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January 28, 2021

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Retail traders spending their stimulus checks...

Day trading is an example of how new technology can produce folly. We saw a lot of it in the dot com era. We are seeing it again . . . as a new generation re-learns that old lesson the hard way.

I am the Houdini of Wall Street. I make money disappear. That said, too bad for the short-sellers. Short selling is a gamble.

Well, it worked out for Winthorpe and Valentine in Trading Places. But they had the real crop report.

1. Hedge funds get unexpected, but richly deserved, comeuppance. May tread more carefully in the future. May not. After all, they are gambling with other people's money.
2. Retail traders of the active sort always get hosed...it's just a matter of time in this instance. When the price starts to go south, the exits will be crowded. Today's action:

https://www.google.com/search?q=gamestop+price&oq=gamestop+price&aqs=chrome..69i57j0i131i433l3j0j0i131i433l2j0i3i395.4816j1j15&sourceid=chrome&ie=UTF-8&safe=active&ssui=on

So who are the schlubs buying at nearly $400/share, excluding the shorts covering?

my 401k's butthole just tightened.

A guy who played outfield next to me years ago, a financial planner in his real life, said one of the smartest things ever about the stock market.

It's designed, on the whole, to go up. It's fixed that way.

Short-selling is a prime example. As we've seen, we have professionals shorting a stock at $5.00 a share, betting it will decline, now being forced, I say forced, to buy this thing they didn't want at, well, a few hours ago, at $410 share, it was in the mid $200 range last minute I looked.

I'd hate to see these guys as they wait for an pandemic or nuclear war to lay in a supply of toilet paper. I hope they don't do their own grocery shopping.

Like medical care, there's something about free markets that doesn't quite work the way it should in the stock market.

And don't get me started on the overwhelming bullish bias in the investing business media. Most of it is just a clearing house tout service for Wall Street druthers.

Stock buybacks, the OPEC of America, are, not in all instances, but have become a bullish fix, like causing shortages of vaccines and selling them out of a truck in an alley at exorbitant prices.

I am glad to see established companies recently selling new tranches of stock to invest the money in their businesses, (some of the penny type of companies have too, steer clear, the money is probably going to something other than business-building), which should be the primary business of the markets, not supply-siding shortages of stock on my already invested behalf.

Cramer. I've seen him in the morning rage about the asteroid that is sure to hit soon and destroy mankind and then in the afternoon list his picks on how to "play" the extinction.

Buy em if they go up. If they don't go up, buy em. If they decline, buy em on the dip (in actuality, a plunge).

A declining market is volatility. A rising market is manifest destiny.

America is a constant stock tip tease by the Motley Fool. We'd tell ya what the secret stock is, but we make a living telling ya, not from the stock. Send money and you can listen to the rest of this message, in which we eventually mention the name of the company (guaranteed to rise 14,993 percent in short order; the three on the end kills me), but before we get to that, let me tell you a story about my pappy during the 19th century gold rush.

He was a liar, and he came to America because the Constitution guaranteed its protection of his lies and who is going to turn that away.

It's bullshit, now amplified by the internet and social media.

And yet unlike all other commodities in America, despite a bottomless supply, the price keeps going up.

Nothing has changed, except the degree of shortchanging.

Let Groucho tell us:

https://www.youtube.com/watch?v=DqypaqLEfM8

Motley Fool was the lead-in ad to that video when I looked at it.

I'm not saying this doesn't work.

Anyone wanna take Tesla off my hands. I'd hate to have to give it away at $5 share when that happens.

I was raised a Protestant but working for a living never appealed to me.


Yes, the game will stop.

Hedge fund traders are asking the government to regulate this jiggerypokery.

That alone was worth the trip.

Note the victimization claimed by the hedge fund traders. Also note the coming whinging victimization of the day traders when the Reddit scam is shut down.

Both pure Trumpian, Tea Party conservative movement grievance fodder for the swirling tornado of mass psychosis about to lift Dorothy's house and deposit on witches: US

When it comes to finance, especially big-F Finance, I'm about as sharp as a box of hair. But I've been following WallStreetBets from the sidelines for a few weeks now. I don't have a dog in the hunt.

Obviously, everyone there is hoping to make some extra dough, but it's the little guy vs. establishment angle that's captivated me. There is strong sentiment from many who vow to hold their shares as they sink to oblivion and eat the loss, just to keep them out of the hands of the HFs who need to cover their shorts.

I don't know what to believe. But if r/WSB is right, and these funds went short to the tune of 140%+ of float and CNBC and other "institutional" mouthpieces are BSing about Melvin and Citron having closed their positions (even though the volume seems to indicate that that did NOT, in fact, happen) and TD, E-Trade, Robinhood, etc halted sales for retailers while allow the big money to continue...

Full disclosure: I'm pretty sure that last paragraph might make sense to somebody who understands this stuff, but there's an equally good chance that it's complete gibberish.

Anyway, if the HFs did overextend themselves and got caught with their pants down, "Up The Rebel Squeeze!", sez me.

And if there were shenanigans by the funds and brokers and financial media, I hope the SEC grows a spine, if it hasn't already been overrun by regulatory capture.

I thought we were done with this synthetic unicorn bullshit after 2008.

Hi Pete! Long time no see!

Hi Janie!

Bidding the price of the stock up can mean bigger profits for the shorters when it inevitably comes down.

Here ya go
https://www.buzzfeed.com/shelbyheinrich/game-stop-memesreddit-stock-market

When we are huddled in shacks, we are going to look back on this and say 'good times'.

One of my "the big one that got away" stories is once, while I was between jobs, I was spending my days hanging out at the local Charles Schwab office watching and playing the market.

Late one Friday afternoon I saw the biggest block of the day of Texas Instruments stock at the lowest price of the day cross the ticker. I rushed around trying to put together $600 to buy a way out of the money put option. I wasn't able to make it happen before the market closed. After the market closed TI announced that they were getting out of the personal computer business. When the market open Monday morning that $600 put option was worth about $150,000.

here is my question about all of this.

every now and then, you'll find yourself in a situation where someone is explaining something to you, something that involves some specialist knowledge, something you are otherwise not that familiar with. they are going along in the explanation, you are basically following along, and then you sort of... stop.

wait, you say. can we back up a minute? what the hell was that XY and Z thing all about?

the bit in the whole Gamestop thing that gives me that feeling is the "borrow somebody's stock" thing. you're going to borrow somebody else's stuff, sell it, buy it back, and then give it back to them? wait, what?

what is the guy who held the stock in the first place's interest in all of this? what the hell is that all about?

I sort of sit back and laugh at all of this stuff, but from the outside it sure as hell seems like one big three-card-monte game.

you're in the club, or you're not in the club. if you're not in the club, the cookies are not for you.

it seems like what the Wall St types are all bent out of shape about here is that some rabble outside of the club is beating them at their own game.

the bit in the whole Gamestop thing that gives me that feeling is the "borrow somebody's stock" thing. you're going to borrow somebody else's stuff, sell it, buy it back, and then give it back to them? wait, what?

The short seller does not directly own any shares. They borrow the shares from current holders (such as a brokerage house or market maker) with a promise to return them (along with a bit of vig or fee for the service) at some point in the future. The short seller then sells the shares in the marketplace.
If the share price goes up, the short seller has to buy the shares at the now higher price, and take a loss to return the shares to the people who loaned them to him in the first place.

If the price goes down, the seller buys the shares back at the now lower market price and returns them to those who loaned them out.

The profit is the amount he initially sold the shares for less the cost of the buyback.

The loaners are thus protected from a decline in share price, but give up the upside profit by loaning the shares out. A hedge.

Hope that helps. Don't ask me about butterfly spreads.

I may have missed a point...when the "loan" is made, the short seller guarantees the loaner will be made whole...i.e., they are locked in to the current price, and cannot be exposed to the risk of market loss on those shares.

It's been a while, but I believe I have conveyed the gist of it.

yeah, I got the part about what the short seller does. what I was (and am) unclear about is the advantage to the actual holder of the stock.

I guess the vig is their upside.

and I'm guessing that... not anybody can 'borrow' other folks shares for this purpose.

all of it seems several steps removed from the purported purpose of financial markets, i.e. evaluate fundamentals, identify risk, and direct capital to productive channels.

but, that's just me.

when the "loan" is made, the short seller guarantees the loaner will be made whole...i.e., they are locked in to the current price

OK, makes more sense now.

thanks bobbyp!

you know a lot about this stuff for a commie!! :)

what is the guy who held the stock in the first place's interest in all of this? what the hell is that all about?

If I understand it correctly, which I don't, the lender gets a fee from the borrower and whatever dividends the stock yields.

The thing that gets me is how it all seems to be created out of thin air. When someone shorts a stock, it creates 3 positions: 1 short (the borrower/seller), 2 long (the lender and the buyer). Magic!

What's most disturbing is after a few weeks it's almost beginning to make some kind of perverse sense.

For those who also find it beginning to make sense, you may be interested in my new fund, TurtlesAllTheWayDownCapital.

In closing, 'twas brillig and the slithy toves...

I remember walking along a street in Cambridge some years ago with byomtov explaining something to me that seemed equally untethered to the real world. I don't think it was this particular configuration of financial shenanigans, but it was something similar, that sounded to me like a bet on a bet on a bet.....

bobbyp, you did a good job explaining, up above. You and byomtov should start a podcast together or something. ;-)

I should refresh the page more often.

Pete is correct.

I may be a bit off on the mechanics of the "loaning party" but they could also write a naked put on the shares they loaned out in order to protect against a price decline (like another fee).

and I'm guessing that... not anybody can 'borrow' other folks shares for this purpose.

Yep. You can't go online (I guess that is how they do things these days...)and blithely ask somebody to loan you a couple thousand shares of stock with a "promise" to return them at some point in the future without having a lot of assets to secure the loan.

They borrow the shares from current holders (such as a brokerage house or market maker) with a promise to return them (along with a bit of vig or fee for the service) at some point in the future.

It's essentially the same as you borrowing money from a bank to build up a business. If the business prospers, you pay it back, with intetest, and still make money. If not, the bank gets whatever you pledged to back the loan.

Or as the bank paying you interest on your savings account, in the hopes that it can lend that money out at a higher interest and come out ahead.

In short selling, you're borrowing stock rather than money. But the principle is the same.

With short selling, your losses can be near open-ended. If you short 1,000 shares at $10 a share and the price jumps to $300 a share, you face owing $300,000. Money you may not have.

With short selling, your losses can be near open-ended. If you short 1,000 shares at $10 a share and the price jumps to $300 a share, you face owing $300,000.

Short sales are margin trades, so are subject to margin calls. In Charles's example, and assuming a 50% margin limit, you would get a call from your broker telling you need to add $150,000 to your account within four days.

From what I've read, it's the margin calls that are killing the hedge funds. To borrow from Trading Places, "You know perfectly well we don't have 394 million dollars in cash!" Only the HFs were/are apparently looking at needing billions.

Even more fun, some of the hedge funds were apparently making illegal "naked" short sales: selling shares they only claimed to have borrowed.

hedge funds doing something illegal? Aren't they the paragons of free market enterprise? I am shocked. Shocked I say.

Thanks Michael.

"Even more fun, some of the hedge funds were apparently making illegal "naked" short sales: selling shares they only claimed to have borrowed."

Yeah, and apparently Citadel and Point72 "invested" $2.75 big-B billion into Melvin earlier in the week, presumably to meet or stave off margin calls. Incidentally, Gabe Plotkin, founder of Melvin, was a top dog at SAC, the predecessor of Point72.

Is this a club or an incestuous family?

And there's this, from Wiki:
"In 2018 Bloomberg reported that 40% of Robinhood's revenues were derived from selling customer orders to firms such as Citadel Securities and Two Sigma Securities. Citadel Securities was fined $700,000 by FINRA in July 2020 for trading ahead of customer orders. They delayed certain equity orders from clients to buy or sell shares while continuing to trade the same stocks in its own account, as part of its market-making activities, according to FINRA.
[...]
In September 2020, Robinhood was probed by the SEC into whether they properly informed clients that they sold stock orders to high-frequency trader and other Wall Street firms."

And this, from the cited article about Citadel:
"The market maker traded over-the-counter stocks for its own account from 2012 to 2014 while simultaneously delaying client orders for the same shares, the Financial Industry Regulatory Authority said in an order dated July 16. The agreement, which wasn’t publicly announced, was signed on behalf of Citadel Securities by Stephen Luparello, the former high-ranking Finra and Securities and Exchange Commission official who is now general counsel for the firm." (emphasis mine)

I'm sorry. Regulatory what, now?

And this, from Citron Research's Twitter this morning:

"Citron Research discontinues short selling research After 20 years of publishing Citron will no longer publish “short reports”. We will focus on giving long side multibagger opportunities for individual investors"


It's the internet, folks, so all caveats apply. Make of it what you will.

When someone shorts a stock, it creates 3 positions: 1 short (the borrower/seller), 2 long (the lender and the buyer). Magic!

The shorter is short. The buyer is long. The lender was already long, and remains long.

I used to care a lot about short-selling costs, in that they affect the pricing of equity options.

all of this is too many for me. I'm just gonna keep working and stashing my cash in a jelly jar out in the back yard.

If you're investing, you buy stocks (go long) and hold, doing so based on fundsmentals. Things like price, earnings, and growth potential.

If you're more interested in gambling, you can do shorts, day trading, etc. As with any gambling, the house always has the edge. Which means probably you're going to lose; at best, make less than you would have.

Sure, some people get rich. Some people win the lottery, too -- but mostly it's just a tax on ignorance of statistics.

Buy low, sell high, but in reverse order. That’s the goal of short selling in the simplest terms.

The whole scenario is really interesting.

I think framing it as a "David vs. Goliath story" is sort of right, but elides over the fact that there are big players on both sides, even going back to 2019 (Burry, for one). Even among the Wall Street Bets crowd it's not all small-timers, there are plenty of finance bros and full-time day-traders there, people with substantial amounts of experience and money.

I think it's interesting that there's a stronger element of getting in or staying in out of spite for the counter-party than there is in many speculative bubbles.

Another thing that strikes me is that the mechanics of this bubble remind me of the dollar auction game, where both players making locally-rational decisions causes both players to take on indefinitely increasing losses. Not saying this is an equivalent game, the reward structure is totally different. But there's something similar about the structure of a short squeeze: The shorts take on indefinite increases in their on-paper losses, hoping that the longs sell first. The longs take on indefinite increases in the value of their position above anything justified by fundamentals of the underlying business, hoping that the shorts will be obligated to buy first.

I think it's interesting that there's a stronger element of getting in or staying in out of spite for the counter-party than there is in many speculative bubbles.

This is the fascination for me, and I think it's an element that's still being dismissed to an extent. Maybe it's my own observational bias at work here, but the patronizing from financial sophisticates is glaring. A Bloomberg article, literally titled GameStop Is Rage Against the Financial Machine, the author goes on to write:

"First, the little guys have had their success so far with the aid of margin accounts, and by using derivatives. We know what happens when these things are used to excess; even the Dutch tulipmania relied on margin debt and derivatives. Little guys (and everyone else) deserve safer tools with which to build wealth."

Could that be any more condescending? It's not the "little guys" whose naked shorts are hemorrhaging billions. It's exactly this detached arrogance that prompted the feedback:

"This isn't a casino. This is a riot.”

That's the sentiment that's out there, and growing. I haven't heard anyone suggest that $GME is in any way an accurate reflection of GameStop's actual value, and everyone seems to know it will return to a sober valuation. That ain't what this is about, and the little guys might just be a bit better outfitted next time.

I hate to crossthread, but given the Min Wage discussion elsewhere:

"I’m just trying to make a living just like you."
- Steven Cohen, founder of Point72, owner of the NY Mets (sigh), worth ~$14 billion, and part-bailer-outer of Melvin Capital.

I think it's interesting that there's a stronger element of getting in or staying in out of spite for the counter-party than there is in many speculative bubbles.

I wonder how much of that reflects the fact that the current market has been seriously overvalued for much longer than such bubbles usually last. The "explanations" I've seen run to people continuing to buy, lest they get "left behind".

Every bubble involves some amount of folks refusing to learn from the last one. But this time, the level determined ignorance seems exceptional. And exceptionally durable. Which likely means that the correction bust will be particularly impressive.

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