Reddittors vs Wall Street

[plodder]

No, you are making a very basic mistake. The interest rate a firm can borrow at is related to the risk the lender incurs. A firm in the doldrums pays a higher rate. Similarly, potential investors will want a greater pound of flesh in return for their risk.

[dyqik]

GameStop is obviously a shaky business. Traditional retail in the digital age, with the pandemic depression on top. But there are some entrepreneurial types who think it has a chance. They think the existing management f.cked up and is driving it into bankruptcy, but a new team could turn it around and give it a profitable future for the long term.

Gamestop has been going through big changes on its board in the past year, with a number of positions taken by the business people behind the very successful Chewy.com online pet supplies business. It's main business has also not been dropping as fast as people expect, because in person sales and resales of physical game consoles and media haven't been dropping as fast as people thought it would. And some things, like console accessories, are still selling well through physical stores, because people need to try them for ergonomics etc. before buying.

It's not at all clear that it's a doomed business, which is what the hedge fund short positions were betting on.

[lpm]

No, you are making a very basic mistake. The interest rate a firm can borrow at is related to the risk the lender incurs. A firm in the doldrums pays a higher rate. Similarly, potential investors will want a greater pound of flesh in return for their risk.

Wrong.

Wrong wrong wrong wrong wrong.

Debt finance is not equity finance. The interest a company pays is not related to the ups and downs of the share price.

[dyqik]

No, you are making a very basic mistake. The interest rate a firm can borrow at is related to the risk the lender incurs. A firm in the doldrums pays a higher rate. Similarly, potential investors will want a greater pound of flesh in return for their risk.

Wrong.

Wrong wrong wrong wrong wrong.

Debt finance is not equity finance. The interest a company pays is not related to the ups and downs of the share price.

It absolutely will if part of the business plan involves stock issuing or buybacks. And the company being ripe for aggressive buyouts and restructuring due to stock collapse is a risk for lenders.

[shpalman]

GameStop is obviously a shaky business. Traditional retail in the digital age, with the pandemic depression on top. But there are some entrepreneurial types who think it has a chance. They think the existing management f.cked up and is driving it into bankruptcy, but a new team could turn it around and give it a profitable future for the long term.

Suppose these long term investors reckon it could be worth $20 a share. However the share price has only fallen to $30. The existing management keeps bumbling along with its crap strategy. Along come short sellers who reckon $30 is way too high and the business is heading to $0. They keep selling, driving the price to $5.

Now the long term investors get excited. They can go for it. Sure, it's going to be risky, and this bricks-and-mortar business still might well go bust, but the chance to turn $5 into $20 is worth that risk. They'll buy the company or a large stake in it, install new management and hope to make it thrive.

When the price hit a high of $354.83, the 13% stake held by Ryan Cohen, 34, GameStop’s largest single shareholder, became worth more than $1.3bn.

Donald Foss bought 5% of GameStop early last year for around $12m. His stake is now worth more than $500m.

GameStop chief executive George Sherman has seen his 3.4% stake jump to a value of about $350m.

BlackRock, the world’s largest asset manager, owned 9.2m shares in GameStop at the end of December, according to a regulatory filing. If it still holds all those shares, they were worth more than $3bn on Wednesday.

It must be other long-term investors who didn't have time to buy in back when the share price was $5 in the middle of August before the price rose to $20 at the end of the year.

https://www.theguardian.com/business/20 ... tock-surge

[lpm]

GameStop is obviously a shaky business. Traditional retail in the digital age, with the pandemic depression on top. But there are some entrepreneurial types who think it has a chance. They think the existing management f.cked up and is driving it into bankruptcy, but a new team could turn it around and give it a profitable future for the long term.

Gamestop has been going through big changes on its board in the past year, with a number of positions taken by the business people behind the very successful Chewy.com online pet supplies business. It's main business has also not been dropping as fast as people expect, because in person sales and resales of physical game consoles and media haven't been dropping as fast as people thought it would. And some things, like console accessories, are still selling well through physical stores, because people need to try them for ergonomics etc. before buying.

It's not at all clear that it's a doomed business, which is what the hedge fund short positions were betting on.

Right.

Which is why the very low share price won the attention of serious long term investors prepared to make a large financial commitment. If these investors have the correct view of the company, they (in a normal share trading environment) will make a lot of money and short sellers will lose a lot of money.

Which is how it should be.

[TimW]

Along come short sellers who reckon $30 is way too high and the business is heading to $0. They keep selling, driving the price to $5.

Aren't they subsequently buying back?

If they are selling and then buying, how do they drive the price down?

[lpm]

No, you are making a very basic mistake. The interest rate a firm can borrow at is related to the risk the lender incurs. A firm in the doldrums pays a higher rate. Similarly, potential investors will want a greater pound of flesh in return for their risk.

Wrong.

Wrong wrong wrong wrong wrong.

Debt finance is not equity finance. The interest a company pays is not related to the ups and downs of the share price.

It absolutely will if part of the business plan involves stock issuing or buybacks. And the company being ripe for aggressive buyouts and restructuring due to stock collapse is a risk for lenders.

No. That's not how it works. It's simply not how modern corporate finance functions.

If a company gets bought out, the debt lenders celebrate - the change of control clause gives them their money back at a premium. If a company is approaching bankruptcy the debt lenders get more and more nervous and hope for a buyout.

If new investors want to put money into equity, they will obviously be more eager to put that money in to own a higher proportion of the company than a lower proportion. Like on Dragons Den, saying yes they'll invest £50,000 in the company but they want 40% ownership not 10%.

[dyqik]

Along come short sellers who reckon $30 is way too high and the business is heading to $0. They keep selling, driving the price to $5.

Aren't they subsequently buying back?

If they are selling and then buying, how do they drive the price down?

They do have to eventually buy the shares back to fulfill their short positions, but they sometimes do that with further shorts, basically doubling down on the first bet.

But the short sellers also talk the company down in the press/social media, and release public statements about their shorting, which drives the price down.

[shpalman]

A twitter thread about it: https://twitter.com/MrBrownEyes2020/sta ... 71584?s=19

tl;dr for anyone with too short an attention span even for that, is that the hedge funds managed to borrow more shares than actually existed.

[dyqik]

Wrong.

Wrong wrong wrong wrong wrong.

Debt finance is not equity finance. The interest a company pays is not related to the ups and downs of the share price.

It absolutely will if part of the business plan involves stock issuing or buybacks. And the company being ripe for aggressive buyouts and restructuring due to stock collapse is a risk for lenders.

No. That's not how it works. It's simply not how modern corporate finance functions.

If a company gets bought out, the debt lenders celebrate - the change of control clause gives them their money back at a premium. If a company is approaching bankruptcy the debt lenders get more and more nervous and hope for a buyout.

Where does this money come from to pay this premium to the lenders? Not from the buying up of collapsed stocks, because, as you say, stock price changes don't reflect the assets.

[lpm]

From the split between old investors and new investors.

In a struggling company the old investors suffer, which is the price they pay for investing in a dud. In a thriving company the old investors crack open the champagne, which is the reward for investing well.

Just work it through with maths. Invent a struggling little company and you'll soon see how existing shareholders are going to be screwed but new investors might see value.

[Martin Y]

I discovered this story on the BBC News site last night and spent ages in the Comments section.

A lot of butthurt that the BBC called the redditors "amateur" investors in their headline. Apparently this is disrespectful and garnered a lot of "okay, boomer" pushback.

Masses of hype about Sticking It To The Man (though of course using non-boomer terminology) and "to the moon" and "hold on till $xxxx". It soon became clear that this is a game of chicken where the losers are going to be the mugs who believe it's all about everyone acting together to smash the hedge funds and not about picking your moment to dump your stock and leave all the mugs behind as they can't sell fast enough to beat the free-fall.

[TimW]

Along come short sellers who reckon $30 is way too high and the business is heading to $0. They keep selling, driving the price to $5.

Aren't they subsequently buying back?

If they are selling and then buying, how do they drive the price down?

They do have to eventually buy the shares back to fulfill their short positions, but they sometimes do that with further shorts, basically doubling down on the first bet.

But the short sellers also talk the company down in the press/social media, and release public statements about their shorting, which drives the price down.

Hooray for the good guys.

[TimW]

It soon became clear that this is a game of chicken where the losers are going to be the mugs who believe it's all about everyone acting together to smash the hedge funds and not about picking your moment to dump your stock and leave all the mugs behind as they can't sell fast enough to beat the free-fall.

Maybe this is a good time to do some short-selling.

[Martin Y]

Hooray for the good guys.

Who will, as is traditional, come last.

[Martin Y]

Oh, and there were another couple of oft-repeated comments I didn't understand: one claiming the hedge funds had short sold 130% of the company's shares and the other, maybe related, talking about "naked short selling" which we are told is illegal. We don't learn what it is, nor whether it is illegal in particular jurisdictions.

Basically the comments section was mostly-American redditors fiercely agreeing with each other except for an occasional "That's not how X works" which is code for I clearly have no clue how X works but I don't like the sound of how you reckon it works. Makes a change from braying Brexiteers I suppose.

[plodder]

It soon became clear that this is a game of chicken where the losers are going to be the mugs who believe it's all about everyone acting together to smash the hedge funds and not about picking your moment to dump your stock and leave all the mugs behind as they can't sell fast enough to beat the free-fall.

Maybe this is a good time to do some short-selling.

100% agree with this.

[lpm]

The claim that 130% of shares were shorted is almost certainly wrong. I'd be surprised if any of these hedge funds strayed into illegality.

The general rule of regulators is that information is good, misinformation is bad. Providing information about your position or publishing an article about a company's problems is encouraged. Again, I'd be surprised if any hedge fund strayed into misinformation.

On the other hand a lot of the social media stuff is clearly misinformation. Mostly accidental due to the millions who don't understand any of it. But they'll be looking hard at the Reddit crowd to see if there's a pump and dump conspiracy going on.

[dyqik]

I don't think the claim is that a single hedge fund has shorted 130% of the stock, but that several together took overlapping positions that totaled that.

[Martin Y]

If lpm lends me 10% of the shares for a fee and I sell them to dyqik who lends them to lpm for a fee and she sells them to me and etc. what percentage of the shares have been shorted if the same 10% have been shorted several times over?

[plodder]

From the other side of the fence here’s an alternative perspective of the impacts of Wall Street being helpful.

https://mobile.twitter.com/alexisohania ... 9184427020

[plodder]

Online platforms for small investors are now blocking these trades. Presumably Wall St etc are also being forced to “hands off”. Lol. Of course they f.cking aren’t.

https://mobile.twitter.com/RampCapitalL ... 0924063746

[plodder]

If lpm lends me 10% of the shares for a fee and I sell them to dyqik who lends them to lpm for a fee and she sells them to me and etc. what percentage of the shares have been shorted if the same 10% have been shorted several times over?

meh, package them up and give them a clever sounding derivative name.

[lpm]

Plodder, how much protection do you want for low-information investors buying relatively small amounts of stock (say <$1,000)?

Do you want regulators to protect them from pump-and-dump cowboys? Or treat them as adults who are making their own decisions and if they lose, they lose?

How do you feel about small investors who are about to lose $10,000 or some who will lose $100,000?

It appears that you want big Wall Street to be strictly controlled but you imply you want a free-for-all at the small retail level...