February 8, 2021 BARRON’S 39
MAILBAG
Send letters [email protected]. To be considered for
publication, correspondence must bear the writer’s name,
address, and phone number. Letters are subject to editing.
The Readback, a podcast taking you
inside the latest stories, is available
wherever you listen to podcasts.
Reining In
Extreme
Leverage
To the Editor:
As the GameStop frenzy shows, there is a problem with
how our current markets operate (“Squeeze Play,” Cover
Story, Jan. 29). As many focus on the socio-political as-
pects of this situation, they are missing the main problem:
U.S. regulators stopped doing their jobs over a decade ago.
One thing that needs to be reined in that should have
been obvious for at least six months to the Securities and
Exchange Commission is the extreme amount of leverage
in our system: Margin debt has increased at a greater-
than 60% rate during that time, breaking the previous
records last seen in 2000 and 2008. One short-term,
common-sense solution to some of this volatility would be
not to allow any investor to sell short a company no mat-
ter what its prospects are if the level of short position
outstanding is greater than 100%. GameStop’s was 140%
before this started.
Brad Brooks
East Hampton, N.Y.
To the Editor:
To understand the wisdom of GameStop investors,
consider this fictional scenario. Con-
sumer Reports puts out a negative
rating on a $100 vacuum cleaner.
Millions of Reddit users then con-
spire to punish Consumer Reports by
purchasing the vacuum en masse.
During the feeding frenzy, retailers
obey the law of supply-and-demand
and keep marking up the vacuums
until the price reaches $1,000. When
the dust settles, a Reddit user posts a
photo of himself and his new vacuum
with the caption, “Consumer Reports
was wrong, and I have a $1,000
vacuum cleaner to prove it!”
Bill Callahan
New Bedford, Mass.
Short Squeezes
To the Editor:
A long time ago in a galaxy far, far
away, it was generally understood that
stocks with high short interest under-
perform over time (“How Small-Cap
Fund Managers Are Navigating the
GameStop Mess,” Funds, Jan. 29). The
past two weeks notwithstanding, it has
typically been a poor strategy to invest
in stocks with high short interest. Short
squeezes are not well understood be-
cause they are rare, hard to quantify,
and defy conventional wisdom.
I have lived through several acute
short squeezes during my 20 years in
the market, and history tells us that
they typically don’t last long. Within
the data set I’ve compiled, the average
short squeeze lasted 12 trading days
(GameStop squeeze lasted 10 days).
History also tells us that when a short
squeeze eventually exhausts itself, the
price reversal is fast and severe. The
stock price typically declines 50%
within the next three to four trading
days. The full round-trip retracement
back to the presqueeze stock price
takes an average of 72 trading days to
play out.
The market is impossible to pre-
dict in the short run, but over time,
fundamentals and valuation matter.
A strategy based on chasing deterio-
rating businesses in hopes of igniting
a short squeeze does not seem like a
sustainable long-term plan. With or
without short sellers, businesses
become obsolete and the creative
destruction of the system replaces
them with something else. Invest
accordingly.
Ben Mackovak
Cleveland
Past Its Prime?
To the Editor:
As a member of WallStreetBets since
2018, I have witnessed many of the
Redditors’ schemes over the past few
years (“WallStreetBets May Be Unique,
but That Doesn’t Mean It’s Not a Bub-
ble,” Up & Down Wall Street, Jan. 29).
The recent media coverage of the group
of retail traders has painted them as an
unstoppable, coherent force. While this
might be true with the GameStop fi-
asco, there have been countless failed
attempts to rile support to a failed
company or “meme stock.”
However, many of WallStreetBets
subscribers are competent investors
who can provide compelling predic-
tions and valuable due diligence. The
recent spotlight on the Reddit group
has caused millions of outsiders to
flood the message board with less
respectful stock suggestions and
countless “pump and dump” traps.
It’s a shame the broader population
will not be able to witness WallStreet-
Bets in its prime.
Demetrius Pyo
Pittsburgh
Illumina’s Prospects
To the Editor:
It seems to me that James Anderson
may be overly optimistic about Illu-
mina over the next 10 years (Barron’s
Roundtable, Part 3). At no point did
he mention that Illumina’s gene-
sequencing technology has been sur-
passed by Pacific Biosciences of Cali-
fornia, which it attempted to merge
with just over a year ago. The merger
was disallowed by regulators due to
the potential monopoly it might have
created. Since then, Pacific Biosci-
ences stock has appreciated over
600%. Although I am no expert in
genomic technology, it seems that
Illumina is running a generation
behind Pacific Biosciences in its
core business, similar to what Intel
has done in the chip industry.
Richard Peterson
San Rafael, Calif.
Futures Funds 101
To the Editor:
Of all the investments mentioned in
“After 10 Years of Underperfor-
mance, Commodities Are Set to
Boom. Here’s How to Play the Rally”
(Jan. 29), one that requires a lot of
study is investing in futures funds
such as U.S. Oil, because of the ef-
fects of contango and backwardation.
These concepts are not the easiest
to grasp, but what they amount to is
the fact that futures contracts need to
be rolled over in these funds from
month to month, and the costs can be
significant—such that, while the
price of a commodity goes up, the
price of your exchange-traded fund
can go down.
This is something that the average
investor should understand before
considering these investments to
avoid getting an unpleasant surprise.
Christopher Galik
On Barrons.com
“It’s a shame the broader population
will not be able to witness
WallStreetBets in its prime.”
Demetrius Pyo, Pittsburgh