A1 Final Draft - Lecture Notes on the first paper PDF

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Lecture notes on first lecture. We talk about the first writing assignment and what her helpful tips are!...

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Yash Khandelwal 8722 Nottingham Place Los Angeles, CA 91325 (818) 669 – 5549 [email protected] Lee R. Cerling, Ph.D. Director of Research and Communications PAC-12 Consulting 1234 USC Way Los Angeles, CA 90007 Dear Dr. Cerling: I am writing to express my interest in the internship at PAC-12 Consulting. I learned about this opportunity through the PAC-12 Consulting website. I am currently a junior at the University of Southern California Marshall School of Business majoring in Business Administration with a concentration in Finance and minoring in Data Analytics. I am very excited about this opportunity to combine my skills in finance and analytics to complete tasks for PAC-12. An important skill needed for this position is strong analytical skills. As a financial services intern at Wilshire Financial Network (WFN) and treasurer of USC Phi Sigma Kappa, I have become very skilled in analyzing costs and revenues to forecast financial statements using Microsoft Excel. Moreover, I have worked closely with executives at WFN and recommended 20+ high-level investment plans after analyzing various real estate options and industry trends. With my help, WFN made great investments, which helped them gain a larger profit margin. Additionally, as treasurer, I not only managed a budget of nearly $1 million, but I also reduced overdue account receivables by 90% by making it a priority to meet with each individual, build a relationship, and create a plan that would hold them accountable. I am confident that my analytical skills and ability to problem-solve make me an excellent match for this position. In the attached memo, I examine the event that took place in the market during the last week of January. I spend time discussing the events that led up to the increase in market volatility for certain stocks and what exactly happened during the period of increased volatility. Additionally, I provide explanations regarding both sides of the dispute and analyze why it was so controversial. I am highly motivated to contribute my analytical, adaptive, and team-work skills through the internship. Thank you for your time and consideration. I look forward to discussing my qualifications with you in the near future. Sincerely,

Yash Khandelwal

Memorandum To:

Dr. Lee Cerling, Director of Research and Communications

From: Yash Khandelwal Date: 02/10/2021 Re:

What Happened in the Stock Market?

INTRODUCTION This memo will be addressing the controversial event that took place towards the end of January, where retail investors associated with the Reddit group called WallStreetBets (WSB) came together against institutional investors such as hedge funds. This event has raised awareness of an important issue in the stock market that needs to be discussed. The impact on the sentiment of retail investors due to this event will change the future of trading by increasing market volatility, which can be seen as a positive outcome that should be supported by the general public because Wall Street has been dominating individual retail investors for decades. The memo will begin with an overview of what led to this disruption in the market, what occurred, and reasons as to why it is so controversial for both types of investors.

WHAT DOES SHORTING A STOCK MEAN? WHAT IS A SHORT SQUEEZE? Shorting a stock is a position taken by an investor who believes that a certain stock is going to decrease in price. It involves borrowing shares and selling them immediately just to buy them again at a lower price. The shares are then returned and the difference between the selling and buying price is the profit per share. In some situations, when the stock price increases rather than decreases, an investor with a short position has to buy back their shares quickly to limit their losses. This leads to a surge in the price, causing a short squeeze.

EVENTS THAT LED UP TO THE DISRUPTION IN THE MARKET Historical Rivalry

For as long as the stock market has existed, retail traders have always been dominated by institutional investors such as hedge funds. Many retail traders are consistently left with large capital losses as hedge funds tend to manipulate stocks and cause them to go down when they are shorting a stock. Frustrated with this happening, a group of retail traders called WallStreetBets decided to finally take a stand against institutional investors and make them suffer huge losses. WallStreetBets (WSB) WSB is a stock trading community on the social media platform called Reddit. Traders in this community noticed that over 100% of GameStop’s shares were being shorted by institutional investors due to them thinking there would be no potential growth after the pandemic. Seeing this, WSB traders realize they could cause a massive short squeeze by coming together and buying GameStop shares, which would increase the price. This move by WallStreetBets would cause all hedge funds involved to cover their short positions at higher prices than anticipated.

THE RISE OF HEAVILY SHORTED STOCKS The Rise of GameStop (GME) The movement that WSB had started began to spread and many inexperienced retail investors began buying and holding as many shares of GME as they could. This increase in new retail traders joining the market significantly increased the volatility. The price of GME drastically increased from $20 to $43. Due to this, hedge funds such as Melvin Capital had to cover their short positions, driving the price up even higher to a result of $400+ (Fishtown Capital). Institutional investors experienced billions of dollars of losses as a result of this short squeeze.

Stocks with High Short Interests

The WSB movement did not stop with GME. Retail investors began flooding into other company stocks that had high short interests. These companies included AMC, BlackBerry, and Nokia. All these stocks experienced a surge in their prices, for example, AMC moved up almost 400% and BlackBerry went up close to 230% (Curtis). The entire market was being affected by the GameStop short squeeze as many retail investors began selling off their shares in companies with low short interests.

(Trade volume of GameStop Corp. (GME) from January 4, 2021, to February 5, 2021) Robinhood Manipulation On January 28th certain trading platforms, specifically, Robinhood began placing restrictions on the number of shares retail investors could buy within the group of stocks that were being hyped up. Additionally, Robinhood began selling off retail investors’ shares without informing them (Gonzalez). This was controversial because they were manipulating the free market and a huge portion of Robinhood’s revenue comes from selling spreads to Citadel, a hedge fund. This connection to Citadel has led many to believe that the restrictions were placed to protect hedge funds from even more losses and has left them infuriated.

INSTITUTIONAL INVESTORS VS. RETAIL INVESTORS As mentioned above, historically, institutional investors have consistently been dominating the market over retail investors. The stock market has never been a fair playing field and the government has not created any regulations to fix this. Never before had so many retail investors come together as they did during the last week of January to flip the playing field and cause hedge funds to suffer significant losses. Retail investors had won, which is why this situation is important. Institutional Investor Reactions

Melvin Capital, a hedge fund, had the biggest short position in GME and they lost more than 50% in January. Seeing this, hedge funds like Citadel and Point 72 gave Melvin Capital around $3 billion to keep them afloat (Chung). As retail investors were joining forces, so were hedge funds to protect themselves. Numerous individuals on Wall Street disliked the market environment at the time, for example, Eric Kuby, the Chief Investment Officer of North Star Investment Management said “This is something that is not going to continue much longer because it is completely decoupled from any kind of economic reality. This retail-driven short squeeze is kind of taking these exaggerated moves to new levels that I have never seen before. It is sort of remarkable. I don’t know when it is going to end, but I don’t think it can continue much longer because it’s so obviously irrational that it has got to end really badly, in my opinion” (Reuters). Another institutional investor, Sean O’Hara who is the president of Pacer ETF Distributors said “At some point in time valuation is going to matter and it won’t matter what social media is cheering the stock on. At some point in time that’s going to be secondary to the fundamentals. It certainly is strange days for sure” (Reuters). From these statements, it is evident that the hedge funds never expected the situation with GameStop to happen as they are always used to being in control of everything. Retail Investor Reactions Retail investors were ecstatic about what was happening in the market. Many were taking out loans, taking on margin, or simply putting their entire portfolio into high short interest stocks. Bringing Wall Street down like this was a historical event in their minds. However, many were angered by the restrictions RH placed as it caused them to lose a large amount of capital since prices fell and they did not sell. To be exact, there was a total of $10 billion in losses the day Robinhood halted trading (Dailymail.com). Positive Aspects Taking everything into account, this was a positive event to the public as it brought to light the importance of creating a level playing field (“The GameStop”). It also showed how when retail investors are able to come together, they can make a huge impact in the market. They can finally take control and make it a leveled playing field. Negative Aspects On the other hand, there some issues that come along with increased market volatility caused by the huge flow of inexperienced retail traders. With zero commission and the ability to buy fractional shares, retail investors with very minimal capital can begin investing. The stock market has always been about understanding the company, looking at financial statements, and basing the stock price off its valuation. However, now retail investors pump up random stocks to unreal valuations and experience losses when the stock is dumped by other retail investors.

FINAL THOUGHTS

The stock market has drastically changed with the introduction of zero commission trading platforms such as Robinhood. These platforms have attracted large numbers of retail investors into the stock market, which also includes inexperienced traders. They do not invest in stocks for their financials or valuations, but rather only invest in stocks if they are being hyped up. This mentality shift has caused various effects such as stocks with high unwarranted valuations. However, this shift is not so terrible as it allows the transfer of wealth from the rich to the poor. Many retail investors are able to change their lives by investing in the right stock. With this in mind, the event was positive. There have been many reports of people donating portions of their profits from GME and AMC to charity, which is not a common action done by hedge funds. Additionally, no regulation is needed now as there were none created to protect retail investors before. An important thing to note is that these new retail investors should be educated on specific aspects of the stock market such as taking on margin. Lastly, with the entry of more retail investors into the market after this event, the future of trading will be impacted. From now on, every retail investor is going to be looking for the next big short squeeze opportunity leading to high short interest stocks getting more volume. Another reason is that there is going to be a sharp increase in market volatility which will make prices fluctuate rapidly allowing for greater profits but also increased risk. Investors need to note this and adjust their investment strategies accordingly.

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Bibliography Chung, Juliet. “WSJ News Exclusive | Citadel, Point72 to Invest $2.75 Billion Into Melvin Capital Management.” The Wall Street Journal, Dow Jones & Company, 25 Jan. 2021, www.wsj.com/articles/citadel-point72-to-invest-2-75-billion-into-melvin-capitalmanagement-11611604340.

Curtis, Charles. “AMC and 4 Other Stocks Being Bought like GameStop.” USA Today, Gannett Satellite Information Network, 29 Jan. 2021, ftw.usatoday.com/lists/gamestop-gme-amcblackberry-stocks-up.

Dailymail.com, Valerie Edwards For. “Robinhood CEO Says Claim Hedge Funds Prompted Company to Stop GameStop Trading a 'Conspiracy Theory'.” Daily Mail Online, Associated Newspapers, 1 Feb. 2021, www.dailymail.co.uk/news/article9207103/Robinhood-CEO-says-claim-hedge-funds-prompted-company-stop-GameStoptrading-conspiracy-theory.html.

Doorn, Philip van. “Opinion: Why You Should Never Short-Sell Stocks.” MarketWatch, MarketWatch, 27 Nov. 2015, www.marketwatch.com/story/why-you-should-never-shortsell-stocks-2015-11-19#:~:text=Shorting%2C%20or%20short%2Dselling%2C,as %20taking%20a%20long%20position.

Fishtown Capital. “Why Did GameStop's Stock Price Go Up: Explaining The Squeeze (NYSE:GME).” SeekingAlpha, seekingalpha.com/article/4402481-why-gamestops-stockprice-go-up-explaining-squeeze.

Gonzalez, Oscar. “Robinhood Backlash: Here's What You Should Know about the GameStop Stock Controversy.” CNET, www.cnet.com/personal-finance/robinhood-backlash-hereswhat-you-should-know-about-the-gamestop-stock-controversy/#:~:text=What %20happened%20last%20week%3F,as%20GameStop%2C%20AMC%20and%20Nokia.

Joyner, April, and Saqib Iqbal Ahmed. “‘GameStop Effect’ Could Ripple Further as Wall Street Eyes Short Squeeze Candidates.” Reuters, Thomson Reuters, 28 Jan. 2021, www.reuters.com/article/us-retail-trading-shorts/gamestop-effect-could-ripple-further-aswall-street-eyes-short-squeeze-candidates-idUSKBN29X2MG.

Klimentov, Mikhail. “Analysis | The GameStop Stock Situation Isn't about Populism. It's about Whether the Market Is 'Real.'.” The Washington Post, WP Company, 1 Feb. 2021, www.washingtonpost.com/business/2021/02/01/understanding-gamestop-situation/.

McCabe, Caitlin. “Robinhood, Other Brokerages Restrict Trading on GameStop, AMC.” The Wall Street Journal, Dow Jones & Company, 29 Jan. 2021, www.wsj.com/articles/onlinebrokerages-restrict-trading-on-gamestop-amc-amid-frenetic-trading-11611849934.

Reuters. “QUOTES 3-No Let up in Short Squeeze, Retail Frenzy Forces Funds to Cover.” Reuters, Thomson Reuters, 27 Jan. 2021, www.reuters.com/article/gamestop-hot/quotes-3no-let-up-in-short-squeeze-retail-frenzy-forces-funds-to-cover-idUSL1N2K21PS.

“The GameStop Short Squeeze Was 'the Grand Awakening': Expert.” Yahoo! Finance, Yahoo!, finance.yahoo.com/news/the-game-stop-short-squeeze-was-the-grand-awakening-expert133439067.html

“These Hedge Funds Have Gotten Torched by the Wall Street Bets Army That Targeted Their Short Positions in GameStop.” Business Insider, Business Insider, markets.businessinsider.com/news/stocks/hedge-funds-torched-wall-street-bets-gamestopshort-squeeze-reddit-2021-1-1030016596....