Forgive us if we believe that, behind the scenes, the war over Gamestop is nothing more than crisis manufactured to force more regulation and negatively impact the American economy.
On the bright side, forevermore we'll use the term "STONKS" to describe a facet of the economy that's basically just a more boring form of gambling.
Best of all, a KICK-ASS KANSAS CITY INSIDER shares a worthwhile Sunday night contemplation in order to offer edification and a fact check against those who would decry one of many financial tools that most people don't REALLY understand.
Check-it . . .
Short Selling Swine And Congressional Fools That Condemn Them.
The news has been breathlessly debating the evils of selling a stock short the last few days.
Short-selling, quite simply, is selling something you don’t own, hoping to be able to buy it back at a later date cheaper than when you purchased it.
So let’s take a simple, local example.
You sell ten (10) KC Chief’s Superbowl tickets at the $5,000 face-value each. You do this because, through your exhaustive research, you discover that Mahomes won’t playing, there is an extremely deadly new strain of the China-Flu in Tampa, and, the NFL, due to so many injuries this season, will play the game as a flag-football match; no tackling.
Worse yet, the NFL knowing this information will kill their biggest money-make event of the year, will announce all this only one day before the game’s start date.
You uncovered all of this. You know that value of the tickets will crash as soon as it’s announced.
So you sell 10 tickets (you don’t own) at $5,000 each, $50,000.
You then announce your findings to the world hoping that the tens of thousands of fans that held these soon-to-be-worthless tickets, could get out before the price went to near zero.
Some people believe you and sold their tickets immediately. Some even followed your example, and sold tickets they didn’t own. Others waited, but as the rumors circulated, and prices crept lower.
Now if people listened to you, and the tickets did go to zero, you stand to make, at most, $50,000. A small reward for saving others millions from being defrauded by news hidden by the NFL.
The Squeeze . . . Or, The Other Side Of The Coin.
Now lets look at it another ways.
Lovely Tammy Reid, wife of Chief’s head coach got wind of these evil short-sellers. She was confident that your news was wrong. She bought all the tickets she could get her hands on. She even talked her friends into jumping on board and buying tickets.
Every time the rumors began to circulate that something may be wrong with the Superbowl game, the price of tickets dropped, Tammy and her friends purchased tickets.
As the tickets grew scarcer, the price went higher and higher, soon topping the highest prices ever paid for a Superbowl ticket. Tammy assured her girls that nothing was wrong, and those tickets were as valuable as the market said they were locking in millions of profits if any of Tammy’s-team sold at these high levels.
You, our short-selling swine, soon realized that if Tammy’s-Team continued, not only would you lose your money, but your house, car, and pretty much everything you own in your attempt to do a good deed and let the fans know they might be being ripped off.
As a short-seller, your risk is limitless. The upside potential is if the price goes to zero, in our case, the most you can make is $50,000. But if those tickets double in price, or triple, or go parabolic and skyrocket to, say, $70,000 each, you have to go into the market and buy the tickets you promised to deliver…You stand to lose $700,000 even if your information is accurate.
In the above scenario, who’s evil?
Is it Tammy’s-Team that has driven prices sky-high, making them unaffordable to just about anyone?
Or is it iur white-hatted short seller, trying to save innocent fans a few dollars and get paid a predefined profit for alerting K.C. fans from this fraud?
If you answer is, “it depends on who’s right”, give yourself a gold-star. You're correct.
Markets move on information. The consumer needs all the information, positive and especially negative, to make an informed decision with their hard-earned dollars.
If Congress makes a mistake (when have they not?) and bans the short-seller, a very valuable flow of information is eliminated from the market. And making informed decisions just became that much more difficult.
And, if you say that Mr. Short-seller is just trying to drive the price down so he makes a profit, my answer would be one word; TESLA.
From nearly TESLA’s start, short-sellers have railed against this company highlighted flaws, difficulties, etc. and, in most cases, their information has been accurate, yet the price keeps climbing.
You see, the thing is, short-sellers can only alert the market to potential damaging information. Real value, as in the case of TESLA, will counteract anyone’s attempt to harm the market. As Elon Musk continues to outperform each downside prediction, the value of his company continues to climb, no matter how damning the short-sellers news has been.
Short-sellers can’t cause the price to drop even if the information they have is accurate. They must convince others to believe in their theory, and then convince them so strongly that they actually take action, and unlimited risk.
You decide . . .