Saturday, January 30, 2021

What's going on with this market?

Profit taking and Game Stop.


Hello. This is our weekly market alert for the week ended January 29, 2021. Wow. Month is over already. Yesterday, it was New Year’s Eve. It’s so fast. Time flies when you’re having fun, I guess. So, this week, I want to start off with saying that the selling that we’ve seen here in the last couple of days, last 3 days actually, we believe is essentially profit taking. We had a phenomenal run in the stock market since November, and so it’s not unreasonable to have some people say, you know what, with all this stuff going on and, you know, the new administration potentially raising taxes and who knows what, I’m a little nervous, maybe I’ll just take some profits off the table, and so we believe that this selling that we’ve seen here this week is that. It’s not the beginning of the next bear market. In fact, we think it’s the opposite. With stimulus and vaccines, that our economy is probably going to get back on its feet here over the next year or two, and all of that bodes well for profits, and as you know, profits tend to drive stock prices, and if profits are rising, stock prices generally are rising as well. So, the outlook is still positive, although you could make the argument there’s a lot of risk in this market, which is why we are so happy we have our invest and protect strategy in place to help us, should things turn south.

So, I’m kind of wanting to get past that because I want to talk about this whole GameStop and AMC stuff, and I find it fascinating and very, very interesting to watch this battle between what they’re saying is, you know, Wall Street and Main Street. So, let me see if I can explain this to you and give you some, I guess, context as to what’s going on. So, there’s a way of investing that is called shorting. Okay? So, what you and I are mostly familiar with is what’s called going long. Going long means that you buy today with the anticipation that your investment is going to rise in the future, and so you’re going to see a rising value of your investment. That’s called going long. Going short means that you think it’s the opposite. You think that this investment, this company, this stock is going to go down, and so how do you invest to take advantage or make money on a stock that’s going to lose value? That’s called shorting. So, when you short, it’s a reverse trade. You’re not buying today because you hope it goes up in the future. You’re selling today because you think it’s going to go down in value and you’re going to buy it back at a lower price. Okay? So, let’s say for example you sell today at $100.00 price, you have a contract, a short contract, which says that at some point in the future, before then, you have to buy it back, and when you buy it back, you’re hoping it’ll be at a lower price. So, for example, let’s say you sell it today at $100.00. It does what you think, it goes down by 50 percent, that would be in this situation a big profitable move because now you can buy it at $50. So, you sold it at $100.00, and you bought it at $50.00. You made a $50.00 profit. So, that’s what hedge funds do.

So, let’s look at the hedge fund that says we think movie theaters are going to get hit badly by this pandemic. We’re going to see their stock price fall dramatically, so let’s short that. So, they short AMC, since that’s the one that’s been targeted here in the last week, and so a lot of hedge funds have shorted AMC stock because they said people aren’t going to theaters. Stock price in movie theater stock should fall, so we’re going to short that. So, they were right. The price of movie theater stocks has fallen dramatically, and they’re sitting on a huge profit potentially. Now, you get these guys that are on Robinhood and other places, and they’re all getting together in these chat groups on Reddit, and they’re saying to each other, hey, you know what, if we all band together and start buying AMC stock or GameStop, which are hugely shorted, we will drive the price up. If we drive the price up, the hedge funds now are losing money because, remember, they have to buy it back, and they’re hoping at a lower price. So, as the price is rising, they could lose money, and if these Reddit guys, these Robinhood people, if they buy enough of it, they could drive the price higher than where the hedge fund sold it, and now the hedge funds lose billions of dollars. So, how do the hedge funds have to react? This is called a short squeeze. What do they have to do to protect themselves? They have to buy. If they buy, what happens to price of GameStop and of AMC? It goes up, and these guys that are on Robinhood and on, you know, Reddit talking to each other, they make money that way. So, they are forcing the hedge funds to buy to get out of their short contracts before they lose a lot of money, and that’s making the price go up dramatically. So, now, what’s the other side of all of this? When there’s no more shorts, when the hedge funds have been squeezed out, all these people that are still in are going to be holding AMC stock at a 500 percent gain, which is unwarranted, and the bell will go off, and everybody’s going to run for the exits, and anybody still there is going to lose their shirts.

So, I don’t think that this thing should be regulated. I don’t think anybody should be in the way of it. I think we should just let it play itself out. What’s going to happen, in my view, if they do nothing, is that those young investors will learn a very harsh lesson if they’re still in when the big drop comes, and the hedge funds on Wall Street are learning a lesson as well. They can’t keep doing what they’ve been doing, which is going and sending all their analysts out and saying, we think, you know, GameStop is a terrible stock, it’s going to lose a ton of money and you need to sell it, and when you do they make money. So, they’ve been doing that too, over this last quite a while, so that’s how they’ve been making money also. They’re going to learn they can’t do that anymore. I think it’s all good, but in the short run, there’s going to be a lot of money made and a lot of money lost in a big way. So, we’re not invested in any of that, have no desire to play that game, but it is going to be a very interesting thing to watch unfold, and I hope the regulators stay out of it. As much as politicians and everybody else wants to get involved, I hope they just stay out of it. Nothing here that I can see at this moment is illegal about any of this. So, stayed tuned to all of that.

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