It seems wrong to expect a company to close deals and its stock to fall to zero, which is why short sellers – traders who make money when stocks plummet – are treated with disdain in many corners of Wall Street and now more and more. Washington.
But the devil, in this case, deserves some sympathy. Without short sellers, the investing public is really doomed. And as proof, just look at a single currency stock that has returned to bleeding levels.
The stock is GameStop, of course, a video game retailer undergoing a corporate restructuring that includes closing stores and, according to many analysts, an outdated business model as people increasingly buy video games online instead of in shops.
As we all know now, GameStop has become the darling of the market among novice traders for reasons that defy logic – taking the stock up nearly $ 500 a few weeks ago before it crashed and then rebounded this week.
Initially, the shares were driven by an unusual series of factors, including conversations on Reddit forums that the company was destined for greatness. Adding fuel to the fire were novice traders armed with a Robinhood fee-free trading app and a deep desire to apply it to the big ones who bet on falling stocks.
Short sellers borrow shares, sell them and repay the loan at a later date, betting shares will fall. That’s why they make a lot of money when stocks plummet. But they can lose a lot of money when the shares sold go up, which is what happened with GameStop.
The craze generated a small squeeze and hedge funds were crushed. Robinhood had to interrupt the deal because it did not have the capital to settle and process all the deals.
Finally, the Chamber’s Financial Services Committee held a hearing to sort things out. But the committee mainly tried to blame the hedge funds that sold the shares short.
What was largely overlooked during the hearings was that, even with hedge funds losing money, they ended up proving that they were right. As predicted, GameStop’s stock collapsed. Small investors who ignored the short thesis and got involved in the Reddit-induced craze by buying near the top (sometimes with borrowed money) were crushed when the stock plunged to less than $ 50.
Last week, GameStop’s shares rose again, reaching almost $ 200 per share, before settling at just $ 100, which is still light years above its low-cost stock levels of less $ 4 over the past summer. And that is preparing small investors to get screwed again.
I took a walk through the dirt on Reddit’s “r / wallstreetbets” topic, the epicenter of GameStop’s advertising, to see what is being pressed on 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 butt if we can get GME for $ 1,000”.
Watch the language here: “If we can get GME for $ 1,000.” It is typical of stock promotion, in which traders exaggerate stocks for weak reasons. Stupid money is running, pushing stocks even higher, before the most experienced traders dispose of their holdings to make a profit.
Of course, it is impossible to know whether GameStop will be worth $ 1,000 per share or even the $ 500 mark it almost reached during the height of the craze in late January. But this time there is reason to believe that the losses for average investors may be even greater: there is an absence of short sellers providing a much-needed second opinion.
Interest sold on GameStop, which exceeded more than 100% of the float in January, has dropped dramatically.
Hammered by tightening short selling and by Congress (during the Finance Committee hearings, committee chairman Maxine Waters used the term “predatory” to describe short selling), short selling is now racing to be covert. The flow of information is being dominated by advertisers.
As I reported in Fox Business, legendary short seller James Chanos is concerned about the market implications of the anti-selling craze that is sweeping retail investors and now, possibly, Congress.
Chanos, a friend of President Biden, sought economic advisers at the White House to convince them that short sellers are needed more than ever. Record low interest rates, free trading apps and over-the-top messaging are creating a perfect storm of small investors snapping up speculative stocks that are likely to implode when reality returns.
Of course, Chanos is one of those bad short sellers who made a fortune betting that the stock will break, so consider the source. He recently made what many advertisers consider to be a mistake in declaring Tesla to be a “walking insolvency”, considering where the shares are being traded and how the electric car maker is doing 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 of all time: the Enron accounting scandal. The investors who heard him made money; those who have not lost money. Regulators who ignored him were forced to reform accounting laws for greater transparency.
Tell me how someone who thinks we need to hear more from people like Chanos as markets reach new highs, while low interest rates and free-of-charge trading apps attract novice investors to think that trading is a lossless situation, because this is what they’re reading on Reddit.