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01/27/2021

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This is really fascinating and a wholesome entertainer during the pandemic. The fundamentals of the companies are questionable but doesn't aggressive shorting also accelerate the downfall these companies? Is this a fight against inequality?

Arun - I agree with you that it has high entertainment value.
Whether shorting accelerates or just accompanies the downfall of these companies is in the eye of the beholder. Resorting to either financial markets or bank loans when one's business model is threatened by digital downloads and the decline of brick and mortar retail will be difficult irrespective of shorting, I suppose.
Is this a fight against inequality? I suppose it is a fight between the very rich and the slightly rich. These day traders exchanging ideas on Reddit are perhaps not your idea of the archetypal capitalist, but they do have to have some capital to invest, and an appetite for risk.
They are laughing all the way to the bank right now but I am not sure that will continue to be the case when the reality of a declining business model starts to hit the markets. They may be tempted to take their profits, but if they do so en masse it will of course defeat the rally. Rock / hard place...

It seems that a lot of attention is paid on the "David vs Goliath" aspect of the story, where these investors (stocks only go up!) feel they want to stick it to the large hedge funds that have had control for decades. While it is true that large hedge fund managers make a lot of money, the ones hurt most by the actions of short-squeezing the hedge funds are normal, everyday people.

As shown in article below, the largest 5 types of investors in hedge funds are Public Pension Funds, Sovereign Wealth Funds, Private Sector Pension Funds, Asset Manager and Endowment Plans. These investors represent a large percentage of the US population and require a certain return to ensure pensions are available. In addition, the "stocks only go up" game will eventually hurt people that are inspired to invest in these YOLO plays but don't get out before it all falls apart.

https://docs.preqin.com/newsletters/hf/Preqin-HFSL-May-15-1bn-Club-Investors.pdf

Yes, I agree and the business models are not helping the cause. In the short term, the short squeeze will give them the capital (AMC sold some stock for capital) but even with that, businesses won't come back to normalcy. That's when it will hurt the retail investors as well. This game cannot go on forever.

I think, fundamentally, shorting a company opens a position where you risk this happening - it's a part of the risk you take on when you evaluate taking on a short (or at least it should be).

If you look at a lot of activist investors, they do play both sides of this often (shorting vs defending to increase their own profits - Ackman, Ichan, etc). So Redditors doing this was less "sticking it to the man" and more just following the same pattern than hedge funds themselves set up.

I think what freaked hedge funds out is that it wasn't another firm - but "retail investors" that are harder to control.

What worries me the most is that even within the Redditors and YOLO plays, there will be winners and cost bearers. The stock prices could very soon start to free-fall much like they went up exponentially, and it could all end very very badly. There's a well-known saying, "rich guys often finish rich on Wall Street". It will also be interesting to see how regulators react to these developments.

Being reddit frequenter myself, it's interesting seeing the sentiment from the Wallstreetbets side especially since the stock price has gone down to $92 as of now. A lot of people believe that the short squeeze is going to happen any moment and that they'll be able to stick it to Melvin Capital by holding GME and "Diamond Handing". I wonder if this trend in retail investing is born in part from the people who had been negatively impacted by globalization trying to get back at the Financial "Establishment" as it were.

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