You may have heard that April 15, 2021, is not our feared National Tax Due Date. For the second year in a row, IRS has granted taxpayers a pandemic-related reprieve for Tax Year 2020. This time, rather than mid-summer, it is only until May 17, 2021, and is not a complete reprieve. Some winter storm-affected Americans already had their due dates changed to June 15.
The most important takeaway from the current extension is that it applies only to 2020 tax filings and payments. 2021 taxes are due on the usual dates, which, for many people simply means routine payroll withholding. For taxpayers who file quarterly tax estimates on Form 1040-ES, 2021 payment dates are April 15, June 25, September 15, and January 15 (2022). These payments are the focus of today’s Blog.
First, remember the April 15, 2021 date: Form 1040-ES for Quarter 1, 2021, is due that day. Since last year’s tax extension applied to both filing and payment dates, April 15 (2021) would be an easy payment to overlook. Filing late will result in penalties and interest. Don’t get penalized for making a late payment.
Second, tax rates have not (so far, anyway) been changed for Tax Year 2021. Estimating quarterly payments should be relatively straightforward this year. If the taxpayer(s) incurred a significant change in income, up or down, the calculation should reflect income variation. Avoiding over-withholding (essentially making a free loan to the Treasury) improves personal cash flow, while under-withholding can lead to penalties and interest.
Third, there are strong indications that tax rates and/or brackets will change for 2022. Promises notwithstanding, people are likely to incur a tax increase in 2022. For taxpayers who have some control over their income and/or expenses, it may be wise to accelerate 2021 income and delay expenses into 2022.
Finally, for last year (2020), it is still possible to fund IRAs until May 17, 2021. That can even be done by diverting all or part of your tax refund to the actual IRA. Contributions to a Traditional IRA decrease your last year’s tax bill. What a deal!
By the way, the current Administration is currently floating a trial balloon regarding the possibility of even another $1.9 Trillion “COVID-19 Relief” bill, on top of everything we just discussed. Fasten your seatbelts, taxpayers! That would probably trigger yet another round of tax hikes.
Van Wie Financial is fee-only. For a reason.
Financial advisors are divided into myriad designations, descriptions, business models, and offerings. Most of the categories are filled with glorified salespeople, making a living by earning sales commissions on products or transactions. Many of them are quality people, providing fine products and services, and making a good living. Others, not so much. How is an average consumer to know?
More than 100 designations and titles are used by practitioners in the financial services industry. These designations range from meaningless to substantial and contribute to mass confusion among people seeking financial assistance and/or advice.
Van Wie Financial is a fee-only, fiduciary, Registered Investment Advisory, or RIA. Our advisors all hold the designation Certified Financial Planner®, or CFP®. In the financial advising industry, CFP® is among the most respected certifications, and it takes years to obtain. Becoming a CFP® requires an undergraduate college degree, successful completion of an additional CFP Board-approved specialized curriculum, adherence to a strict Code of Ethics, and passing a demanding exam. Then, an experience requirement must be completed prior to earning certification. A CFP® engaged in business for compensation may render financial advice regarding securities and other financial assets.
The CFP® designation is clear proof that a financial advisor has demonstrated competence in a wide range of financial topics. Most self-described “financial advisors” can only discuss investments, and do not qualify as fiduciary, fee-only, financial planners, and advisors. The fiduciary standard requires an advisor to place clients’ interests ahead of the advisor’s own. The “fee-only” standard requires the advisor to never accept commissions, whether from sales of insurance products or from securities trading.
Many “fee-only” firms conduct business in the same manner as Van Wie Financial, but some are starting to “embellish” their own compensation. This is a disturbing trend and one we believe the public should know about and understand. These firms are starting to charge “extra” fees for such items as phone calls, emails, and even routine meetings with clients. These add-on fees are on top of the annual percentage-of-assets under management fee schedule.
That is just plain WRONG!
Consumers, whether current or future clients of financial advisors, owe it to themselves to understand how their advisors are compensated, now and in the future. Seek simplicity and transparency to foster a long-term relationship.
Van Wie Financial is fee-only. For a reason.
In last week’s blog post, we reported that taxpayers would probably not be granted an extension to file 2020 tax returns. After last year’s 3-month delay for 2019 returns, the customary April 15 deadline looked like a sure thing this time. However, many politicians and taxpayers had requested to have the entire U.S. population receive another delay. In Texas, winter storm-affected taxpayers had been granted a full delay until June 15, 2021, including for required 2021 tax payments.
Before the digital ink dried on that blog posting, IRS announced a month-long delay for every American. Because May 15, 2021, is a Saturday, the new due date for non-Texas taxpayers was extended to May 17, 2021. However, this nation-wide delay is limited in scope, and the Devil is in the details. From the IRS website (emphasis added), we found that:
“This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by people whose income isn’t subject to income tax withholding, including self-employment income, interest, dividends, alimony, or rental income. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer.”
Setting aside our wounded pride from having to admit we were incorrect about a general delay, we promised to report on any developments. We also addressed certain steps taxpayers can take to improve their own situations, both for 2021 and into the future. Here is an updated summary of possibilities from last week:
- Perhaps the easiest and most common tax reducer is the Traditional IRA, which can be funded for Tax Year 2020 until April 15, 2021, filing date (which has now been extended to May 17, 2021).
- Small business owners can open and/or fund Small Business Retirement Accounts, including SEP IRAs and Individual(k) Plans, until their actual filing date, even if further extended.
- For some tax-reducing transactions, it is already too late to affect 2020 returns. However, the next 4 (now 8) weeks afford many people an opportunity to reduce current and future taxes, improve future financial independence, and better plan for cash flow.
- This is also a good time to remind taxpayers that 2021 charitable contributions are deductible “above the line” up to $300 for individuals, and $600 for married filing jointly. (These are the most valuable deductions a person can take.)
For taxpayers who are required to make quarterly tax payments (Form 1040-ES) for 2021 income, this means that by April 15, you must submit your Q1, 2021 installment. The cost of late payments includes interest and penalty. It is not worth the money, nor the hassle, of making a mistake.
One of the main difficulties taxpayers face is estimating current year income. This is not made easier by delaying last year’s tax return preparation. Generally speaking, we believe that most taxpayers would benefit from acting as though no extension had been granted. Storm-affected people may be in a different situation, but for the rest of us, there seems to be little benefit to waiting until May 17. Filing for an extension remains, however, perfectly legal and automatic.
Van Wie Financial is not a tax preparer, and we do not render tax advice. We routinely assist clients with tax planning, often working closely with clients’ tax preparers. Don’t waste the opportunity to improve your tax planning, now and in the future.
Van Wie Financial is fee-only. For a reason.
Last year, American taxpayers were granted a reprieve from the dreaded annual April 15 due date for personal tax returns. While it seemed like a great idea at the time, we were not able to completely avoid the unpleasant chore, because July 15 became the 2020 due date. There was, however, a useful side benefit. While tax filing can always be extended to October 15 by filing Form 4868, any money owed is still due on April 15. In 2020, COVID-19 relief allowed us to delay sending in all money due until July 15. That helped many Americans with their struggling cash flow.
Right now, there is a push in Congress to emulate 2020 by delaying both filing and paying dates. Due to an unusually harsh winter storm in the South, taxpayers in designated disaster areas have been granted a delay for their 2020 taxes. For affected people, business tax returns, personal tax returns, IRS deposits, taxes owed for last year, and 2021 Quarterly Estimate #1 (Form 1040-ES) are delayed until June 15, 2021. The rest of us will apparently be held to the usual April 15 date (extendable for filing, but not for paying).
Many politicians and taxpayers would prefer to have the entire U.S. population receive the same delay to June 15, 2021. Apparently, this is a decision IRS can make, and the House of Representatives has made a formal request for the delay. There is no indication at this time that IRS will respond positively.
Since the usual April 15 deadline is now only a month away, most tax preparers are likely advising their clients to operate on a “business as usual” assumption. Even if you file for an automatic extension of your personal tax return, be sure to have paid in sufficient amounts to either cover your actual liability, or to have satisfied one of the “safe harbor” provisions. Your preparer will assist you in meeting these goals. Van Wie Financial is not a tax preparer, and cannot give tax advice. We can, however, help you plan for your future tax situation. Given the number, size, and complexity of bills in front of Congress, it will take weeks to sort out the many provisions that have been slipped into recent legislation behind the “Great Wall” currently surrounding the capitol.Assuming the 2021 filing deadline for most 2020 tax returns will remain April 15, there are steps you can take to improve your own situation before filing. Perhaps the easiest and most common tax reducer is the Traditional IRA, which can be funded for last year until the April 15 filing date. There are some qualifications for the tax deduction, but most working Americans are eligible. It has become easy to fund an IRA, even allowing tax refund money to be diverted to last year’s IRA.
Small business owners can open and/or fund small business Retirement Accounts, including SEP IRAs and Individual(k) Plans, until their actual filing date. The Plan type available to any individual depends on the nature and size of the business, and a competent financial advisor should be consulted.
For some tax-reducing transactions, it is already too late to affect 2020 returns. However, the next 4 weeks afford many people an opportunity to reduce future taxes, improve future financial independence, and better plan for cash flow. Now is a perfect time for planning 2021 taxes.
This is also a good time to remind taxpayers that 2021 charitable contributions are deductible “above the line” up to $300 for individuals, and $600 for married filing jointly. These are the most lucrative deductions, as they do not require itemizing to reduce taxable income. “Above the line” donations paid from personal funds during the calendar year must be documented by qualified recipients.
As a great planning tool, when your numbers are finalized, take the opportunity to analyze and adjust your withholding. If you are owed a large refund, decrease your withholding and divert the difference to savings, whether for retirement or your cash reserve. If you owe too much, increase your withholding if necessary, but see if you can increase your 401(k) deferral, or make deductible IRA contributions.
Whether or not we finally arrive at an extended filing date, it is smart to get and stay organized now. Van Wie Financial routinely assists clients with tax planning. We can and will work with clients’ tax preparers to implement plans, once made. Don’t get caught unaware of your situation and get a large, unexpected “April Surprise,” even if it turns out to be in June.
Van Wie Financial is fee-only. For a reason.
Electric Vehicles, or EVs, are already here, and gaining market share every day. EVs are so popular that General Motors (GM) recently announced an all-electric lineup by 2035, with 40% of their vehicle production being electric by 2025. While many of us believe this goal is ambitious, it demonstrates the commitment made by Americans to fundamentally change the way we travel.
Today, GM has yet to increase profitability by even one cent with electric vehicles. Given today’s cost structure, GM loses money on every VOLT produced and sold. VOLT is the only electric vehicle (EV) produced today by GM, and I doubt TESLA feels threatened by VOLT’s current (pun intended) paltry market share. After all, look at previous GM forays into the EV market; the Electrovair and EV1, which were both disastrous.
Before internal combustion engines became the norm, electric vehicles were very popular. By 1900, about 1/3 of all vehicles on the road were electric. Sales remained strong for a few years, during which gasoline engines began to gather market share. However, increases in the availability of electricity to consumers also fueled (again, pun intended) the EV market.
The biggest factors in the popularity of gasoline cars were road building, the discovery of oil in West Texas, which drove gasoline prices down sharply, and World War II. When WWII ended, Americans tasted freedom afforded by private vehicles, and the Great American Love Affair with personal automobiles began. The rest, as they say, is history.
Or it was until the 1960s and 1970s when gasoline shortages began to drive prices higher. Additionally, 1970 saw the creation of the Environmental Protection Agency, or EPA, triggering renewed interest in EVs, viewed as environmentally friendly. General Motors, American Motors, and NASA all did pioneering work in EV development. GM’s earliest foray into the EV market was the Electrovair, which was based on the 1966 Corvair. Ralph Nader essentially doomed the Electrovair, along with the Corvair, with his 1965 book, Unsafe at Any Speed. Although Corvair was declared safe by the National Highway Traffic Safety Administration (NHTSA) in 1972, it was too late to save the model.
GM re-entered the EV market in 1996 with the first production EV, dubbed the EV1. Produced until 1999, EV1 was only offered for rent. In an action that remains controversial to this day, GM recalled every EV1 in 2002 and destroyed them all. Today, any number of car buffs would pay hefty sums to have an EV1 in their private collections.
In the middle of the EV1 era, Toyota’s Prius went into production in 1997. Many of us found the Prius’ appearance unconventional and confining. As thousands of owners have learned over 2+ decades since Prius is an excellent hybrid vehicle that performs as advertised. Worldwide sales are approaching 2 million, and larger new models have made Prius practical for families.
Other hybrids and EV ventures are commonplace, with TESLA leading the way, and proving the viability of EV cars. Competition is producing more and better options and at increasingly affordable pricing.
As a society, we are moving in the direction of electrified travel, both personal and commercial. However, electricity doesn’t magically appear in America’s wall outlets. Increasing demand for electricity will put the brakes (yeah, another pun) on the popularity of EVs unless we confront looming energy supply problems.
Environmentalists are doing their best to eliminate the use of “fossil fuels,” but they have demonstrated no ability to meet the rapidly increasing demand for electric power. Governments, both here and abroad, must come to grips with a requirement for a sufficient uninterruptable supply of electric power, now and in the future. Until that is accomplished, we should authorize new nuclear plants, as well as ending tax subsidies granted to buyers of electric cars. Allowing free markets to work, through traditional supply and demand, is the surest path to our electrified travel goal.
Van Wie Financial is fee-only. For a reason.
Beverly Hills High School produced a lot of crude oil for over 20 years. Wait, did you say, “Beverly Hills High School?” Yes, I did. For about 22 years, a large oil derrick on the campus of BHHS pumped hundreds of thousands of barrels from a very rich oil reserve under Los Angeles County. The BHHS derrick was wood-covered and brightly painted, and flaunted the moniker “Tower of Hope.” The well was closed in 2018 due to pressure from environmentalists.
Los Angeles County sits on a massive oil reserve, which was discovered in 1893. As recently as 2019, California produced 442,000 barrels of crude oil daily. That number is down from 1,079,000 barrels per day in 1985. At $60/barrel, oil brings into the State’s economy more than $26 Million daily (oil production is a process industry, meaning it operates 24/7/365).
For an interesting look at the history of oil production in LA, I suggest the website, https://oilandgas.lacounty.gov/history/ for its excellent pictures and brief, but informative, narrative.
Today, California seemingly detests oil. A large segment of Californians would abolish oil and gas production immediately. A significant percentage would also cease oil and gas consumption as well. Recent experience in Texas demonstrates just what a tragic idea this represents.
Texas produces oil, gas, nuclear power, and “renewables,” which include wind and solar. The State has resources sufficient to keep Texans supplied with energy, with enough surplus to export. Usually. Recent events displayed an unexpected exception to “business as usual.” A rare intense winter storm rendered production of several forms of energy inoperable for days and left hundreds of thousands of Texans without heat, lights, and potable water.
Nationwide, only natural gas and renewables are increasing in market share. Coal and oil consumption are being driven down by record-low market prices of natural gas. So long as gas remains plentiful and inexpensive, we expect the changeover to proceed. However, it should be left to market forces, rather than political pressures, to dictate the rate of replacement.
Political trends have been veering away from coal, oil, nuclear, and even natural gas, in favor of renewables. This utopian (“green”) view has failed to consider the consequences of real-life conditions affecting real people, as recently seen in Texas. Accelerating implementation of renewables, in the absence of contingency plans, can lead to unnecessary death and destruction.
The bottom line seems very clear. For every 1% of renewable energy consumption in today’s market, we need to have 1% traditional energy available in reserve. Fossil fuels are latent energy until needed, whereas wind and solar currently must be consumed within seconds of production. Worse yet, they cannot always be produced. Nuclear energy is the cleanest and safest of all and is available as required. However, nuclear power is hated by environmentalists, most of whom have no concept of nuclear power’s safety and efficiency.
Consequences of ignoring the realities of energy were on display recently in Texas. It was not a pretty sight. We cannot let it happen again. State and Local Governments, and especially the Federal Government, take heed.
Van Wie Financial is fee-only. For a reason.
In this blog and on The Van Wie Financial Hourradio program last August, I asked the question, “Is your side-hustle being threatened?” My reference was to a national movement attempting to reclassify an ever-growing number of “gig workers” (those who receive 1099s, also known as “independent contractors”) into traditional W-2 employees. What difference does it make? If you have a “side-hustle,” meaning a voluntary, usually part-time, second, or third job, you understand the reasons and consequences of choosing this method of income enhancement.
Despite the constant under-reporting of inflation by the government and media, everyone knows that prices are rapidly escalating. Food, gasoline, insurance premiums, and many other necessities, are reflecting dramatic price increases to consumers. For most people, incomes (especially net of taxes and benefits) are not keeping pace.
For millions in America, and in countries around the world, one answer to closing the gap has been a “side-hustle.” Having a supplementary money-making gig has allowed many ambitious Americans to maintain, or even enhance, their lifestyles. Perhaps surprisingly, many people profess to enjoy their alternative employment for more than financial reasons; freedom and flexibility are most often mentioned.
As the old saying goes,“No good deed goes unpunished.”Gig workers are again being targeted by the usual groups of do-gooders, who are trying to force them into becoming W-2 employees. This is being fought in Courts around the country and the world. Unsurprisingly, many employers and employees are not readily accepting the change. Companies such as Uber and Lyft, along with other businesses that need part-time and/or seasonal workers, are being challenged to eliminate gig workers.
American courts and politicians have for some time been pressured into maintaining the status quo, but this week produced an ominous decision from “across the pond.” From the Supreme Court of the United Kingdom (UK) came a ruling that may well produce a ripple effect in this country. In the UK, Uber BV vs. Aslam (Aslam) was unanimously ruled to eliminate the gig status of Uber drivers. That decision will most likely metastasize, and like COVID-19, spread over several continents.
Under Aslam, Uber drivers in the UK are now entitled to minimum wage and benefits such as Holiday Pay. While that may sound reasonable, even compassionate, it also allows the company to dictate working hours and conditions for drivers. In fact, the entire employer/employee relationship is altered, allowing the employer to establish mandatory wages, hours, and working conditions.”
Resulting from this relationship change, drivers may not be free to set their own hours. Rather, the Employer may demand their services in terms of time and place. Routes and hours can be changed, and when a customer requests a car, there may or may not be available rides in the immediate area. One inevitable result will be disappointed and inconvenienced customers.
The entire business model of ridesharing is now at risk. There will be some winners, but there will be a great number of losers. Many of the losers will be customers, and the overall volume of business activity could be diminished. Prices are certain to rise. And for what?
Aslam doesn’t stop at ridesharing. Delivery services for various products are booming in the COVID-19 economy, and these will also be affected, should Aslam’s decision trickle down to this country. We know that our Supreme Court (SCOTUS) has a fondness for International laws.
The UK Court decision does not have to migrate to the USA. Congress could enact legislation to maintain the current voluntary system. After all, many elected officials use ridesharing, especially in Washington, D.C. Sadly, few are likely to care about cost and availability, as they are “prioritized” customers, and they get reimbursed for transportation expenses in the Capital City. By taxpayers. Go figure. Be careful what you wish for.
Van Wie Financial is fee-only. For a reason.
You may have seen a headline last week in many large papers and financial news outlets, proclaiming, “Home prices rocketed in 4th quarter.” According to the ubiquitous headlines, median home prices were up 14.9% in the 4th
The articles I read correctly stated that the rise in the median home price was the highest ever recorded. Whether this was tailored to be a political statement is anyone’s guess, but at best it is misleading to most people. Did your home’s value increase 14.9%? Likely, not even close. So, what gives?
One of the oldest sayings in math (and journalism) is that “figures lie, and liars figure.” Combine that with another old adage that states that “there are 3 basic kinds of lies; white lies, damn lies, and statistics.” Together, these can be used to imply to a reader that something is better or worse than the actual statistical meaning. (In today’s journalism, add lies of omission.)
What’s the problem? The word “median,” is an often-misunderstood statistical term that describes consumer preferences more than housing prices. The median sale is defined as the sale which has an equal number of sales lower and higher in price, regardless of actual value. Any individual home may have increased in value, decreased in value, or stayed the same. That has no effect on the median value.
Variables that influence the median sale value include economic conditions, the supply of housing in all price ranges, changing consumer preferences, tax considerations, and a host of other decision-making criteria. None of these factors applies directly to your home, although some can affect the market value of your homestead. Rarely does any single residence increase by more than a few percentage points in an entire year (yes, it can happen).
A quick example will illustrate my point. Eleven homes sell in a quarter, ranging from $100,000 to $1,000,000. Of these, 5 are below, and 5 are above, the “middle” house, which for argument’s sake is $500,000. The median sale for that period is $500,000. Now let’s say that a similar group of 11 sells next quarter, but the highest value home is $2 Million. The median price is unchanged, but the average sale price rises. In the next quarter, low-priced homes are no longer available, as investors have been gobbling them up. Now the lowest-price sale is $200,000. Median sale? Still $500,000. Average sale? Up.
Reading statistics requires careful attention, as well as an understanding of the use of statistics. Writers often support a particular point of view and slant their stats accordingly. Go figure.
Van Wie Financial is fee-only. For a reason.
Last week we discussed recent hoopla over GameStop common stock (GME) and the Robinhood trading platform. GME suddenly became very volatile, and a lot of quick money was made and lost. Not unexpectedly, those speculators who lost were angered and were willing to blame “the system,” or virtually everyone else, except themselves (of course).
How volatile was GME? On April 3, 2020, the low trade was $2.57/share. On January 28, 2021, the high trade was $483.00/share. That is an increase of 18,694%. The closing price on Friday, February 5, 2021, was $63.77, a decline of $419.23/share in just 6 trading sessions.
Whenever a large amount of money is made in the market, it generates an understandable amount of attention. It also results in an absurd pattern of trading activity. All too often, that activity brings in many unqualified players. How do unqualified traders participate in an arena they do not fully understand? There are some companies that do not properly vet their customers before allowing them to participate in fast-moving and dangerous stock trading.
Without editorializing as to the regulation of financial markets, as professional Financial Advisors, we would never recommend that our clients get involved in Short Selling (selling securities you don’t own) or Derivatives (all kinds of options, including puts and calls). Normally, we are not asked about these areas of Speculation (as opposed to Investing). That changes during periods of intense excitement and media coverage, such as the recent GameStop fad.
Every definition we can find for the word fad includes terms such as temporary, short-lived, craze, and other terms for ideas that fade away. See the grammatical similarity between fad and fade? Coincidence? We think not.
Speculation is short-term activity, whereas Investing is a long-term process involving attainable goals, planning, and patience. People in any age group and/or economic status can become successful investors. The clientele of Van Wie Financial demonstrates that principal. We represent a microcosm of the gigantic world of free financial markets and participants.
Very few speculators will succeed over time. A few will make extraordinary gains, but the majority will likely lose their proverbial shirts.
We are watching for the day GME once again trades for $2.57/share, reasonably certain that day will soon arrive. GameStop is already losing money, and their business model reminds us of Blockbuster Video, which faded away as trends changed. Who will lose the remaining $60+ per share? It will most likely be speculators who jumped into the fad without any justification.
Van Wie Financial is fee-only. For a reason.
No one seems to know for sure whether “Robin Hood” ever existed, and there is no verified story. Whether truth or fiction, here is the way I learned the story. Robin Hood supported King Richard while the King was away defending the English Throne. That made Robin a British loyalist, and not necessarily the self-righteous wealth-redistribution legend. He took what interlopers stole from the Crown and returned it to the rightful owners, therefore not robbing from the rich to give to the poor.
Update Robin Hood to Wall Street 2021, where we find a stock trading service dubbed Robinhood. What Robinhood and other similar platforms do well is to allow novice investors without a great deal of money to purchase fractional shares in good companies. Not only do I like the concept, but it is also educational and interesting for investors. But there is another side to the concept. Robinhood was recently fined $64 Million for misleading customers as to the cost of its service, which is advertised to be free.
This week brought Robinhood to the forefront of Wall Street’s news coverage. On Wall Street, “Selling Short” (read: selling shares you do not own) is legal. Conditions are simple; shares must be legally borrowed from a consenting owner, with a money-backed promise to return the same number of shares borrowed. For that privilege, the lender (stock owner) also gets a payment from the Short Seller (consider it rent). The lender also continues to collect any and all dividend payments paid during the rental period.
A Short Seller believes that the market price of the borrowed stock will fall. When it does, the seller will buy more shares on the open market, and simply return newly purchased shares to the lender. The Short Seller then pockets any positive difference and moves on.
That assumes the stock price actually went down.
What happens when the stock price rises? At some point, the Short Seller will generally get fed up, buy new, more expensive, shares to return to the lender, absorb the loss, and lick his or her wounds. If the stock rise is fast and furious, the Short Seller’s losses skyrocket. At that point, the Sort Seller can experience a “Short Squeeze” (run out of his or her own “guarantee money”). The brokerage, having conducted the Short Sale transaction according to a written arrangement with the Short Seller, issues a “margin call,” meaning “pay up now.” The Short Seller must come up with enough cash to cover the margin call, or get caught in the “Short Squeeze.” Even if a personal loan is required, the cash must be paid, under penalty of law.
What if Short Sellers “borrow” more than 100% of outstanding shares? Impossible, you say? Mathematically, you are correct. Legally, you are correct. Morally, you are correct. But it is done frequently. And illegally. It is done so frequently it has a name, “Naked Short Selling.”
Here’s where the recent GameStop (GSE) story begins. In last week’s case, many of the GSE shares “borrowed” did not exist. The number of shorted shares was at least 40% higher than the total number of shares available. That illegal Naked Short Selling activity caused a panic when buyers began to bid up the market price. Similar to a “run on the bank,” the Short Sellers were required to execute panic share purchases to cover their short positions. Ironically, their purchases enhanced the price runup, and they lost billions.
As you might imagine, many of these self-important Wall Street Insiders were not about to take that lying down. So, who was the object of their ire? The “little people,” who talked and traded on Robinhood, Reddit, etc. My premise is very simple. The losers have only themselves to blame. (Note to the SEC – Stop allowing illegal activity in the market. Note to the Short Sellers who lost a fortune or two – no one feels sorry for you.)
The bottom line on the GSE/Robinhood story is simple; “little people” made lots of money legally, and Wall Street Insiders lost that money through illegal practices. Karma? Redistribution of wealth sometimes looks more like poetic justice.
Van Wie Financial is fee-only. For a reason.