Return of the TRO

A federal judge on Tuesday granted Texas Attorney General Ken Paxton’s request for a nationwide ...

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A federal judge on Tuesday granted Texas Attorney General Ken Paxton’s request for a nationwide temporary restraining order blocking the Biden administration’s halt of a 100-day pause in deportations of noncitizens for 14 days. It’s safe to say our podcast hosts have some thoughts! Stick around to hear David and Sarah chat about an indictment against pro-Trump Twitter troll Ricky Vaughn in response to his voter disinformation campaign, a wonky First Amendment case, and what’s behind this week’s GameStop rally.

Show Notes:

–Giboney v. Empire Storage & Ice Co. and Expressions Hair Design v. Schneiderman.

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  1. Avatar photo
    Jason Gibson

    Interested in the history of ice?

    Here's your post pandemic destination!

    https://www.roadsideamerica.com/tip/23981

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  2. Avatar photo
    Kevin M. James

    Just wanted to jump in here to put in a word for the Red Storm Rising boardgame. Spent many happy hours playing it one Easter holiday, staying with a friend in Greece (boy that makes my life sound an order of magnitude fancier than it is). I remember it being a very nice beer-and-pretzels large-scope wargame. (And when my friend played the Warsaw Pact side he had a lot of fun taunting my capitalist-running-dog armies. The Berlin Wall had very recently fallen, making the whole scenario suddenly so much more light-hearted to play out on the tabletop.)

    The decision on whether or not to break out the chemical weapons was especially well-implemented in that game I thought.

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  3. Michael.Shermanbklyn

    I love Advisory Opinion and listen regularly. I generally believe that Sarah is a genius and David knows a lot about the First Amendment. Sarah, I must beg you to not dive into things you haven't researched. Your description of short selling was just plain wrong and terribly confusing. Read Cameron Price's description, below. It is quite good. Also, Sarah and David, both, recognize that short selling is as valid an activity as buying or selling long. Buyers believe the shares are undervalued and will be worth more in the future. Long sellers believe the shares are fully valued and are not worth holding any longer. Short sellers believe that shares are over valued and are likely to fall in the future. This is not prima facie manipulative. It is as legitimate a stock view as long activity and helps to support efficient markets. Short selling is also necessary to hedge dealers who trade in options. If I sell you a put option, which provides you the obligation to sell me stock in the future at a set price, you need to be able to sell stock short to hedge the risk that I will put stock to you at a price higher than the then-current market price. These hedge option writers sell and buy increments of their total obligation over time, ensuring that, upon expiration, they have either sold short the full number of shares they are about to receive when I exercise my put, or have sold no shares at all if the market price is below the put price and the put option expires worthless. This is how our extremely efficient markets operate. Our capital markets would be much less efficient and effective if we lacked the right to short stock.

    Are there people who use short-selling as a means of manipulation? Most certainly, and they should be prosecuted. Can short sellers drive a company's stock to zero and cause a bankruptcy? Short of a need for the company to raise equity capital to run it's business, most certainly not. Company fundamentals win out in the long run. Short sellers typically cannot beat a company that can execute on a legitimate business plan. In the same way, long buyers of flawed companies are bound to underperform the market.

    No one should feel sorry for hedge funds that lose money, nor should anyone feel happy at their failure. These firms take positions based on tons of research and experience. Some times they win and other times they lose. Part of the reason for the spike in the market broadly was hedge funds covering shorts, not only in GameStop, but across their portfolios. They have policies that they try to adhere to. They will generally not stay with a failed trade. They recognize that losing money on bad investments is part of the business. Retail investors, hopefully understand that, too. David's example of the person who invested half of his savings in GameStop stock is frightening, if true. Brokers are supposed to make judgements as to the suitability of any investment for any client. Responsible investors should do the same before they make a trade. Brokers often will not approve retail investors for margin accounts if they lack experience. Some may also prevent inexperienced investors from buying anything but mutual funds and ETFs. If you have the money to lose and like taking the risk, bless you. If you haven't done your homework and don't appreciate the risks, then you may just learn a very expensive lesson.

    Finally, I historically have had complete confidence that everything I hear on AO is accurate, thoughtful and correct. I have lost a bit of that faith after this episode. My advice to you is stick to what you know, guys. For Sarah that would be everything you have researched, including chicken sandwiches. For David that would the the First Amendment.

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  4. Sarah

    I know Twitter is a private company and can do what they want, but probably you'd agree they are going too far in blocking free speech in the case below. Curious if you're getting reports of other similar cases. Hopefully this is a one off mistake. My understanding is the account is now unlocked again and the offending tweet was not deleted.

    "On Thursday, Twitter locked the account of Catholic World Report, a news service of Ignatius Press, for “hateful conduct.” CWR had republished a report by Catholic News Agency’s Matt Hadro, reporting on Biden’s nominee for HHS Assistant Secretary for Health, Dr. Rachel Levine.

    CWR’s tweet quoted the report, making the observation that Levine is a “a biological man identifying as a transgender woman who has served as Pennsylvania’s health secretary since 2017.”

    While many people would insist such an observation is a matter of empirically observable facts, the statement was classified as the promotion of “violence” or “harassment,” according to Twitter. "

    https://www.pillarcatholic.com/p/will-catholics-be-forced-to-fight

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  5. Cameron

    As a non-lawyer I really enjoy your analysis, even if a lot of the time it's a touch over my head. And I'm always incredibly impressed with the level of detail and precision. (This was especially true when it came to Sarah's chicken sandwich study). But as someone who spends a fair amount of time trading (and occasionally short-selling) I feel I have to clarify a couple things you got wrong about the GameSpot trade, and short selling in general.

    Short selling: The way this actually works is pretty weird, but relatively simple. Supposing a stock is trading at $100, and I believe it's going to go down to 80. And suppose you own 50 shares of that stock. I can borrow 50 shares of stock from my broker, who in turn borrows it from you. This transaction is invisible to you, except that you will receive interest payments on the loan of the stock. How much you will receive will depend on how scarce shares available to short are. So I borrow your 50 shares, and I sell them at 100, collecting $5000. If the stock goes down to 80, as I predicted, I can buy the stock back at 80, for $4000, and I will have made a $1000 profit. If the stock goes up, however, I can get into trouble. If it only goes up a little, I can just buy it back at the higher price, and take a loss, but if it goes up a lot, I can be forced to buy it back (because my margin ratio exceeds the amount allowed by my broker, usually 50%).

    In the case of GameStop, what happened was not quite as David described it. GME was not a failing company. They were in no particular danger of bankruptcy on the merits, they had decent revenues, and a relatively healthy balance sheet, but they did have declining profits and revenues, and "everybody knew" that brick and mortar retailers of video games were "doomed" in the long term. Some big hedge funds sold them short, partly using the mechanism described above, and partly using "put options" which ends up amounting to the same thing for reasons I won't go into. Then a year and a half ago, a few retail traders noticed that the price of the stock didn't really accord with the inherent value of the business (in their opinion, which they analyzed at some length). They bought heavily into this investment thesis, using "call options" to leverage their relatively small investments (on the order of 10's of thousands of dollars).

    Their approach, and the fact that they publicised what they were doing, and probably got a few people to join them in the trade (although to be fair, they were widely mocked for their idiocy in the early days), led to an increase in the stock price. Nothing crazy, but enough to put the short sellers underwater. The short sellers responded by doubling down, and eventually put themselves in a position where they had borrowed more stock in the company than actually exists. Their intention had to be to put GME out of business, because as far as I know, that's the only way they were going to get out of their position (how are they going to buy back more stock than is actually available in the market?) It is _this_ action which has led to the insanity. Normally you look at a situation where the price of a stock is untethered from its intrinsic value, and the only justification for buying it is the "greater fool theory". Some greater fool must come along and buy this asset at a higher price. But what if you know for a fact, that there are fools out there who have borrowed 140% of the total available stock, and will be paying interest on that loan until they close it (current interest rate appears to be 31%). Well, those are some locked in fools, and it's not necessarily insane to buy, even at these prices. (disclosure, I did so, yesterday at 290, with an amount of money I'm quite prepared to lose entirely). Will some retail investors get burned? Yeah, probably. But that's very much a dog bites man story. The man biting the dog here is that the short selling hedge funds are being undone using one of the very strategies that they themselves use to (legally) manipulate the market every day.

    I'm not sure how this thing is going to end. I'm not enough of an expert to know how the funds are going to be able to close these positions, because the one thing that's pretty certain now is that GME isn't going out of business any time soon, but I'm quite sure that all the experts going on TV and bemoaning the inevitable harm coming to some small retail investors are being thoroughly disingenuous. Some will be harmed, some will make a lot of money, some will make a little money, depending on how they play it, but none of them are in a multi-billion dollar unexitable position that they entered because they thought it was inevitable that GME could be forced into bankruptcy.

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  6. Avatar photo
    Rebecca Ray

    Just chiming in to say that I loved the reference to Tom Clancy novels. They are all things nostalgia to me. I first read them as a teenager as I was twelve when The Hunt For Red October movie came out. My first "book crush" was on Jack Ryan!

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  7. Jim Flinchum

    When David said "This should be familiar to both Advisory Opinions listeners and French Press readers", my brain inserted a period and though it heard a self deprecating joke.
    "This should be familiar to both Advisory Opinions listeners."

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    1. Avatar photo
      Mike B

      LOL.

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  8. Avatar photo
    M.E.

    I just have to chime in on Tom Clancy because you forgot the real force behind Red Storm Rising's scope, co-author Larry Bond. It's Bond who brought the strategic-level material, and paired with other authors to flesh it out by following several characters through a theater-wide conflict. See his early-90s works Red Phoenix, Vortex, and Cauldron (he's done a lot since, so I don't know if he kept to this format). He based this on developing naval combat games like Harpoon, much like how The Expanse feels more realistic being in part based on the travel mechanics of a space RPG -- in both cases they thought through how things were going to work.

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  9. Paul Zummo

    Hunt for Red October was by far the best of the movies because it's the one that was most faithful to the novel (other than making it so that they weren't sure if Ramius was defecting, where in the book they had intelligence confirming that this was definitely his intention). In most things I would take Harrison Ford over Alec Baldwin, but Baldwin was the better Jack Ryan. With Harrison Ford, he became a bit more of the action hero prototype, and that's not really who Jack Ryan is.

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  10. Avatar photo
    Guffia

    Let me just make a quick comment about the Gamestop circumstance. It's not just that Gamestop was shorted, but that it was shorted beyond all possibility. In order to cover their short positions, the hedge funds would need to buy around 120% of all Gamestop shares. This is highly unethical, even beyond the bounds of short selling in general, and also has put the hedge funds in a very vulnerable position now. Essentially, they got caught with their hands in the cookie jar.

    The point is legit that it's bad that some people will jump in on this and lose money that they can't afford to lose, but this happens in the stock market all the time. But if you actually read on wallstreetbets you'll see a lot of people saying, "Just bought two shares. I know it's overbought, but if this can help to stick it to the hedge funds, I'm good with it." (On wallstreetbets, of course, the language is slightly more colorful than my paraphrase.)

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