The GMDM p constant
?He uses statistics as a drunken man uses lampposts-for support rather than for illumination.? Andrew Lang
Well I engaged in my own brand of statistical debauchery in order to better understand the GMDM paradigm as it applies to our G* microcosm. (Evangelical Gilderian Smile).
Now the GMDM passengers are kindly requested to put on their 3 D glasses for a short trip down math lala land?.
What do we know???
1. We know that G* has a float of about 60 M shares. We also know that there are more or less 25M-3M=22 M shares shorted (Yes! That?s the mysterious 3M-I-am-not-sure-why-I-am-making-a ?$30M-transaction). Lets simplify and set si=20/60=1/3
2. But, enough idle chit chat. Lets get down to the nitty gritty! A fundamental metric to consider here is the margin to cash ratio (mc), from which we derive the ratio of short interest to mc, p=si/mc. ?p? is not the result of an extravagant mental tangent but represents the probability that your average, run of the mill 1000 share block in a margin account is well?hypotheticated (sp?). If you are confused, just think that 60M shares are not all held in margin but in margin and cash, so we need to multiply 60 by mc!
What can we deduce??
?a few things?while we cruise at nerd altitude:
This p ratio probably (no pun intended!) represents some kind of stable point, a relative truce between the forces of good and darkness. Now, if numbers are your friends, you will want to play around a bit with say mc=0.75, 0.65, 0.5, 0.333 (oh my! what happens when mc = 0.333!)
 p = 0.44, 0.50, 0.66, 1.
Well Marketers do it, Bad Analysts do it even BLS does it, so why should we the-thread morons-soon-to-be-filthy-rich be denied the luxury of picking a number ?? I like mc=0.5
( the tyranny of democracy I suppose), so p=0.66.
By now, you are furiously working the ole Excel, soon to be part of Softy/3
If you apply some nerdiness, you can see that as mc starts going down, (you know why it will go down, silly!) in order to conserve stability there must be a corresponding decrease in si, or the official short interest, really the purpose of our trip! And just in case you had any doubts, bad things happen when stability isn?t conserved, frogs start falling from the sky, #DIV/0!, General Protection FFFFxxxx shows up?you get the idea
A bit more nerdiness: with p=0.66 and m+c=60M, si=0.33 and assuming a GMDM dehypothecation reduction of 1.5M shares and corresponding cash increase of 1.5M. Before I get accused of unpleasant things, that 1.5M is an honest to god uneducated guess. Feel free to pick your own!
Anyway, the GMDM conservation of ?p? implies, with these assumptions and all else being equal that the equilibrium short interest must decrease from %33 to at least %29.
Wheee! Wasn?t that fun! Time to plug away and go mad with assumptions!
If you liked this one, you will love our next chapter, when Day Traders join in on the fun! Did you say non linear or am I just hearing voices?
Until then, happy picking!
^H
PS It is left as an exercise to the reader to show that with the above assumptions, the equilibrium price level is about $25, based on past equilibrium levels (Dec15 99). Of course, equilibrium can be anytime between May 31 and eternity. Gotta have that intellectual parachute! Lies, damn lies and statistics! |
