So, do people still think Efficient Market Hypothesis is a thing?
If this doesn't prove that the stock market is just a video game, which decoupled from economic reality a long time ago...
We've now entered the age of the meme stock market.
If this doesn't prove that the stock market is just a video game, which decoupled from economic reality a long time ago...
We've now entered the age of the meme stock market.
Sure, it's a thing. But underdamping is also a thing. And information diffusion is also a thing.
The efficient market hypothesis doesn't say "markets are always efficient, and prices only move based on new public information." Rather, that information diffuses into the market. Some idiot hotshot billionaire short-seller overshorted GME, and it took time for that information to spread to other market participants. Then, once the information was there, it took time for the upward price impact to un-do the impact of the short. And it is going to overshoot the true asset value because the market is underdamped -- contrarians aren't going to step in immediately, and longs are still waiting to put in a clear indication of a top.
The real joke here is that Plotkin went so heavily short a name that was trading at a mere fraction of its annual sales.
Personally I think there are two SEC rules that should come out of all of this:
First, shorts should be reported alongside longs in 13F filings.
Second, there should either be a limitation on re-hypothecation for heavily shorted names, or short sellers should not be able to add to new positions once shorts go beyond 100% of the float.
If you look at the option chains, it is clear that traders value GameStop in the long run far below the current trading price.
https://www.nasdaq.com/market-activity/stocks/gme/option-cha...
A November 2021 "put" at the present market price of ~$360, the right to sell GameStop stock in November at $360, is selling for about $300.
For comparison, a January 2022 put at Microsoft's present market price of ~$235 is selling for ~$30.
GameStop is presently a cafeteria food-fight. It will end, a lot of people will be sad, everyone will remember the story, and GameStop stock will eventually better-correlate with business performance.
Edit: Indeed, the fact that one can buy puts for so cheap is interesting, as GameStop is probably "worth" $30 or less at present. However, is it worth risking $300 to perhaps make $30 while food is flying around? Not for me.
Here’s an article on why calls and puts must be the same price: https://robotwealth.com/why-arent-call-options-more-expensiv...
If I bought a GameStop put today, for the pricing in my post above, it would be because I was willing to make a strong bet that GameStop's intrinsic value in November would remain below $60/share and that I was fairly sure the market would return to its senses by then. How the option-seller reaches her offering price is entirely irrelevant to me.
It is true that much of the pricing of options comes from volatility, but for me, as a buyer, it is perhaps irrelevant.
Thanks for your perspective, though. I'll read your link with interest.
In that situation, someone with a reasonable guess at the future could absolutely murder uninformed arbitrageurs, right? It is my expectation that "correct" pricing of the options should fold in information about both the expected volatility and the direction of the underlying.
In the long term, stocks that actually make money are the popular ones.
The market does serve a real purpose, ie deploying capital and providing liquidity.
K-shaped recoveries make me think "I wish there were a better way."
But I'm an idiot. So my best idea right now is, "When a business issues stock, they also have to issue an additional 20% to the government, and then we need to keep the tax rate low-ish on dividends, but increase the tax rate on capital gains - hopefully encouraging companies to pay dividends, which the government would receive."
I'd appreciate if someone could tell me why my plan is awful. Because I'm sure it is, but I haven't been able to figure out why it's awful.
Dividends and capital gains in general have an inverse relationship, ie dividend paying stocks typically are low growing and as such don't tend to experience much price increase (ie capital gains). You own such shares so you can get the consistent dividend (share of profits) as your return...There may be exceptions but in general this relationship holds.
In a non-bubble market, the capital gains are a reflection of company's growth and expected future profits, thus the stock price is based on present-value-of-future-cashflows model (ideally of course, the reality is often messy).
In other words dividends and capital gains are not inherently in conflict, they merely reflect life-cycles of companies. Of course there are a ton of unprofitable companies on the market currently with high stock prices, there is a larger debate to be had on why that is and how to curtail it.
As it turns out, government is already entitled to N% of a company's profit, through corporate taxes. If you are greedy on behalf of the politicians and want N to be a bigger cut of that, that's one thing.
But if politicians want to boss companies around, they already have the option to go on record and pass neutral and generally-applicable laws to do that — and such laws are a fair sight better than the shady backroom deals that will go in when politicians start filling board seats with political apparatchiks. Do you want Donald Trump filling a board seat at Disney with someone like Jared Kushner? If you do, do you want Biden appointing his son Hunter to a board seat at Tesla? Can you imagine the insane conflicts of interest multiplied by the entire economy? It's bad enough already. We really, really don't need to glue together everything shady about big business with everything shadowy about government.
P.S. Oh, and the other thing is that people start raising capital and incorporating in ways that these confiscatory taxes and seizures of control that you propose just don't apply. More private equity, or just incorporating overseas.
P.P.S. Oh, it also favors the companies who don't need to raise capital on the markets: Apple can just take its cash hoarde and invest like crazy, while the next hot Silicon Valley player that would challenge them has to pay 20%.
I'd love to hear your analysis of how Norway is handling their oil reserves.
Huge companies are not paying taxes. That's a problem. You seem to think there's no good solution. I maybe agree. But I'm willing to move on to a bad solution. How about you?
> As it turns out, government is already entitled to N% of a company's profit, through corporate taxes.
If you think in practice that actually works, then you and I are on completely different pages.
> politicians start filling board seats with political apparatchiks
I'm proposing the government receive non-voting shares, or is just restricted from voting. I don't want politicians on boards.
In fact, if you're curious, I think that the major political parties should refuse to endorse anyone who doesn't 100% divest themselves of all future income, instead promising to receive all of their future income through their government pension. And elections should be publicly funded (each citizen gets $100 per year to allocate to whichever politician or party they want to, and that's it). Amend the Constitution to overturn Citizens United. Re-instate the Fairness Doctrine.
> everything shady about big business with everything shadowy about government
That you apparently believe they're not already 100% glued together already shows again that you and I are on completely different pages.
> More private equity, or just incorporating overseas.
Yes, we need a "Uniform Commercial Code" for taxation, around the world. We all suffer that that doesn't exist.
> Apple can just take its cash hoarde and invest like crazy
That problem already exists in many ways. We should never have allowed corporations to get as big as they are, and we should start to break them up. Competition is good.
And no, I didn't say "I want to deploy capital more efficiently."
I actually used the phrase "is [this] the BEST way" [emphasis added].
We went through a K-shaped recovery. Capital did AWESOME. I'm now asserting that the society should think about better ways to ALLOW capital to be deployed.
In one dimension, the new GME management (which did occur) does a secondary market offering directly into liquidity, recapitalizing themselves which changes all the fundamentals. This wouldnt be known information because the expectation of no liquidity, but now that there is liquidity it creates new information
A regression to the mean will inevitably happen and that will further confirm the efficiency idea. Everyone will eventually have to sell.
I guess in last years it became as easy to get into as it's in games :P
The noise just got bigger...