A Short Squeeze

A short sale occurs when an investor sells a stock they don’t own to hopefully buy it back later at a reduced price. Recently, Gamestop and AMC have seen a short squeeze. When you short a stock, if the stock price increases, you must make a margin deposit, that is, make an additional deposit of cash into your account, or repurchase the stock and take the loss. In a short squeeze, a group of investors buy the stock, forcing short sellers to make more deposits or take a loss. In the past two weeks, Gamestop has gained about 1,800 percent, which in our opinion, means the stock is in a bubble.

Monte Carlo In Retirement

In the textbook, we discussed the use of a Monte Carlo simulation in capital budgeting. A common application of a Monte Carlo simulation is using it to determine the probability a retirement portfolio will last for the duration of an individual's life. However, as the article notes, it may be difficult for the average investor to understand "the odds of success" or recognize the difference between a 50 percent probability of success and a 70 percent probability of success. One point the article makes that we would like to reiterate is that flawed inputs can cause erroneous outputs. In other words, like any other model, the end result is only as accurate as the inputs.  

Buyback Increase

During the COVID-19 lockdowns, corporate cash flows dropped dramatically, which led to a decline in both dividends and stock buybacks. Now, companies are beginning to discuss an increase in buybacks. Buybacks in the fourth quarter of 2020 were $116 billion, up from $102 billion in the third quarter. For 2021, buybacks are expected to reach $651 billion, a big jump from 2020's $505 billion.

COVID-19 Bankruptcies

As we mentioned in the textbook, financial leverage is a double edged sword. With the COVID-19 lockdowns, the economy slowed dramatically and the effect on highly leveraged companies was immediate. During 2020, 244 U.S. companies with liabilities over $50 million filed for bankruptcy. This was a 70 percent increase from 2019, and the most since 2009's 293 filings. In what may be more telling, during 2019, 62 percent of companies reported being a net investor. However, by the fall of 2020, only 52 percent of companies reported being a net investor.