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The Reddit Rally – Thoughts on the Current Market Volatility

What has transpired in the markets during the last week of January is an ironic twist to 2008. We examine.

The old expression is “bulls make money, bears make money, but pigs get slaughtered”- and this seems relevant here.

There is something to be said about the recent developments in heavily shorted names from a historical sense.  During the 2008 financial crisis, changes in the way that the shorting of stocks could take place (SEC abolished the uptick rule) let short-sellers maul companies in a modest degree of financial difficulty – so to speak, not letting their heads up for air as the stocks were pushed lower.  This aggressive short-selling prevented companies that were salvageable, via a capital raise, from executing one at a price that either didn’t basically wipe out long term shareholders or alternatively no capital raise at all, leading to bankruptcies or forced sales (like Bear Stearns, for example).  So there were real businesses wrecked by the hedge fund crowd.  Maybe some of them needed wrecking, others, I am not so sure that is a fair comment.

Thus it is not a small irony that aggressively shorted positions in stocks that have already shed the vast bulk of historical market value, like GameStop, AMC, etc. may lead to capital holes, forced sales, and possibly some covering by hedge funds that held large short positions.  GameStop is the most extreme of these as it had 140% of shares sold short as of the last report.  I have been doing this for a long time and actually did not know a short interest >100% was legally possible (evidently it is).

The old expression is “bulls make money, bears make money, but pigs get slaughtered” – and this seems relevant here.

After the experience of the last ~14 years, where retail activity in the stock market fell to very low if not invisible levels of participation, it is enjoyable (for myself) to see retail back in the market in a big way.  It had become a pros versus pros market, and very influenced by hedge fund-type thinking and the Novocaine drip of index investing, which from my vantage point had become not very fun at all.   Buying an index fund by definition means you don’t have much conviction in any stock specifically or any voice in the process of capital allocation and price discovery that is such a necessary function in capital markets.  So I welcome it.

That said, this has turned into an overt exercise in speculation as of late January, in effect speculating on how much more speculating speculators may engage in – kind of like speculating3.   No that won’t end very well at all…

Stay disciplined and try to focus on fundamentals.

Brian Barish is the President and CIO at Cambiar Investors and is responsible for the oversight of all investment functions…




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