weirdness happening in US company

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Forums › Finance and wealth management › weirdness happening in US company

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Smpl Mnmlst
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#2644648 31-Jan-2021 10:00

BlinkyBill:

eracode:

It’s a game of ‘musical shares’ - when the music stops, many of those holding the shares lose their money. The actual values of these companies are a minute fraction of the false valuations implied by the total market value of the inflated share prices.

Although the hedge funds have lost or will lose billions, the private investors who have bought into this lunacy stand to lose a lot more in aggregate. A massive price to pay just to see the hedge funds hurt.

Well, you’ve got that wrong.

....

@BlinkyBill If you’re prepared to contradict, how about responding when asked to justify your assertion? I’m genuinely interested in how or why my understanding of all this may be flawed.

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Kyanar

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#2644659 31-Jan-2021 11:06

eracode:

@BlinkyBill If you’re prepared to contradict, how about responding when asked to justify your assertion? I’m genuinely interested in how or why my understanding of all this may be flawed.

You've missed that over 100% of the stocks are shorted. Over 100%. The music literally cannot stop until the entirety of the float is in the hands of the hedge funds stupid enough to have shorted more stocks than even existed. They were basically banking on GameStop going bankrupt and tens of thousands of employees being consigned to the unemployment line in several countries, just so they'd never have to pay the piper.

Which, incidentally, is exactly the sort of thing these people find abhorrent, and are railing against.

BlinkyBill

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#2644661 31-Jan-2021 11:17

eracode:

@BlinkyBill If you’re prepared to contradict, how about responding when asked to justify your assertion? I’m genuinely interested in how or why my understanding of all this may be flawed.

I got busy yesterday.

You said “it’s a game of ‘musical shares’”.

As I said in the comments that you want justified, it’s not a game, it’s not investment for monetary gain; it’s activism designed to highlight the inequities in the stock market.

Interestingly, academics in equities legislation are now commenting that this activism is led by serious trading experts (who were the first to spot the fraudulent shorting of stock they hadn’t actually borrowed yet, and couldn’t since they took positions on 140% of the stock, which obviously enough is impossible); and are suggesting that SEC investigations will rule that the activism isn’t a ‘pump-and-dump’ since the objective isn’t to make money on the part of the retail investors.

In short, no pun intended, the objective here isn’t making money or losing money on the part of the retail investors, who are forcing the market activities; instead it’s to force change in the legislation.

It’s also interesting that the SEC allowed the shorting in the first place, or at least didn’t seem to be planning to take action, highlighting on the part of the academics the, shall we say, patchy enforcement of securities legislation and trading rules.

It’s also interesting to see Hedge Managers commenting about the folly of this, that the activists are uneducated and don’t know what they’re doing. Hilarious and self-serving. Just because you don’t work for Wall Street it doesn’t mean you can’t read the market. If you want to read an interesting book about how a single individual can manipulate global markets, read ‘Flash Crash’ by Liam Vaughn. Navinder Sarao (excuse spelling) manipulated markets for the challenge of beating Wall Street and drove change accordingly. Gazillions lost by retail investors in the crash he incited.

yes, lots of people will lose $, and if you bought/buy GameStop for investment reasons then you’re a fool.

eracode

Smpl Mnmlst
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#2644666 31-Jan-2021 11:29

Kyanar:

eracode:

@BlinkyBill If you’re prepared to contradict, how about responding when asked to justify your assertion? I’m genuinely interested in how or why my understanding of all this may be flawed.

You've missed that over 100% of the stocks are shorted. Over 100%. The music literally cannot stop until the entirety of the float is in the hands of the hedge funds stupid enough to have shorted more stocks than even existed. They were basically banking on GameStop going bankrupt and tens of thousands of employees being consigned to the unemployment line in several countries, just so they'd never have to pay the piper.

Which, incidentally, is exactly the sort of thing these people find abhorrent, and are railing against.

So what do you predict for how this will end? I would have thought that once enough of the shorts have been flushed out, there won’t be any new buyers to keep the stock price propped up and the price will drop to levels that reflect the underlying fundamental value of the company.

Are you saying that enough shorts can’t be flushed out because more than 100% of the shares have been shorted - i.e. that the music can’t or won’t stop? So there’s no mechanism for the price to drop?

How can this ever pan out such that a lot of people, particularly the late-entrants, don’t lose a lot of money - which is all I was saying in the first place.

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Scott3

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#2644668 31-Jan-2021 11:36

Retail investors have noticed that there is greater than 100% short interest in GME.

As such there is is the potential to trigger an infinate short squeeze, where there are not enough stock for sale to allow the shorts who are forced to close out their position to do so, sending the price to infinity.

Note that many GME buyers view themselves as activists.

They are still pissed at the hedge funds and financial sector as a whole for 2007/2008 and essentially getting away with it.

They see short selling is unethical due to how it can cause companies to fail and cost jobs.

They are annoyed that information and market power asymmetry has allowed institutional investors to have access to opportunities that retail investors don't have

They see this as an opportunity to cause a few hedge funds to fail, and create the Kind of change the occupy wall street movement wanted but never got.

They are amused that when institutional investors treat the markets like a casino it is OK, but when retail investors do it there are calls for regulatory change to stop them. (Including to protect the from hurting themselves. How patronising.).

They enjoy watching the frantic attempts by the institutional investors to stop them (ladder attacks, false information in press releases etc.).

Re the musical chairs comment. This assumes that the retail investors are rational and driven by optimising returns. For many this is not the case. Many like the stock and intend to hold it as long is it continues to trade. Many have no exit strategy

Disclosure: Not financial advice, long GME. Mostly for LOLs.

Kyanar

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#2644671 31-Jan-2021 11:42

Scott3:

Disclosure: Not financial advice, long AMC. Mostly for LOLs.

On AMC: last month, AMC was considering filing for bankruptcy as they had no capital, mountains of debt, and COVID basically made their business unviable. Four days ago, Silver Lake Capital converted their secured notes into stocks, wiping out AMC's debt (because the stock price was higher than their conversion strike price). AMC is now essentially debt free and well positioned to recover, saving thousands of jobs. This sort of activist investing can in fact be used for good - GameStop is also struggling, and looking at their stock price they are considering a stock issue to raise capital which would give the business the breathing room they need to make changes to their model to accomodate the direction the gaming industry is going (look at the way EB Games stores in Aus/NZ are starting to devote more floor space to Zing Pop Culture and hardware sales) and save tens of thousands of jobs.

Scott3

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#2644680 31-Jan-2021 11:52

Re the above I have just fixed an error in my previous post. I am long GME, but have no interest in AMC.

I am aware anouther of the meme stocks has done a capital raise (cruise industry?). Essentially giving them the funds to ride out the long, cold, covid impacted winter.

Something that was not viable prior to the activism movement, partially thanks to institutional investors betting on their failure and dragging their share price down via short selling. Something of a self fulfilling prophecy.

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vexxxboy

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#2644683 31-Jan-2021 11:58

sonyxperiageek:
eracode:

It’s a game of ‘musical shares’ - when the music stops, many of those holding the shares lose their money. It’s like a Ponzi Scheme. The actual values of these companies are a minute fraction of the false valuations implied by the total market value of the inflated share prices.

Although the hedge funds have lost or will lose billions, the private investors who have bought into this lunacy stand to lose a lot more in aggregate. A massive price to pay just to see the hedge funds hurt.

I've seen/read a lot of people are willing to lose their lot invested, just to see the hedge funds hurt. Fair enough.

so far 20 billion has been lost since it started.

Common sense is not as common as you think.

BlinkyBill

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#2644686 31-Jan-2021 12:25

vexxxboy:

so far 20 billion has been lost since it started.

Got a source? I imagine this is all from calls on the short options, but I had thought that only a small percentage of these options had come due. I haven’t had a chance to check the end of trading status on Friday.

eracode

Smpl Mnmlst
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#2644689 31-Jan-2021 12:39

@Scott3 Great post, thanks. I was aware of most of that but not the possibility of an ‘infinite short squeeze’ and an infinitely high GME price. Maybe that’s theoretically possible - but what do you think will actually happen?

I also get the activism component in all this and the hatred for hedge funds - but I also understand that the shorting mechanism is a component of the checks and balances under the ‘efficient market’ hypothesis. If shorting is somehow made illegal, the market may lose some of it’s so-called ‘efficiency’. I’m by no means defending the hedge funds or anything like that - just commenting on the market mechanisms.

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eracode

Smpl Mnmlst
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#2644690 31-Jan-2021 12:47

https://www.cnbc.com/2021/01/29/gamestop-short-sellers-are-still-not-surrendering-despite-nearly-20-billion-in-losses-this-year.html

’Mark-to-market’ losses - so not necessarily paid out for covering short positions.

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Scott3

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#2644691 31-Jan-2021 12:51

Would be interesting to be a fly on he wall in the hedge funds, and see the people with likes of yale degrees in game theory trying to rationalise the behaviour of highly irrational actors.

For those who haven't done game theory before, the typical basis is that all actors are rational and will behave to get the outcome best for themselves.

Re the greater than 100% short interest I don't think this is fraudulent or illegal. Just incredibly stupid by the short sellers.

Haven't looked into the details but assume it works in a similar way to fractional reserve banking.

Re the end game. One thing is clear. History is being made. The are a few possiably outcomes:

- Hedge funds double down with even more shorts. Pay obscene interest costs, and meet massive margin calls. (Apparently the required margin to short GMC is 300% atm). Wait out the activists, until they start getting tired of it and cashing out (or GMC fails). Everythig goes back to how it was (share price under $50)
- Infinate squeeze happens. Share price in excess of $100,000k. Metaphorical blood in the streets. Massive regulatory change in the wake of this event.
- Dirty tactics. - institutional investors convince regulators to put a price ceiling, limit retail sales, pay mainstream media to lie etc. Manage to prevent epic price rises.
- GMC does a massive stock issue. One so big that all there is suddenly enough stock in circulation that the shorts can cover.

Things of interest:
- If retail investors hold greater than 50% of GME stock, the GME directors now work for them. Anything they do that is unpopular for retail investors may see them replaced as directors. (A bit more complicated than this as some of the retail platforms hold shares on behalf and don't give voting rights).
- if market cap of GME exceeds a certain threshold (and other criteria are met like profitability) major index funds are compelled to buy in, adding more fuel to the fire. Activists could potentially assist with GME profit via say mass sign ups to the GME loyalty program (usd15 cost) or lots of retail purchases.

eracode

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#2644694 31-Jan-2021 13:00

I have seen several news stories where commentators have reportedly said ‘there’s no reason to believe/no evidence that anything illegal has happened here’.

If “Everythig goes back to how it was (share price under $50)” then a lot of people must have lost a lot of money at that point. Like Dutch tulip bulbs.

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Scott3

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#2644695 31-Jan-2021 13:04

eracode:
@Scott3 Great post, thanks. I was aware of most of that but not the possibility of an ‘infinite short squeeze’ and an infinitely high GME price. Maybe that’s theoretically possible - but what do you think will actually happen?

I also get the activism component in all this and the hatred for hedge funds - but I also understand that the shorting mechanism is a component of the checks and balances under the ‘efficient market’ hypothesis. If shorting is somehow made illegal, the market may lose some of it’s so-called ‘efficiency’. I’m by no means defending the hedge funds or anything like that - just commenting on the market mechanisms.

What do I think will happen? I expect to loose my money. As I said, for LOL's

Probiably dirty tactics as described in my above post.

Will end with some institutional investors getting away with fairly cheap financially, but facing charges (that likely will not amount to much as per 2007/2008.).

Retail investors pissed.

Regulatory changes, but meek enough to be meaningless.

Hopefully I am wrong and this actually spurs meaningfull change.

eracode

Smpl Mnmlst
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#2644699 31-Jan-2021 13:12

By ‘facing charges’ do you mean charges in the legal sense? If it’s correct that nothing illegal has gone on, not sure what the charges could be. Maybe some regulatory repercussions.

Sometimes I just sit and think. Other times I just sit.

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