way down to wherever it settles. GameStop is a tiny company in the scale of the market. Everything that happens right now is noise to institutional investors in index strategies. And to me, for what it’s worth.
He is a colorful writer and a smart guy who basically knows his stuff but I think he often fails to explain the nuances of his theses. I suspect a lot of his readers get roped in with a colorful metaphor (e.g., “vampire squid”) but don’t come away understanding the issue a lot better than they went in.
The problem with the “it will go up forever” theory is that it becomes a prisoner’s dilemma. It only works if everyone holds forever. A guy who borrowed a thousand dollars on his credit card to fund a few shares sees that his account is worth $100,000. At that point, he has a six-figure paper gain and a thousand dollar credit card bill. He, and everyone like him, have to decide to continue to hold the stock forever in order not to start supplying the covering short sellers their stock. Defectors make this an impossible strategy.
I will only comment here that hedge funds are not market makers within the definition of the rule and are not eligible for the exemption.
Right.
In part because people who thought the stock wasn’t worth shorting at $20 think it is definitely worth shorting at $300.
There is but some companies will use shelf registration statements. Effectively, they do the paperwork up front to register shares but they don’t sell them right away. When the right time for an offering comes, they “take stock off the shelf” and sell them into the market. AMC raised, I think, a couple hundred million dollars during their recent redditor-fueled runup. It will probably be enough money for them to survive the pandemic. It is one of the ways that stock prices can have real effects.
They can just sell at the market without a firm commitment underwriting. Again, AMC just did this. It also kills the idea that if the redditors just hold their shares forever, the stock price will go to infinity.
Generally, the shares are callable with notice to the borrower but that almost never happens. There are also several people typically involved here, and you might be confusing their roles and who has what authority and what responsibilities. I am afraid I don’t have the time to go through it all.
The short’s broker-dealer will demand sufficient margin to keep the short position open and as long as the short keeps sufficient margin in the account, the position will (generally) stay open. The problem is that shorts in GameStop lost so much money that it could have wiped out all their other capital to make their required margin calls. At some point, they could be (or in some cases, have been) forced to close their GameStop position no matter how convinced they are that they are right.
How long a notice is required? I was thinking this morning that if I was one of the people whose stock had been borrowed, I might like to sell it before the bubble bursts.
Are you State Street Bank? Or someone like that? Because if not, you don’t know and shouldn’t particularly care. Your broker makes the decision whether to lend out your stock. They will make the money off the loan and they will take the risk of settlement failures They don’t have to consult with you or tell you.
If you want to sell your stock, go ahead and do it without worrying about whether your broker has loaned out your shares.
For what it’s worth, if you have a cash account as a broker-dealer (that is, your account is not a margin account) your shares aren’t being loaned out at all. Even if you have a margin account, there are several layers of protection to ensure that you are made whole, and those have largely not been threatened by a few hedge funds taking it in the shorts during the GameStop debacle.
Ah, another reason to take the stock certificate and not have it in street name then, like virtually every individual investor does.
It really isn’t. People lost stock certificates all the time through theft, fire, negligence, etc. While lost stock certificates could usually be replaced (unless the owner just forgot about them, or died and left them to someone who didn’t know they were missing), stolen ones that were subsequently transferred were often lost forever.
Almost no one in America – and no one with less then than the SIPC protection limit (currently $500,000, and $250,000 for cash) – has lost any money from a broker-dealer’s failure. And again, if you have a cash account, your broker is not lending your shares out. .
Do they even have purty certificates any more or are they just computer-printed on safety paper?
I don’t even know. Honestly, the market is moving towards dematerializing stock certificates and its for the best. As far as I’m concerned, stock certificates are all ones and zeros now. I say this even though I have framed stock certificates for the B&O, Pennsylvania RR and Reading Railroads. They are novelties, not investments.
With all of those being fallen flags are they even any good any more?
I remember when Playboy went public, their stock certificates featured a nude model. Some people were buying stock in Playboy just to have the certificate as a souvenir.
I read yesterday on WSB that at least some in that subreddit are convinced that it’s an effort by Wall Street hedge fund trolls to turn attention away from GME and silver is now an astroturf bet.
I have no idea what the hell they’re talking about to be honest, but just wanted to chime in that there’s a conspiracy theory out there about today’s run on silver.
Same here. Since I took an early retirement, I’ve had to be a little more frugal, but back when I was living in NYC and had plenty of discretionary income, a $50 or $100 buck outlay for the sheer entertainment value of some well-deserved and long overdue billionaire tears ( and the satisfaction of knowing that I helped make that) would’ve been so worth it.
That’s media FUD–if you read the subreddit they’re doing nothing of the kind. Consensus of the sub is GME is it for the moment and the silver thing is an attempt to draw heat off the Gamestop short squeeze.
It’s definitely money that has a better chance of changing the world for the better than giving to political campaigns and candidates, with the added fillip of possibly turning a profit on the deal. What’s not to love?
Does anyone know if other hedge funds shorted GME, AMC, etc? – to the extent that Melvin did?
Would they, say, sell an Apple or other blue chips to raise cash to compensate for losses?
Could this potentially destabilize the entire financial system and cause contagion?
I kinda understand economics but markets, day to day, aren’t really my thing.
There’s no way to tell for certain until the bill comes due but the volume of trading of the stock kinda indicates that a bunch of other vultures are winging down to the carcass in hopes of grabbing up some Melvin giblets for themselves.
I seriously doubt it. Melvin Capital’s losses - 2.75 billion - may seem large to us individual investors, but compared to Apple’s market cap, much less the entire US stock market, it’s nothing but a rounding error.
The kinda shit I’m beginning to see in markets reminds me of what I saw in 1998-99. “This is the new economy. Stock always goes up, dude. We have created a recession-proof economy, lolz.”
I think this reddit GME stuff is the beginning of people quitting their day jobs to do f-t daytrading.
I don’t think there is public information that hedge funds shorted to the extent of Melvin and Citron. We know that total short interest in Game Stop peaked around 140% of float. The market cap of Game Stop peaked around $30 billion, so the peak outstanding short interest was around $52 billion. Worst case scenario is that all those shorts are called in at the same time (which, they wouldn’t be, since they were all capitalized by different people at different prices and with different assets). The margin call would be less than 0.2% of the market cap of the S&P 500. And, when you figure that people can also fulfill their margin obligations with Treasury bonds, corporate bonds, foreign stocks, small cap stocks, etc., the actual selling pressure on any particular asset is much lower.
The more likely scenario is some big short seller gets a margin call. The broker liquidates some relatively large position in some single stock in a slapdash manner to recapitalilze the account, and that particular stock gets hammered. But knowing which stock ahead of time would require knowing who the short is, what large positions they have, and which position the broker is going to liquidate. And the effect would only be temporary. When the hammered stock gets cheap for no reason, other buyers will come in and buy it on the cheap.