Financial Analysis – Week 04, 2021

Feb 02, 2021

Market Overview




Do small investors outwit hedge fund brokers?

The big news has appeared these days that small investors have taken a huge profit from Wall Street brokers by “shorting” on the stock exchange.

Are Wall Street brokers stupid?

Let’s see what really happened.


First let’s explain, that everyone can follow.

Here is an example that I got from Canada and it explains well what happened.


What is “shorting” on the stock market?

Borrow a diesel car “VW Golf” from a friend on January 1 and agree to return it to him on July 1 and give him 6,000 euros for it. You immediately sell that car to a neighbor who is just buying a car, for example, for 5,000 euros. You have heard that due to the pollution, a ban on driving a diesel car will be introduced in the city center, where the neighbor lives. That really happened in April and the value of diesel was halved. As everyone starts selling them, the price continues to fall and in June you offer a desperate neighbor to buy a car from him for two thousand euros. On the first of July, return the car to your friend, on which you earned a total of 3000 euros in just 6 months.

This is, to put it simply, a mechanism for shortening shares on the stock exchange, with shares being borrowed and returned instead of diesel cars.


When is shorting illegal?

If a friend from the city administration told you that a decree banning diesel cars is being prepared and someone proves that you had that information before you borrowed the car, you will most likely go to prison.

This is simply not allowed, because you had privileged information.


What is GameStop?

GameStop is a chain of video game stores, consoles, and other gaming trinkets. They have been around since 1984, but lately, they have not been working that smoothly because the store has moved online. With its 5,509 stores, they are not a negligible company, but hedge funds recognized them as very endangered by the pandemic and began to shorten their shares. When that pressure starts, the value of shares often falls below the real price, which many small players on the stock market have noticed.


What is Reddit?

Reddit is an internet forum or social network where people choose a topic to talk about. For example, the owners of a certain type of camera exchange pictures, experiences, tips, you can start any topic on Reddit and there will be someone to exchange opinions with you about it. So, there are groups for those who trade on the stock exchange and one team from the forum started talking about how some large hedge funds, i.e. investors, lowered the value of GameStop below the real one. At the beginning of April 2020, the stock was worth $ 3.25. That means that everyone could play with it a little.


How did the game become expensive?

Small investors agreed to buy shares en masse and thus initiate demand that will raise the price of shares. The idea was to lower the price above that at which hedge funds borrowed shares (and invested billions of dollars in it), which would mean that they would lose money when they start buying shares to return them to the owner as agreed.

The matter, however, got out of control. GameStop shares started to rise sharply, then hedge funds got scared and started buying them to reduce the damage, which created additional demand, which again raised the price, and which created additional nervousness, demand… and so in just a few days this week, they reached a price, at one point, of $ 380 per share.

Imagine investing a billion dollars in GameStop shares through shorting while they cost ten dollars, two years ago, with the idea of ​​later buying them at half price and earning a nice 500 million dollars, and now you have to buy them at thirty times the price?

The potential losses are huge.


Why is all this interesting?

Everyone would think that the team gathered around the Reddit forum WallStreetBets got richer, but instead of selling the shares when they were the most expensive, they decided to stay in the game, and even lose money by keeping a high stock price, because they wanted to penalize hedge funds and other stock exchanges. traders who make billions on the shares of small investors or workers. With the proviso that they will now lose them. Multiple.

Reddit, meanwhile, is under pressure to close the forum, and a debate has immediately begun over whether to cancel the trade and prevent the collapse of several large funds in which some other (richer) people have invested their money. Also, the question arises as to whether this case will stop or at least make shorting less attractive as a way of trading stocks.


Is everything true?

It all seems like a movie story in which small investors outwit Wall Street brokers, but, unfortunately, that is not the case.

Everything is set up.

The trade of small investors through new applications reached 1,000 billion dollars in 2020.

Where do small investors get that money from?

It is a help that the Fed printed and put into the system to help citizens in a pandemic because they lost their jobs.

Wall Street brokers offered the opportunity for small investors to gamble in a casino on the financial market, through the applications offered.

This is how the “shortening of shares” is intended.


Shares of the American company Herz, which filed for bankruptcy in May 2020, jumped by 1,500% in June, because small investors started investing.

The madness of gambling has gripped small investors.


Small investors, 15 million of them, seemed to have outwitted Wall Street brokers.

But that was just an illusion.

The game.

Wall Street is not stupid.


We should look for the essence in business connections, which small investors do not see, between the operators of trading application platforms and hedge funds.

Hedge funds own these operating platforms.


For example, the owners of 26% of GameStop shares are BlackRock and Fidelity, which have $ 10,000 billion in capital.


RobinHood is now worth over 11 billion dollars and is preparing an IPO, and his main advisor is – Goldman Sachs!


What is it really about?

Since the 2007/08 crisis, the global financial system has been kept alive only by continuous cash injections and simultaneous interest rate cuts. Since interest rates have now reached zero, only an injection of money remains in the future.

So far, central banks have introduced them into the money cycle in the form of so-called “aid packages”. That has changed in the past year. Due to pandemic measures, states have made increasing aid payments to ordinary citizens. For example, in the United States, the government issued checks for $ 600 a week.

At the same time, the main financiers sponsored advertising campaigns for new trading platforms, so a significant part of government payments went straight to speculation and stimulated financial markets. This trend should be further encouraged in the United States this year: the Biden administration plans monthly payments of up to 2,000 dollars for a total of almost 100 million American citizens.

Clearly, this means: Trading platforms like RobinHood and WallStreetBets are by no means there to start a revolution on Wall Street and get big players in business into serious trouble. In contrast, they are part of a huge money machine dominated by Wall Street. Your task is to absorb the money generated by the state in the interest of the digital-financial complex and to direct it directly to the financial casino so that the unhindered gambling of our days can continue unhindered – and certainly not in favor of swarms of small investors.



Branko Dragaš

Investment banker


Market Overview