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Some of the takes lately on short sellers have been exaggerations of reality in my opinion.
Short sellers serve an important roll in the markets. They dampen out volatility because they often cover when prices fall rapidly to cover their positions, and sell on rapid...
Short sellers serve an important roll in the markets. They dampen out volatility because they often cover when prices fall rapidly to cover their positions, and sell on rapid...
.., unusual price increases on the way up. Usually this improves market stability.
Others have pointed out they also ferret out fraudulent companies like Enron and Worldcom. All true.
Lately, I have seen the following companies being short squeezed described as frauds:
Others have pointed out they also ferret out fraudulent companies like Enron and Worldcom. All true.
Lately, I have seen the following companies being short squeezed described as frauds:
.
.
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If I missed any please let me know.
What the companies being squeezed do seem to have in common is the deep impact the pandemic has had on their operations.
Gamestop, AMC, American Airlines, Bed Bath and Beyond, Express....
Not frauds, but all greatly hurt by Coronavirus
What the companies being squeezed do seem to have in common is the deep impact the pandemic has had on their operations.
Gamestop, AMC, American Airlines, Bed Bath and Beyond, Express....
Not frauds, but all greatly hurt by Coronavirus
Its been wisely pointed out that short squeezes like this cause economic harm through capital mis-allocations. Companies raise money at crazy valuations, getting more than "their fair share" of available capital when it could go to better uses. All true. https://twitter.com/Jesse_Livermore/status/1354464243572240385?s=20
The squeezers run amok have dislocated reasonable resource allocation.
But the opposite is true of short sellers running amok and driving prices down too low on real businesses.
A depressed share price makes raising capital harder when a company needs it (like in a pandemic).
But the opposite is true of short sellers running amok and driving prices down too low on real businesses.
A depressed share price makes raising capital harder when a company needs it (like in a pandemic).
Selling 140% of the shares outstanding pushes down prices. During times of stress, this weakens the ability of a company to raise capital, and therefore, recursively strengthens the position of the short sellers, potentially creating a feedback loop. Shorts seem predatory here.
This kind pressure ultimately hurts co-operation and growth in the entire economy. It's a wealth transfer from the unlucky to the lucky, which is exactly the opposite of what helps society.
Some companies which would have survived disappear unnecessarily. https://breakingthemarket.com/an-ode-to-cooperation/
Some companies which would have survived disappear unnecessarily. https://breakingthemarket.com/an-ode-to-cooperation/
So the benefits of short sellers uncovering frauds and providing stability in some environments have to be weighed against their tendency to sometimes drive prices below reasonable levels and hinder a companies ability to survive.
Its a tradeoff.
Its a tradeoff.
But the negative side mostly seems to come from extreme levels of short selling, when the shorting keeps building and building, overly depressing the share price.
From this light, a roving band of short squeeze hunters might be a good thing for markets and the overall economy.
From this light, a roving band of short squeeze hunters might be a good thing for markets and the overall economy.
If they allow shorts to continue to play their roll finding frauds and preventing extreme volatility, while the squeeze-hunters prevent shorts from pilling onto weakened, but real, companies preventing their possible recovery, we may have stumbled onto a better system.
