I just came across a research I did a year ago and wanted to share with you further evidence from another angel that the stock market is rigged (not only GME, surprise, surprise) and how to test this.

Boring theory.

Ever wondered how much a change in price would change the demand (and supply) of a product? And vice versa how much a change in demand would change the price of a product?

If the price of gas rises will the demand shrink and if so by how much?

If the demand for stocks rises will the price rise and if so by how much?

Common sense would suggest with rising demand the price of a stock should rise, right? (Okay, okay, we already know about Dougie the liquidity fairy and his friends).

This concept is called price elasticity (of demand/supply) and measured by the coefficient of price and demand, which could be anything between

  • perfectly inelastic (demand doesn’t change no matter the price)
  • Inelastic (demand changes less than the price)
  • Unitary elastic (demand changes in union with the price)
  • Elastic (demand changes more than the price)
  • Perfectly elastic (demand is detached from the price, welcome to the
  • MOASS scenario haha, Kenny and Dougie are looking forward to very perfectly elasticity)

There is ample research on the topic as well on the demand as on the supply side.

Would you buy less gas if the price doubles? Probably not, which COVID and inflation when travel restrictions were lifted clearly showed. Demand was relatively constant while prices shot up.

Was this already predicted? Oh yes, demand for gas was always very price inelastic.

Buff waff abouf Mayonnaise?

What about MAYONNAISE I hear you say. It just depends on whether you are a loyal or non-loyal consumer:

We also get a feeling on price elasticity. So we see detergent nearly perfectly inelastic for loyals, gas being inelastic, Mayonnaise for loyals unitary elastic (they should, floorcloth for non-loyals being very elastic. Nobody buys floorcloth if price goes up!

What do you think is the price elasticity of the stock market? Make your guess, maybe Pulte is buying you a burger if you are right.

Here are some more examples, also since in high inflation, high interest rate times it could be good to know how demand is behaving here are some more

(Source: https://scholar.harvard.edu/files/alada/files/price_elasticity_of_demand_handout.pdf)

Okay, so in general one (or in this case Investopedia could say) “When a good or service is a luxury or a comfort good, the demand is highly price-elastic when compared to a necessary good. Conversely, the demand for an essential good, such as food, is generally price-inelastic because consumers still buy food even if the price changes.” (https://www.investopedia.com/ask/answers/040715/which-factors-are-more-important-determining-demand-elasticity-good-or-service.asp)

Now, how would stocks behave? What number would you assume? Ready for Pultes burger?

And of course how would stocks we like behave?

And would there be differences for stocks which are mainly owned by individual investors vs. institutional investors (mainly, like >140%…)? But this is for another time.

Of course we have data also on the stock market. A study from 2021 found “[…] both theoretically and empirically, that the aggregate stock market is surprisingly price-inelastic in general […]”.

Ah, yes, ah, surprisingly. Not only for meme stocks, but for all stocks the demand does not really change a lot with a change in the price. The study found a coefficient of 0.2 which would be comparable to gas or coffee. So the price changes 100% while demand would only change 20%. But also a small change in demand would hugely impact the price.

Stonks we like in comparison.

Now, lets do this for some of our favorite stonks as well as some other well-known ones.

(Monthly aggregated values based on daily close prices from 2019-01-01 to 2023-09-13: one can perfectly see the capital inflow post 2020-03, GME price elasticity picking up after the Sneeze and the market going nuts in 2023-Q2/Q3)

All the time we talked about numbers between 0 and infinity (I like infinity), why are some stocks below 0 here?

They do the reverse. As the price goes up, demand goes up, too. Price goes down, demand goes down, too. Like for really luxury products, the higher the price, the higher the demand (expensive Champagne, Rolex Daytona, Tesla, Apple, Microsoft,… and AMC in August???).

I didn’t dig too much into AMC, but there was the 10:1 stock split August 24, the 40m new shares offering finished September 13 and a lot of price movement.

What stings out is the rather flat line 2018, 2019, 2020 for GME and BBBY. Especially GME hovering around the perfectly inelastic demand. Again, this means the price is detached from any volume change… of course it is, greetings to the finest investors of our time, Ken and Dougie.

One could form a thesis that those two stocks were obviously price controlled with a clear price target being ~0, until something broke.

Even if you didn’t get a burger from Pulte you now know what price elasticity is, how elastic Mayonnaise is, that the stock market behaves counter intuitively and especially GME and BBBY look the most manipulated.

Looking forward

rom all we know (cellar boxing, dark pools, naked shorts) we can safely say that the price in the current system will never be a real output of supply and demand. Thus it is to question if price discovery for the whole stock market is real at all.

But there are boundaries. With GME in late 2020 and January 2021 one could theorize that the buying pressure in relation to the former very low stock price got too large. Also that BBBY is in a similar position right now.

So if whatever stock comes out successful of a restructuring (or near certain bankruptcy like GME in 2020/21) the valuation changes and the stock price has to be adjusted for one or two orders of magnitude (like $4 -> $400 now $80, BBBY from $0.2 to we will see).

That is without a real price discovery, just avoiding an insane buying pressure w/o a certain bankruptcy (and most probably to profit from derivate trades after the price adjustment). We’ll call this disruptive price adjustment to valuation (Level 1).

And yes, that’s a nice play. But it doesn’t foster all those nice naked shorts, or any short covering at all. Remember mcuban, shorts don’t plan to ever close, also see the SEC report on the sneeze showing nearly no short covering.

Okaaay, who of you sweet little stocks already had a short squeeze? OSTK, you? The PED (price elasticity of demand) went up from 0.04 to 0.11. Hmm and getting into perfectly inelastic territory right after??

Also even if FTDs for OSTK went down, it traded its outstanding shares 2017: 6x, 2018: 14x, 2019: 19x, 2020: 25x, 2021: 11x while also institutions own ~80% of the outstanding shares. I don’t think we saw a real short squeeze here either.

So for a real shortsqueeze and especially MOASS including an infinity pool, we would assume a rather (perfectly) elastic price curve (PED > 1). The price will remain astronomically while the demand is huuuuuge. We’ll call this MOASS with real price discovery (Level 2).

TL;DR: we never passed disruptive price adjustment to valuation (Level 1). MOASS will require real price discovery, which potentially would be visible due to a change in price elasticity of demand. The question remains whether real price discovery is part of the plan, if so there will be fireworks.

  • AnimorphFan1996English
    3·
    1 year ago

    @[email protected] I appreciate you doing this original research. You state that perfect elasticity is the MOASS scenario. Wouldn’t it be the opposite? Perfect inelasticity. Short sales are margin called and must buy at any price. “Demand doesn’t change no matter the price.”

    • beyond_mythosOPEnglish
      2·
      1 year ago

      Exactly, lets assume shorts would be margin called and must buy at any price (which surprisingly didn’t happen in Jan 2021 if you recall the SEC report). But will there be a seller for any price? In short, I don’t think so. Do you?

      Honestly, I am not sure how MOASS will really look like. And of course any hedgie would tell you how it looks like, like with the Sneeze being the Squeeze in Jan 2021. Haha, there was a like 30 slide set in like 20 versions claiming in a later version that FTDs would be unwound no matter what, just remember reading this and nearly crying how hard hedgies tried but how dumb they thought us to be (it was promoted by rensole at the time and called “The FTD Squeeze theory and the coiling spring”). So the psychological part will certainly play a huge role here (“SELL NOW, [INSERT COMPELLING REASON HERE]!”).

      This is why I always found concepts like buy, hold, DRS and the infinity pool very easy and compelling. I don’t fully agree with no cell no sell, because its system change not single scape goats in prison I want. But I like the message it sends.

      Lets theorize:

      • the amount of naked shorts gets larger every day (see short % of daily volume)
      • to make naked shorts = 0 they need to either bankrupt the company or a lot of people sell so we get back to shares owned = shares outstanding
      • you can 10x or 100x the stock price and people would rather buy than sell… WHAT???
      • in a MOASS scenario price rises which leads to FOMO - THIS IS WELL TESTED! (see also the Sneeze which was nearly pure buy volume (https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf , p. 28)
      • with the knowledge about DRS and infinity pool with a rising price, every DRSed share becomes more valuable. Its like bringing money to a bank with a niiiceee %age. For every seller there will (or might) be a buyer beside the one trying to cover the naked short.
      • Ultimately, the price becomes infinity, no matter how much volume is traded. Perfect price elasticity.

      DRSd shares could become like the Mona Lisa. There is just one (real share for each outstanding). There are estimates, but ultimately its Priceless. PED = ∞ at P = ∞.

      This is a nice theory. Becoming true, it could brake the financial market.

      Or to just put it another way round, this is real infinite loss expressed, which before were just words.