My Last Post on This...I Think
Now that Gamestop (GME), and to a lesser extent AMC Theatres (AMC), have come back to Earth, we can take a perfect hindsight approach. What went right, what went wrong and what will the fallout be?
The positives, and there are a bunch, seem to be the fact that the little guy can take on the big guys and take those big guys to the woodshed. The Reddit Mob that created this frenzy 10 days ago have proven that with information there is power. In the simplest terms, this group of investors figured out there there was something misaligned with GME shares and that there was potential for trading against that misalignment and making some money. The nonsense that this was some sort of uprising plays nicely into a media that is starved for a story but the truth is, these traders jumped on a momentum play in a marketplace that was open to them and took advantage of it. Good for them and I am truly glad that some people made some nice profit. I feel for those that got on the last car of that freight train and missed the gold rush but as the old saying goes, “He who hesitates, loses”. It actually is a little more graphic than that and I will leave that to your imagination.
The negatives of this tale are also numerous. Several hedge funds got smoked. The SEC with good intent and probably poor results, will go in and pick apart what happened and create a white paper on the incident. The rule changes that will likely come out of this investigation will more than likely focus on the dynamics of short selling. My guess is, they will probably want to limit how many shares of a stock can be sold short at any one time and an overhaul of the stock loan industry.
I don’t think one of the proposals I have heard makes sense and I am sure almost every hedge fund manager would agree with me. The proposal is to increase the transparency of what these hedge funds are doing as far as selling a stock short. There would be some sort of tipping point where a hedge fund (or mutual fund) will have to report their short interest in a company.
The thinking goes, if you take a large position in a company, you have to file with the SEC and announce that position. Your intent can be for investment purposes or possible takeover purposes or something other. I believe that limit is 5% of the shares outstanding. If you go over another threshold, you are then required to refile under a different statute and your purchases, be they 100 shares or 100,000 shares, need to be reported on an ongoing basis. Short sellers presently, don’t have to report the strategy or strategies they are developing. The exchanges report the total amount of shares sold short but do not identify who is doing the shorting. Along with the fact that certain strategies with options can effectively allow more shares to be sold short than actually exist, you can see why the SEC will want to make some changes. Exposing the individual short sellers and their positions will harm an investment strategy that actually provides quite a bit of liquidity to markets. Why would I, as a hedge fund manager, want the World to know my strategy before that strategy becomes successful?
When I first started out in the business, I was not a big fan of short selling. In some uniformed way I felt it was anti-American, but after years of working with and seeing all different types of investment strategies, I am not so sure it’s a bad thing.
When a company continues to fail in its mission, whatever that mission might be, markets usually turn against those companies as holders sell. Why not have a strategy to take advantage of a company’s failures? I have worked with several large short sellers over my career and I can say without question, these guys do more research about the companies they are shorting than anyone else. They understand the risks of being wrong. It is the financial industry’s form of checks and balances.
Will this happen again? Yes. Will hedge funds be vilified for creating the environment for this to happen again? Yes. Will the Reddit Mob have learned anything about trading and taking profits? Yes and No.
One thing is for certain, Greed is a powerful force, some things will never change.