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February 2021 Edition

2021 Roars In Like A Lion.

One month down eleven to go. It was one year ago that the word pandemic became part of our everyday vocabulary. New phrases we have added this year: virus mutations, storming of the US Capital, Impeachment part 2, low-low interest rates, and in case you missed it, last week, Robinhood. Robinhood is a new online trading platform that marketed itself as democratizing investment, stopped investors from buying certain stocks (to further understand what happened see useful definitions below).

We saw a “short squeeze” play out last week. The new Robinhood trading platform took on hedge funds. This is not the first or last time something like this has happened. This "short squeeze" pitted small investors who bought stocks that primarily hedge funds had sold short. The result: those stock prices skyrocketed. Billions were made and billions were lost. No one knows everything that actually happened, who lost money and who made money is still being sorted out. What we do know is that some trading platforms locked investors out and some stock prices rose dramatically.

Depending on which side of the equation you are on, the arguments are very different. One side may say it is a good idea to keep inexperienced investors out of these markets. However, both buyers and sellers influence market the result of those actions, some will argue no matter how much volatility, it must be allowed to play out. 

Some say a  "short squeeze" is bad because it can drive the prices above fair market value. This is not good for short sellers.

The other side will say fair is what the market will bear. A periodic squeeze is viewed as free-market medicine, that prevents short sellers from getting to pick and choose which stocks they want to drive below fair value. They argue a in world in which a “squeeze on the shorts” is impossible, the short sellers would never face the risk of a major loss. That's not a world that most individual investors want to live in.

We also can't help but notice that some of those bashing the small investors (who are making short sellers take a major loss) claim some stock prices are now above fair value. These critics were also on the side of the short sellers in 2008-2009 when large firms drove the value of mortgage-backed securities well below fair value. Back then, they supported mark-to-mark accounting because it was supposedly more transparent, even though it distorted prices for mortgage securities and led to a financial implosion that cost regular people millions of jobs.


Despite similar tactics, the stocks that are part of this “short squeeze” are not targeting American housing markets and therefore will not have the same lasting impact.


Stay strong, stay the course, and as always, call with questions.


The Team at TruNorth



Useful definitions:


Long Stock Position Buying and owning stock. (Most people in the stock market are in a long position.) Hope: Buying it hoping the price per share will go up, in which case your investment will make money. Risk: You run the risk of the stock price falling, in which case your investment will lose money. But your risk is limited to the amount you've invested. Buy $1,000 worth of stock and the most you can lose is $1,000


Short Stock Position  Short-sellers sell shares of companies they don't own. The stock they “borrow” is with a promise to buy the shares later to complete the transaction. Hope:  In general, if the price of the stock goes down after they short it then your investment will make money; Risk: if it goes up, your investment will lose money. (Sometimes shorting can overwhelm a security and send its price well below fair market value.) An investor ose more if short and risk is not limited to the amount you’ve invested.


Short Squeeze A short squeeze is a situation in which a heavily shorted stock or commodity moves sharply higher, forcing short sellers to close out their short positions and adding to the upward pressure on the stock.


Fair Market Value The fair market value is the price at which the investment would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.