Friday, January 29, 2021

"David Beats Goliath"

"David Beats Goliath"
by Brian Maher

"We sense we are among unrealities... Joe Biden is president of the United States, Donald Trump was president of the United States… The director of the National Institute of Allergy and Infectious Diseases is famous… Washington and Lincoln are infamous... And a fifth-rate stock that trades for $17 on January 4 trades for $469 on January 28.

In what world could it come to pass? Surely the clocks run backward. Ice is aflame. The sun dawns in the west and dusks in the east. GameStop is a “brick-and-mortar” retailer of video games and related merchandise. Like many retailers, it confronts savage competition from digital rivals. Its business model is obsolete. Why visit the store when you can simply download your entertainment? The company is losing money. Yet its stock has gone skyshooting over 1,600% this month. Its chief executive officer is presently worth $1 billion… though he captains a sinking vessel.

You are likely aware of the mania at this point. Flush hedge funds had “shorted” GameStop stock, expecting to profit when its price dropped. But a collection of some five million day traders on a Reddit forum - WallStreetBets by name - tossed a spanner in the works. Most own accounts with small balances… generally under $5,000. They are, in the parlance of the trade, “newbies.” These saboteurs piled into GameStop stock in astounding volume. This mass purchasing sent the stock price galloping higher.

The short-selling hedge funds began hemorrhaging sweat. The higher the price jumped, the more money they would lose. We will not descend into the witchcraft of options trading. It can be complicated. And we are versed only in its merest rudiments. But this you must understand: When you short a stock, you must borrow it from a broker. You then sell it upon the open market. To exit your position at a later date, you must repurchase the stock… and return it to the broker. 

If the stock declines - as you had planned - you reap a profit. If the stock increases, you endure a loss. The higher the stock price, the more money you lose. You, therefore, prefer an early exit. You would rather lose some than lose much. But recall, you must repurchase the stock to exit your position. If many short-sellers purchase the stock, it pushes the stock higher still. Other short-sellers then capitulate… and exit their position… meaning they purchase more shares… pushing prices higher yet.

Now come back to GameStop… The small fry traders of WallStreetBets gobbled loads of GameStop stock. That, of course, placed upward pressure upon the price. The flummoxed hedge funds began exiting their short positions to avoid further losses. That is, they were forced to purchase GameStop stock.

Thus the stock price increased. The billiard balls were set in dizzying motion… more short-sellers being “squeezed” from their positions… the more stock they were forced to purchase… the higher the stock price. Before you know what has struck you, GameStop stock streaked from $17 to $469 within one month.

Impossible - but there you are. Thus the day trading minnows harpoon the mighty hedge fund whales. GameStop trades today at $323, not $469. It is plenty handsome nonetheless. WallStreetBets members reaped windfall fortunes. Many are now in clover… at least until they squander it all chasing the next rainbow. In all, they squeezed $20 billion from the short-sellers this month.

And so the gold rush is on… Some two million new members stampeded into WallStreetBets yesterday alone. Each seeks his fortune in the new wild west. Go long shorted stocks, young man.” Most will come to grief of course… prospectors plumbing dry river beds. Here you have the bubble psychology in all its fevered delirium, all its dizziness. How much longer it can rage we do not know.

Richard Fisher - former president of the Dallas Federal Reserve - is gravely concerned: "I think we've had a bubble for some time. This is just icing on the cake. When things get out of control like this, it is a sign that you should be very worried."

They have seen the rich get extremely rich by taking advantage of cheap money - and they want to get their piece as well. This is a sign that we are getting a blow-off top. What you're doing is throwing money out there - and hoping to find an idea. It's another indicator that money is too cheap.

But why, Mr. Fisher, is money too cheap? Perhaps because your former institution has pummeled it to nothing? A drug peddler gives away his narcotics in order to hook customers. It is the first intoxication for many. He hooks them. Before long they are addicted, bankrupted and ruined. He then scolds them for accepting his offer. Now you have the flavor of it. For now, the dealer still pushes his drugs… and many of his addicts are heading for the gutter…"

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