A reader emails,
It seems to me that even if markets are only semi-efficient, then the trading curbs imposed by Robinhood and other firms should not have had an adverse impact on GME’s share price.
1. I do not believe that financial markets are efficient. When GameStop stock goes up or down by double-digit percentages on days when there is no news about the underlying business, then either you have to concede that the market is not efficient or else concede that the Efficient Markets Hypothesis is just word salad without meaningful implications.
2. A stock market in which any particular trader or group of traders can manipulate the price is not a good market either in theory or in practice.
3. I meant what I said about the Wall Street riot being more significant than the Capitol Hill riot. I don’t watch television, which is why the Capitol Hill riot did not make a big impression on me. If you were around a TV during the O.J. Simpson chase, you will probably never forget it. But in the grand scheme of things it was not important. That’s my view of the Capitol Hill riot–compelling TV, minor event.
But as of right now, the stock market looks ridiculous. There is an economic theory, most clearly articulated by James Tobin, that when a firm’s share value rises that is a signal that it should expand. That theory implies that GameStop should be undertaking a massive expansion of its business. Nobody believes that.
Why do you base generalizations about the “financial markets” on a single anomalous situation? Are you now planning to liquidate your index fund holdings and put the money into gold?
Exactly right. The practical import of EMH is “you can’t systematically earn abnormal returns by investing based on publicly available information and past movements.” To say that GameStop’s stock price is “ridiculously high” is to imply you can make a killing by short selling the stock. Is that what you’re doing Arnold? Elsewhere you’ve said a person thinks differently after being confronted with a bet, reevaluating an initial opinion with more careful thought. A short sale is such a bet. Ask yourself why you wouldn’t take this bet. The fact (assuming it is a fact) that GameStop’s price rise is based on Reddit discussions, or a motive to take vengeance against short-selling hedge funds, is utterly irrelevant to the practical version of EMH. Such considerations don’t make future stock prices any more predictable, even if you feel sure the price must collapse “eventually.”
The trouble is that the current shorting system doesn’t work that way. If the shorts couldn’t be called in and burned at pretty much any time in the discretion of the creditors and other key players when they claim they are too spooked by volatility or whatever, then it’s a pure easy win waiting to get picked up, and so many people (er, supercomputers) would be diving in to the short side that the price would come back down to earth right away, and none of this would have been possible. Also, if it were not possible to have more shorts than shares and thus to take advantage of the impossible-to-remedy shortage of shares and thus corner the market on the outstanding supply, this also could not happen.
Which should tell us we are watching an unexpected failure mode of the system’s current design which, I think it would be fair to interpret as able to temporarily prevent the arbitrage mechanisms that are the assumptions behind EMH theory from functioning.
Perhaps we should think about redesigning the rules of the system so that those assumptions are much more often true, and failure modes much less likely? The light of that discussion is overwhelmed several orders of magnitudes by the heat of everyone passionately taking “sides”.
All these years later I am still kind of embarrassed to confess that I didn’t know until the GFC that one didn’t really “own” shares of stock in a portfolio at a brokerage in the sense of the way one owns a house by having exclusive title and exclusive right to control what happens with a particular thing. That the brokerage wasn’t just some company that provided the infrastructure and access to make the trades and move the money around and I guess “store” your property for you.
Instead, one usually had something closer to a demand-deposit at a bank, a digital record and a liability claim against the brokerage. In the meantime, just like your cash in “your” account at a bank is just a fictional construct and most of the money gets loaned out , “your” share at a brokerage really just gets put into a big collective pot with which they can do all kinds of complicated things with, with your “trades” and “transaction records” merely being the surface ice obscuring a vast lake of countless little collectivized positions that are unwound to make sure all the private illusions add up right.
Just like fractional reserve banking, this system has its own failure modes. There are apparently no genuinely “narrow banks” that just help you store your money, and maybe they are out there, but I’m not aware of any “100% reserve” brokerages either.
You are permitted to “lock up” your shares so that they can’t be lent out. Big institutional funds don’t regularly do this because it may impact their margin situation adversely, especially if they are buying stock on margin. If the shares are locked up, funds are generally paid by the broker to borrow the shares. This stock lending is a very lucrative part of the brokerage business, and can be for funds as well if they own shares that are highly demanded in the lending market.
Todd, maybe you missed my bottom posts.
https://seekingalpha.com/instablog/11442671-gerald-klein/3096735-anatomy-of-a-short-attack
This 2014 article describes how short sellers can, and do, collude in a short attack to kill companies.
Dollar dumping for penny pumping.
You didn’t answer my question about whether you think it’s possible (in earlier post).
It is possible. It is, arguably, illegal – but without looking too much, it seems the SEC seldom punishes any such short attack colluders.
I’m glad the retail market found a way to punish such short sharks.
Looks like more short sellers are getting more cautious about such attacks. (For now)
You are also permitted to receive physical share certificates for the company stock that you own from your broker, usually for a fee. Most traders, even long-term investors, don’t bother with this or even think about this. You wouldn’t be able to sell the shares until you deposited them back at a broker, and would be SOL if the certificates were lost, stolen, ruined in a fire, etc.
Barbarian raiders could once strike a village without warning at any time or place. The tide turned when walls were built around villages, and defensive weapons could overwhelm anything the raiders could carry on horseback.
Instant communications have now turned the tide back in favor of barbarians who live within civilization’s walls. Teen thugs use social media to assemble “flash mob” robberies and ransack stores. President Trump gathered the January 6th mob outside the Capitol building with little more than a few tweets. GameStop enthusiasts organized a stock-buying spree through Reddit.
To stop such raids, must we build walls within walls? If so, are we willing to pay the price?
Apparently they intend to keep the Capitol building permanently walled off from now on.
It was embarrassing that a selfie mob could storm the Capitol, but its more embarrassing that we are going to close it off as a public space forever. The first is a one off event due to poor planning that could easily be fixed. The second is a permanent change in affairs.
Walling off your official buildings to keep the plebs out is way more banana republic than admitting you need better riot control protocols.
On the other hand, the governing elite may have paid the price that comes with commercializing and mythologizing their workspace following principles enshrined by Disneyland and Disneyworld. “The Peoples House” is just that kind of Disneyland doublespeak. As if to say, “The rulers of this land understand that they work for the people, come and see how our elected officials stride from duty to duty, with fine decorum in these hallowed halls!”
Baloney. Secure their workspace and enough with the sales pitches to tourists and schoolkids (remember those?).
It seems like a long time ago, but as recently as just before 9/11, most ordinary federal buildings allowed easy access and even many major US military bases were completely open to public traffic, with “gates” often with booths being usually unattended by guards, and even when attended, not being able to withstand any kind of determined assault, just being a simple light rotating arm like you’d find in a parking garage or maybe a chained-up chain link fence.
Just like air travel before the TSA, things are so uniformly different now, and we’ve gotten so used to it, that it’s hard to remember our own experiences of how things used to be, how much more open and easy (and yet, less secure) many things were.
Now most federal buildings and installations are fortresses and getting in or out or especially receiving visitors or even family members is a big hassle and pain in the neck. Especially with newly designed or renovated properties which gone overboard even further, now many employees treat their commutes (back when people commuted) between home and work like soldiers convoying between forward operating bases in enemy territory.
The relatively open character of the capitol was not really some fake show (at least, not totally), but really a kind of anachronistic legacy of a lamentably bygone era in which even real security threats could be, well, perhaps “taken in stride” is not the appropriate idiom, but handled in an adult manner without provoking extreme over-reactions.
In March of 1971, Susan Rosenberg participated in an SDS / Weather Underground operation to plant a bomb in a bathroom in the capitol. It went off, causing a lot of damage, but thankfully not hurting anyone.
But the reaction was not hysterical (perhaps having something to do with which side the perpetrators were on). Security protocols at the capitol were only slightly and/or temporarily enhanced, even though there were a lot of crazy bombings going on in those days, another “the past is a foreign country” thing that is hard to remember (see Burrough’s “Days of Rage”.) Things were still open, no walls, etc.
Rosenberg was eventually caught almost 20 years later after a bunch of other crimes, and with a huge amount of explosives in her car. She spent 16 years in prison, but Bill Clinton pardoned her on his last day in office, and recently she was on the board of and raising money for Black Lives Matter.
EMH implies that prices cannot deviate for long from values that reflect available information. So the question is, what is ”long”? If this oddity lasts more than a couple weeks, EMH certainly looks bad. BTW, Fama tells students markets almost certainly aren’t efficient, but that it’s still a useful benchmark.
EMH is like Newtonian physics. Everyone knows its “wrong” but you can still do stuff with it, e.g., design a car for physics, realize that you should probably just by index funds for retirement for the second.
Pointing out Gamestops days-or-week-long crazy prices is like says “Well yeah, but what if I drove my Honda Civic at superluminal speeds? Will the CAN-bus data network in it still work? Hmmm?”
A question I’ve asked myself is “why are asset prices so high when the economy is so bad.” One answer is that the printed a bunch of debt/money and the price of every crazy ass thing has gone up. Gamestop, Dogecoin/Bitcoin, or even Tesla are just the canaries in the coal mine. Are Teslas fundamentals at these valuations that much better than Gamestop? I mean its a better story in the sense I guess I can believe Tesla has some crazy technology that could theoretically one day maybe justify its P/E and GME does not. But they are probably both kind of crazy at these prices. Is GME just the Pets.com indication of a huge bubble?
Things like GME show what a casino it all is, and makes people who wonder if the market is insane do a double take and remember that yes, sometimes it really is insane.
You should know that Ryan Cohen, who bought 10% of GME late last year, created chewy.com to make multi-millions?
(Now up to billions with GME). “Pets.com” was a great idea, just not done well enough, tho possibly the tech wasn’t good enough, at the time.
Plus, HE wants to turnaround the business plan and go more digital.
I think it’s money printing/stimulus but also that there are no better alternatives.
In the early to mid 1990s, you could have a 60/40 portfolio of stocks and bonds, and receive a yield of perhaps 7-8% on the bond part of the portfolio. Many people back then would either buy stocks through somewhat expensive mutual funds or have to pay sizable commissions to brokers. In that backdrop, it makes sense to pay 15x earnings for a typical stock.
Now rates are very low and there’s hardly any transaction cost to trade in stocks. That should alone push up the price. We have some companies which are very expensive because of momentum trading and probably also due to retail investors YOLOing single names based on (not entirely false) hopes & dreams.
Tesla seems overvalued to me (and not long ago Elon said the same when the stock was much cheaper), but as you say, Telsa could actually work out. Perhaps it becomes a dominant corporation by 2035, worth $2-$3 trillion, so its current valuation could possibly make a decent return for people who buy in today. It seems farfetched, but at least possible.
GME isn’t an indication of a bubble as most of the people buying it know that long term it doesn’t have much underlying value. The current market seems less bubbly than the late 1990s, if only because the most expensive stocks tend to be making money and seem to have a bright future.
What Jon said above. The stock market, like many human aggregates, models general behavior well but can suck at specific, individual prediction.
An N of 1 does not necessarily negate the entire pattern. There are always outliers.
“I meant what I said about the Wall Street riot being more significant than the Capitol Hill riot.”
We will have to wait and see what the “real effects” of both events are. I’m still betting that the Capitol riots will have much more lasting damage (e.g. de-legitimization of a political movement, “white supremacy”catcalls at every turn possible, domestic terror bills, etc.) vs. a short term loss in confidence in the stock markets that has a duration of a couple weeks at most. The GameStop saga is probably just a fun blip until more pressing issues hit the radar.
Agreed. It’s like the Reichstag fire. The fire itself doesn’t actually matter, but to the extent people exploit a good opportunity who knows.
On the issue of how important was the event, as seen 12/31/21 end of year, I think most will say both were important.
And related.
But more changes noted by the protest/ pseudo-riot.
Because those changes will be negative, and seen by many.
Most changes due to GME, including short sellers being more careful, and less public, will be … less visible.
That theory implies that GameStop should be undertaking a massive expansion of its business. Nobody believes that.
Expanding its business doesn’t necessarily mean more GameStop stores or more GameStop web presence. It may mean its operators should employ their business skills in other endeavors. It also means GameStop should issue more shares. GameStop operators owe this to it’s share holders. Expanding the number of shares at high prices increases the share holder’s wealth. If its just a game, and the share price soon declines, the existing shareholders are better off by the premium in the share price. Those that bought the shares at the high prices lose. Of course, the existing shareholders could also sell their positions unless they had already lent their shares to the short sellers.
Perhaps the inefficiency has its cause in the time lag between current market conditions and the ability of GameStop to issue more stock.
If they issue stock, it’s not clear that it would clear in sufficient volume. An announcement of an issue might cause a collapse.
Meanwhile, their brand is front page news everyday. And likely their biggest fans/customers would see issuing stock as somehow taking sides against them.
I’d ride it out and enjoy the brand recognition. GME is ultimately trying to transform from a store that sells games to a store that sells game merchandise.
GameStop has no treasury stock. If they had some, perhaps a lot, the attempt at a short squeeze never would have started.
My view of EMH is just that it precludes any riskless profit opportunities.
I’ve been telling everyone gamestop should jettison the physical business and convert the ticker into a “digital currency”. With the current environment it might actually work, and sending GME permanently to 40k or whatever would so thoroughly scramble the professionals and academics it might even achieve their other goal.
Why are people calling Capital protests a riot? Makes no sense. It was just a protest that went nowhere. Some paid provocateurs, like the Viking weirdo, came in to cause trouble. A few protestors followed them and the Capitol Hill Police let them in.
They breached the modern day equivalent of a holy temple or shrine and then mocked it by spreading feces around and taking selfies. Do you not understand optics?
They also violently overran police lines, killed one cop, injured dozens more and came within minutes of kidnapping the members of legislative branch of government while the President watched approvingly on TV before he was convinced by desperate aides that this was likely to end badly for him.
Sure there were a lot of freaks and buffoons in the mob. There were also significant number of militia members who had expressed a desire to kidnap and/or execute the political leaders they were trying to reach.
It was an actual insurrection publicly encouraged by a lame duck President who told them to go there at that time and stop what was going on there as his lawyer told the crowd to prepare for “trial by combat.” They missed actually kidnapping elected leaders by just a few minutes. Just because the whole thing was shot through with Trump’s usual incompetence and failed doesn’t mean it wasn’t an actual insurrection.
If it had been a few dozen people looting a Foot Locker at a BLM protest you wouldn’t have any trouble seeing it as more than just “optics.”
If you’re looking for me to come to the RIOTER’S defense after they BREACHED the Capitol, then you are out of luck.
And, yes a completely tragic and sad death of a police officer. It was a disgusting chain of events. My heart goes out to his family.
Please let me know if there is anything else that you might need from me on this matter.
He wants to be told that the Capitol Riot was worse then the rioting his party endorsed all summer and that it justifies a variety of measures you
“It was an actual insurrection”
No it wasn’t. I’m not sure what you think an insurrection is.
“publicly encouraged by a lame duck President”
He asked them to peacefully protest. That’s more than Pelosi has done. I’d rate his rhetoric far less incendiary than the Dems.
“They missed actually kidnapping elected leaders by just a few minutes.”
“BLM protest”
Happened all summer and hurt a lot of people and were essentially endorsed, sometimes directly, by Dem leadership. Despite constant riots in all major cities over a prolonged period Dems NEVER endorsed providing the level of protection to ordinary people they have no provided themselves. In fact the capitol riot happened in part because bowser wouldn’t order the necessary resources or means to control it.
“They missed actually kidnapping elected leaders by just a few minutes.”
If they breached the door several people with guns pointing at it would have opened fire.
Had they taken congress with them in it, it’s unclear what, if anything, anyone would have done.
Even if the worse happened, it would have no effect on the functioning of the government. Biden would be president. New leaders would be elected to fill the open slots.
It’s obvious you want to use this to impose totalitarianism on the country after spending an entire summer endorsing the pro riot party as our whole country burned and regular folks that don’t have the resources of congress were its continual victims.
No one in the mainstream conservative movement has ever tried to justify the Capitol riots. Literally…no one. All I’ve seen is shock, embarrassment and contrition.
Contrast this with the left who actively denied, then supported and ultimately dismissed the riots over the summer as “mostly peaceful.”
Yet, all of the apologies for the Capitol riots from the right never seem to be enough for Greg. He just wants to keep flogging away.
But, at some point, his insistence starts to look a lot like a form of sadism. So much for unity.
“I’m the dog who gets beat…shove my nose in shit”
https://youtu.be/naoSdrzqh-M
>—“No one in the mainstream conservative movement has ever tried to justify the Capitol riots. Literally…no one.”
Not sure exactly who you consider to be in and out of the mainstream conservative movement Hans. I wouldn’t consider Trump to be a “mainstream” conservative.
There has been no shortage of attempts to blame it on antifa or trivialize it as “just a protest that went nowhere” which is exactly what Dave said about it in the comment that started this thread which you replied to by describing it all as being all about “optics.” So if you are wondering where I got the crazy idea that a lot of people are trivializing these events, you could start by reviewing this thread itself. Or you could look higher where another regular describes it as a “protest/pseudo-riot.” Not even able to acknowledge there was a real riot.
Polls I’ve seen indicate that a fifth of Republican voters actually are in sympathy with the rioters at the Capital which is probably about the percentage of Democratic voters in sympathy with the riots around BLM incidents. Professional politicians on both sides are more cautious in what they say but none of them really want to alienate a fifth of their base.
We all ought to be able to be unambiguously opposed to two different things at the same time.
“We all ought to be able to be unambiguously opposed to two different things at the same time.”
Exactly, which is precisely what I’ve done consistently from the get go as have every single other mainstream conservative outlet.
So, please keep flogging away and shoving our noses in it. You all haven’t quite figured out yet that a Trump ouster in the Senate benefits my side much more than yours. Think on that. But, you’re never gonna get me to acknowledge that he incited a riot. That’s crazy talk based on the evidence.
BTW – I’m still a fan of yours 🙂
>—“a Trump ouster in the Senate benefits my side much more than yours.”
So then why is it you are opposed to your side getting this great benefit? Why are we missing out on such a rare opportunity to agree on something that benefits your side?
Collateral damage. Your side is looking to maximize it based on completely bogus nonsense. My side is looking to minimize it. Let the orange boogeyman rip…but come for others and it’s time for a food fight.
If Joe Biden was smart (in an “I’m willing to take a risk” way), he would pardon Trump tomorrow. The whole impeachment trial goes against one of the electorate’s fondest hopes: after 4 years of divisiveness and craziness, we can put that behind us. But it also puts in the head of much of the electorate, “Trump must be guilty of things or Biden wouldn’t have to pardon him.”
Biden can tell us about “unity” and how he wants to calm things and lead us forward to a better country. And lots of people will eat it up.
After the Capitol Riot, if Biden had gone on TV and said something like “you know, all of us in politics have been implicitly and explicitly egging these kind of actions on for a long time, and especially since this summer. There have been a lot of missteps by everyone during this pandemic that has created a an environment of desperation. People of all political persuasions haven’t felt we in government have been doing a good job for a long time. Maybe it’s time to admit things have gone seriously wrong.
I’m going to make a pledge that I’m not going to pass a single bill that doesn’t have 60 votes in the Senate. And I’m not going to issue a bunch of executive orders either.
If I have a piece of legislation that really matters to me, I’m going to go on TV during primetime to explain it in detail, like those old Ross Perot specials, and I’ll even set aside a prolonged block of time for the opposition to make their case. Like the kind of debates we should have had this Fall instead of what we got.
We’ll give that a shot for the next two years, and then you the voters can decide if you want a change. I hope that this might turn the temperature down, and let everyone realize that the outcome of an election isn’t the end of the world.”
I probably would have been a convert.
Instead, he got on TV and called the police that saved his colleagues lives a bunch of racists and exonerated BLM rioters. Then crammed a bunch of SJWism down out throats.
Before the last year, I thought the Dems view on immigration was dumb and their views on cultural values were self destructive, but it was all kind of an abstract societal issues that might have some impact in the long run. Not enough to care that much, I didn’t even vote in most elections.
After this year though…it’s clear nothing like that will happen and literally every single aspect of my personal life can be subjected to politics at the whim of power.
Yes, and I wish after the 2000 election, George W. had said, “Concerns have been raised about irregularities in the Florida counting. Let us have a non-partisan recounting of the entire state.” Instead, we had the Gore campaign calling for a recount in a few counties where they thought they could pick up votes and the Bush people going, “Leave it alone. We won so far and we want to keep it that way” and then dueling court decisions and lots of people who thought Bush stole the election. If the original Florida Supreme Court decision had been allowed to stand, a lot of people would have thought Gore stole the election.
It would have taken statesmanship to go for a risky recount. But politicians want power. It takes a strong person to give it up when he doesn’t have to.
Granted it was far far less dangerous than the BLM riots, but there is the purity/religious angle.
The attack on the people buying shares because they realize that short sellers have created an impending demand for shares as “market manipulation” is indistinguishable from the “hording” and “price gouging” attacks made against entrepreneurs who listen to the weather channel and stock up on bottled water and plywood to resell at higher prices when the hurricane gets closer. If you value consistency, then should you you oppose one, you should oppose the other.
I don’t mind some shorts getting squeezed, and to the extent that their forced buying makes free money for some randos on reddit I’m fine with that.
But I suspect when it comes back do to earth there will be some regular schlubs who bought high and got left holding the bag, which kind of sucks. I mean that happens all the time and maybe they would have blown it on lotto tickets anyway, but this issue doesn’t deserve the heat and light it gets.
Concur completely
Sorry, but the post really said nothing. Most fin. economists seem to see the EMH if at all, having only some sense to it via its weak form. As to GME phenomena , the short squeeze has not been supported by fundamentals but has the by my count at lest 5 short squeezes in TSLA for ex. Short squeezes have been around forever ever and will happen from time to time. Markets working efficiently: Well, perhaps a bit of over valuation/pricing when one looks at an Equity Risk Premium, and yes some sectors very highly priced, low ERP. Overpricing of growth securities will happen in a low interest rate environment, aside from the difficulty of pricing hyper growth based upon real underlying fundamental metrics.
Perhaps less of a GME event would have been the case if:
1. T+3 shortened. Not sure in this day and age why settlement is same as has been for very long time
2. Limiting the short buys to no more than Float of a given stock
3. Increasing margin requirements
Doubt most would want to see higher commissions for trading, and if long term investing to be emphasized ( an aside) maybe the taxing of gains should be tied to holding periods- longer the hold less the tax and maybe zero after say a 5 year period
Likelihood of pump and dump and other illegal activity not to be the case, but prosecutors with their zeal are likely to use their weapons to come up with some flimsy grounds; we shall see. But the talk among the Reddit crowd, no diff than talk between hedges and those familiar with markets are aware of so called “Whisper numbers”
Not sure how that any diff. than what the pro’s do, ex possible illegalities.
“A Random Walk Down Wall Street” supports the EMH to the extent that smart people, looking for mis-valuations, are constantly buying & selling – clearly indicating differences in opinion. Sellers think it’s time to sell (stock going down), buyers the opposite.
For EMH believers, you either
a) have to concede that the market is not efficient or else
b) concede that the Efficient Markets Hypothesis is just word salad without meaningful implications.
OR
c) take the EMH as the most useful guide, like traffic laws, towards navigating the roads of finance, depending on where you want to go.
d) plus, know that some people’s goals are not just to go from A to B most quickly, but have other goals.
Short selling is good for the market, but it’s possible to be done “too much”. Getting caught in a squeeze, short or gamma or liquidity, is “market” discipline when your actions have been excessively sub-optimal.
Let’s recall the “market” doesn’t exist. People do. Billions of folk making buy-sell decisions are called “the market” as a shorthand.
2. A stock market in which any particular trader or group of traders can manipulate the price is not a good market either in theory or in practice.
NO. Among the silliest things ever posted by ASK.
Ownership takeover battles always change the prices – and “manipulate” is just a pejorative synonym, tho there is connotation of undefined quantity, where “small” changes are OK but big “manipulations” are bad.
All short sellers know there is “no limit” on the possible losses for selling stock they don’t own. They depend on EMH and “usual” goals and evaluations of investors to make money as companies die. How many made money as Blockbuster died? Burry noted that the Big Short, about the inevitable drop in MBS, that they would make billions as the housing economy & finance tanked.
Any market or system that allows behavior with High Risk, of low frequency, should expect occasional instances of the Risk being realized. Especially if there is some way for others with money to make money, with their own Game Theoretic moves modeling others’ move, noting the Risk of leverage.
This huge short squeeze price jump IS, exactly, the “market” punishing the short sellers. It looks very likely that those buying long at over $200 or so are likely to lose monetary value, but they’re not blind to that, either. Right now, they feel like it’s worth it to punish the short sellers. Say $320 a share.
It’s likely many will regret it in July if GME is back down to $20; but many will say it was worth it even then. Any realistic theory of human/ market behavior has to include the occasions when non-monetary factors dominate what is usually a mostly monetary decisions.
One guy on reddit showed he got one share, finally, for $243. Maybe from Fidelity (not sure the broker or the seller – Fidelity is the largest shareholder.)
With too much time, I’m reading more about this. Links here (plus a great Kinks song):
https://tomgrey.wordpress.com/2021/02/01/gamestop-all-day-and-all-of-the-night/
Markets are not perfectly efficient.
But maybe around 95%. Maybe 99%. Maybe 80%.
What is the metric for evaluating “market efficiency”?
Especially if non-monetary goals need to be included?
I’m on the same page. Trying to put financial markets into either/or categories of efficient or inefficient seems wrong. If you think of a range, where perfectly efficient is 1.00, and prices instantly adjust to news about a company’s future financial prospects and then stay there til the next bit of news arrives, vs completely inefficient markets where the price of securities is indistinguishable from a random number generator and have no identifiable correlation to a given company’s assets, cash flow, or profitability, well…that seems like a better way to formulate the question. Where do American financial markets fall? I would imagine the efficiency probably oscillates over time. What range does it oscillate across? Someone smarter and more knowledgeable than I can answer that question.
I am always amused by the rank hypocrisy that repeatedly pops up in our country. The efficient market theory is manifestly ignored by most investors who seek to capitalize on what they see as mis-pricings in the market. If everyone was rational and fully informed, there should be no opportunity for short selling, except for very small gains due to volatility. But the extent of the short selling on several stocks indicates that many institutional investors are considering these stocks overpriced…by a lot.
Complaining that the Reddit-fueled buying of GME was ignorant and irrational, is funny from people who rely on irrationality and ignorance to create the opportunities for short selling. I guess irrationality and ignorance is only acceptable when institutions can profit from it, but not when it runs contra to their expectations.
re. 1 “No News” – Can’t be assessed beyond doubt.
re. 2 “Not good” – Huh?
re. 3 “Non event” and Someone’s theory for expansion? So we elect someone’s theory and say it’s BS?
Might be me, but again what’s your point really?
i think there is a *limited* amount of inefficiency that can be focused on at most a few names with this intensity. we’re simply seeing new lenses for a dim flame.
also, what markets can’t be manipulated? what’s your proposal?
A market is efficient if someone with information can act on that information and incorporate it into the market. Real estate markets are not so efficient (high transaction costs, difficult to short) but by this standard the U.S. stock market is one of the most efficient markets ever created.
The Game Stop saga can be reframed as a story where a few value investors had the belief that the short interest in Game Stop was overleveraged, and that a well-executed short squeeze would force other investors to cover their positions at a much higher price than the “fundamental” price of the stock. In this story, there is a second, higher, equilibrium price of Game Stop stock. It is an unstable price that we can expect to return to more fundamental levels some day, like the battery and bottle watered prices as the hurricane approaches, but there is nothing inefficient going on here.
2. A stock market in which any particular trader or group of traders can manipulate the price is not a good market either in theory or in practice.
This is backwards. Every interaction with the market, from the giant tender offer at the highest premium to a market price, to the smallest out-of-the-money limit order, affects the market, like Heisenberg making an observation on a quantum system. The trader seeks to benefit from the market by giving him/her the opportunity to buy low, sell high, and profit. The market seeks to benefit from the trader, incorporating their beliefs into the instantaneous valuation of every company, and improve the allocation of capital. It’s a market that can not be “manipulated” by participants with different beliefs than the market consensus that cannot be considered a good market.
+1
[Enough. You are in complete violation of the norms of this blog. Do it again, and you will be banned.–AK]
Well EB-Ch, it looks like it’s time for me to agree with you – sort of.
[I am not putting up with any more of this insulting tone. You have no idea what I know and what I don’t know. This comment may have made me angrier than any comment ever posted on this blog. And by the way, the substance of this comment is not very good, either. –AK]
I’ll explain the easiest concept first – Investors (like me) buy Stocks in companies to own the companies, not to “flip” or “sell-at-a-profit” on the stock price. I, for example, am an Investor (NOT a Trader). I purchased my first Stock (in Boeing, if it matters) back in August of 1969. And I still own those shares – along with many others, in many other companies, that I’ve purchased over the intervening 50+ years. I’m perfectly content with my share of ownership of the profits regularly, if somewhat slowly, made by the companies I own – via the stock ownership.
But of late, that sort of Investing thing has been deemed “boring”, slow, out-of-date, antiquated, geriatric, etc., by folks who only want to “profit” from the stock price movement alone. And they are almost supernaturally unconcerned with the profits (or even profitability) of the underlying companies. They are the Traders.
And note that I’m just highlighting the distinction between Trading and Investing here. I am in no way belittling, or taking a jab at Traders. As a matter of fact, I agree completely with commenter Todd Moodey and others here who have pointed out that Traders – and the “tools” they’ve developed and use, such as short-selling, options, etc. – are extremely important not just to Traders, but to Investors (like me) and the market at-large.
But there is another critical aspect to this distinction between Traders and Investors, that requires a bit more explanation. Traders, as I explained above, are interested in “profiting” from stock price change (up OR down), not the Stocks themselves. Stated differently, Traders are interested in “profits” that are Derived from Stock price changes.
Investors deal in Stocks. Traders deal in Derivatives. And Shorts, Puts, Calls, Options, etc. are all Derivative Trader tools/methods. Investors (like me) don’t typically – and mostly never – use them.
Experienced Investors (like me) DO know how to use them, know how and why they work, how and why they are valuable for Traders – and more explicitly, know the distinction/difference between an Investment and a Derivative.
That is why I assert (here and at his earlier post on this topic) that the Stock market does NOT look “ridiculous” right now, as Arnold asserts.
But I would quickly add that a small portion of the Derivatives market is showing itself to be a bit silly!
My sincerest apologies, Arnold. Insulting you was NOT my intent.
I’ll refrain from posting any comments to your blog in the future.
[apology accepted–AK]
experienced investors use options for hedging a portfolio, and to generate income such as selling calls, covered call positions. Any number of traders buy shares for just a trade instead of using options.
Increasing one’s purchasing power over time is what counts and not owning a piece of company per se. After inflation, after tax compounding and a great many companies have not provided that to investors.
Here’s a great article on short attacks – justifying rage against colluding short sellers.
https://seekingalpha.com/instablog/11442671-gerald-klein/3096735-anatomy-of-a-short-attack
Basically, the rich guys go Dump, Dump, Dump and either
a) homerun bankruptcy (no need to cover shorts), or
b) little cheap pump buy shares for pennies.
“Dollar Dump Dump for the penny pump” is likely the far more usual “manipulation” by relatively few decision makers – a few dozen.
Note that some sites note the existence of only 68.9 million GME shares, and yet, show 77 million outstanding. There seem to be lots of counterfeit shares literally floating around (in digital brokerage books). Some reports indicate there is often controversy about who really owns how many legal shares.
Game Stop is in the process of trying to issue an additional ~6 million shares. Whether you report 69 or 75 million shares outstanding depends on whether you include these pending shares.
Link, please?
Important!
And shorts on 100% of shares, or fewer, really do seem less risky than on 138%; tho 115% seems closer in riskiness to 138 than to 100.
My guess today is that Palihapitiya’s $115 option strike price might be near where there’s some stability for a while.
https://www.thestreet.com/investing/gamestop-rides-on-chamath-palihapitiya-tweets-option-buy
Seems like lots of shorters are reducing their over-short positions.
A bit less of the
Dollar dumping for penny pumping.
When GameStop stock goes up or down by double-digit percentages on days when there is no news about the underlying business, then either you have to concede that the market is not efficient
Actually, one can easily conclude that this is a drastic case of “market discipline”. To punish “reckless” short selling.
There is long term news about Ryan Cohen wanting a more digital GME in a turnaround. The short selling short term orders to sell 138% of the company seems like some kind of “market inefficiency”.
The current short term fluctuations are the processes of the market correcting the inefficiency. (Market = traders & investors & financial system, & gov’t regs)
The reader wrote: the trading curbs imposed by Robinhood and other firms should not have had an adverse impact on GME’s share price.
There was s wave of buyer desire to “buy” at the market prices – in order to make it tougher for the shorts to cover their positions.
Time is always money, but sometimes hours, seconds, minutes count more than other times.
The trading was not based on “fundamental” value, which basically didn’t change. It was based on trading rules allow the short squeeze and gamma squeeze – based on timing. And requirements for the gamblers, er, investors (same thing) to have cash to cover their positions.
If you need $10,000 in an hour or else you lose $100,000 it’s a lot worse than if you have 24 hours to get that $10k.