Local companies have felt impact of ‘shorts,’ minus the GameStop craziness

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Good afternoon,

The GameStop Reddit group saga is another reflection of the craziness in an overheated stock market.

In short,  a group on the popular Reddit site started buying up shares of downtrodden companies that hedge fund investors were betting against. The big guys use various financial tools to “short” stocks in hopes of a nice profit. 

In theory, “shorts” balance out the excesses of investor enthusiasm or manipulation,  but automated trading and other technology may do the opposite.

The rebel investors snapped up shares of GameStop, Bed, Bath and Beyond, and others. The companies are often household names viewed as vulnerable but have been showing signs of a turnaround.

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The individual investor purchases pushed up the price and forced the short sellers into protecting their positions and bidding shares up further. 

The tech site CNet offers a good explanation of the phenomenon.

Short sellers have also lurked in the shadows at companies with local ties.

Shorting occurred in 2019  with Bloom Energy. The company was vulnerable since it never posted a profit and faced criticism on how it booked orders.  One short-seller, Hindenberg, wrote a scathing report on the fuel cell company with a Newark site. Shares of the company fell below $4.

A similar situation was faced by DuPont spinoff Chemours, which saw its stock price fall below $4 a share. It is a good bet that shorts bet on environmental liabilities inherited from DuPont sinking the company.

The shorts had it wrong. Thanks in part to the frenzy over “green hydrogen” that may be a good way to store energy from wind and solar, shares of Bloom rose past $40 in recent days but as of today cooled off to $37. (Bloom has tweaked its fuel cells to make hydrogen that could in turn power its electricity-making fuel cells.).

Chemours stock has seen its ups and downs. Still, the solidly managed company is profitable, with shares trading at $26. 

The Reddit crowd does  buy Bloom fuel cells or Chemours’ titanium oxide and did not take on the shorts. 

While day trading via computer and, more recently, mobile devices has been around for decades, the GameStop situation will draw others into the game, often with disastrous results.

Still, the rebel in many of us could not help but cheer on someone taking on entities that many see as market manipulators.

Today,  the stock market pulled back on concern over the  GameStop phenomenon as well as disappointing results for the Johnson & Johnson Covid-19 vaccine.

It seems obvious that curbs are needed for both the shorts and the Reddit crowd when this type of trading occurs. Also needed is greater  scrutiny of hedge funds and whether they are “gaming the system.”  

Enjoy a weekend and stay safe. – Doug Rainey, chief content officer.

 

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