Stopping the Company from Uplisting

I believe short selling is an epidemic in the OTC markets just now.

While some listed companies can escape short sellers if they have merit, a low price, and are not otherwise suitable for attack, OTC companies generally are under a cloud.

First, the general opinion, not without merit, is that most OTC stocks are a short sellers dream because:

These companies are not managed by persons experienced in the treachery of the stock markets. These managers do not realize that a short attack means a life and death battle. Thus, the company sits there without taking any defensive action and so bleeds to death under the continual attack of a predatory short. Even if a defense is mounted, defense is a losing game -- only attacking back will drive off a short seller. I do not recall seeing any such attack on a short seller, although counter attacks are common in hostile takeover fights over listed companies.

These small companies often are not managed by experienced executives. Successful management of a growing company is a art and a very difficult one at that. One wrong turn and the company falls prey to the vultures.

The entire OTC market is under a cloud with investors and regulators because of frequent abuses by promoters.

Many institutions and other sophisticated investors will not consider low priced or unlisted securities.

The resources of the shorts often exceed the resources of the company.

OTC companies are often long on dreams and short on substance.

OTC companies often lack positive cash flow.

Generally, longs do not rise to the defense of an OTC company when it is attacked. It is their opinion that being sold short is a sign of something wrong and they do not want to take any unnecessary risk. Why swim upstream?

Thus, it is natural for a growing company to want to uplist, to go to a higher exchange or trading venue.

However, such markets require for listing a minimum stock price. Often the company's stock is well below this price. Management orders a reverse split to get the price over the required threshold.

The shorts, as with anything that would benefit the company, immediately try to kill the uplisting effort by blasting the stock back down below the threshold. This will prevent the uplisting. Hopefully, it will demoralize the longs and management as well and cause them to realize that the stock is caught in quicksand -- the more you struggle in quicksand, the more you sink in.

This post is written with one recent example in mind. I will not embarrass management by naming it or showing you the chart.

This was a Pink Sheet company, a product of a reverse merger. The operating company has millions in revenue and even paid a dividend. The idea was to get the stock over $1.00 and make the company fully reporting, a worthwhile goal for a worthwhile company.

A one for 50 reverse split was done and the stock traded over $2.50 per share. At that point the company must have figured they were all set to meet with $1.00 target.

Yet their joy was short lived. Seven months later the stock hit $0.25 -- dropping 90% and putting it below the $1.00 target.

And this company had a stock repurchase program!

Short Selling -- Stopping the Company from Raising Money

One of the great techniques of predatory short sellers is to keep the price of the company stock down.

Now you might think that a short seller would want to increase the price so he could increase his line at a high price.

However, for a company that has negative cash flow, or a company that needs to raise money, a los stock price will cause the company to raise money at lower prices causing more dilution and thus decreasing the value of the stock.

If the price is low enough, it may stop financing altogether. Some institutions have rules about avoiding low priced stock and if you push the price down below their lower limit, finance dries up.

A declining stock price can also cause morale problems among shareholders, employees, and even customers. A declining stock price or a low stock price is taken as evidence of some defect. Key employees with stock options are sensitive to the stock price.

Thus, aggressive predatory short sellers want the price to go down, to continue to do down and to stay down.

As the short seller only recognizes taxable gain when he closes out his position, he may not want the company to fail entirely, just to stay comfortably and surely in the land of the living dead with a price in the cellar and no chance of jumping back to life.

This was a wonderful technique in the days of naked short selling as you could short more than the outstanding stock and by using the laws of supply and demand push the stock into oblivion by destroying all attempts to get new money.

Personally, I find it too predatory to destroy companies with potential just by pushing the price down. We are here to benefit people, not hurt them. We only want to hurt scammers and bums.

This is why it is so wonderful to find some real crooks out there working a manipulation and crush them. You can attack without reservation. Where else do you have this license?

Short Selling -- The One Thing that Crushes the Enemy

What most people, in fact all the people I know of, do not realize is that there is always one thing that causes your enemies to collapse.

So if you are a short seller wanting to crush a stock price or a company, you can find, even if you think not, one thing that causes them to collapse instantly.

Short selling should not be a battle of years, a war of attrition.

Remember you are going for a fast return on your investment as that maximizes return on investment -- ROI is measured as a percentage per year, not a percentage per millenia.

50% ROI in one year is great, 50% ROI in ten year sucks -- think of all the risks you took to get there.

You will know when you find the one thing because the stock price dives and terminates in a total win.

The one thing causes the enemy to flee the battlefield, causes them to retreat in a panic.

The one thing cause the stock to drop like a burst balloon.

The one thing takes a hardened enemy with all guns blazing and makes them collapse into a fast and unconditional surrender. From machine gun blasts to white flag as fast as the flag can be shown.

Unless your attack causes these results you have not found the one thing.

The same is true of companies fighting off short sellers -- the one thing causes the shorts to cover and go away fast.

A careful study of stock market and military battles shows that the one thing, when found, works magic.

What causes soldiers to panic and flee and what causes boards of directors to head to Brazil? There is your answer.

Now if you don't know there is always one thing, you are going to be trying all sorts of moderately useful solutions, but you will not get the result you want.

Find the one thing from experience, from thought, from testing. Find it any way you can, but find it.

You do not need huge resources to win, only the one thing.

FOIA Request for SEC's Naked Short Files

http://www.marketwatch.com/story/journalist-sues-sec-to-get-naked-short-selling-files-2014-05-29

Mark Mitchell, who writes on www.deepcapture.com, has filed a Freedom of Information Act lawsuit against the Securities and Exchange Commission (SEC) to obtain the agency’s investigative files relating to more than a dozen aborted investigations and cases involving naked short selling.

This will be interesting. First, the SEC never released results of the investigation into the Bear Stearns case. Second, there have not been many naked shorting cases brought, yet it seems like there were more than a few cases of this abuse.

Stay tuned for further developments. . . .

Short Selling -- Research and Destroy

If you had not noticed, or if you have not participated, there is a technique I call "research and destroy."

A stock researcher finds a short sale candidate. This stock may have some hidden fraud, or weak holders, or some other vulnerability. He does his homework and if he does not have his own short fund, he tells those who do.

They all short the stock and once they have a good position, with great fanfare they publish the hit piece on the stock with huge publicity.

The stock craters and the shorts have one of the best trades in the world -- a sure thing and a short term sure thing at that.

Never mind the merits of the company or that the research of the shorts is questionnable, the important thing is scaring the weak shareholders into dumping the stock.

With a fast hit like this, a drive by shooting, no one has a chance to dig into the real facts.

The media, hungry for news, and loving stories that invalidate things and people, give the researcher's claims a wide distribution.

This starts the stampede of the longs to the exits and with the resulting short term imbalance in supply and demand the price goes into free fall.

Only after a month or two can the stock recover if the selling is unwarranted.

But who cares, the shorts have their fast profits and time to cover at leisure.

Risk to the shorts = almost zero. The only question is how far the stock will go before it is time to close out the trade.

Now it helps if the stock is that of a Chinese company traded in the United States as these companies are under a cloud and they do not know how to defend themselves from short sellers.

The big shorts have someone else act as the front man in the media. The big boys like privacy and why put yourself out there to be sued when you can pay someone else to be the public mouthpiece and take the heat.

Where else are you going to find a short term sure thing like this? You put up 50% of the price to go short. If the stock drops about 50%, so you have a 100% profit in a few months. What is the worst that can happen? The stock does not drop on the hit? So you cover even and lose nothing.

Research and destroy.

Herbalife - HLF - conflict wastes time

Much news this week on Herbalife (HLF).

The New York Times put up a well written piece covertly criticizing Ackmann for lobbying and revealing the million of bucks spent  by HLF on counter-lobbying : The Herbalife War

Both sides are hiring people who are connected in an attempt to influence the regulators.

Ackmann scored a big win when the FTC opened an investigation, yet HLF's allies say the result of this FTC action will not be very expensive to HLF. 

Here is the chart showing the surprise hit, the eventual comeback to higher prices that caused Ackmann to take a huge loss, and the recent hit when the FTC investigation is announced.

HLF -- Chart courtesy of Stockcharts.com

Missing the Point 

I maintain that both sides are missing the point.

The idea is not to expend massive resources for huge battles. These resources are expensive. Expensive advisers, even though they may be people of great reputation and integrity, have a built in interest in keeping the battle going, do they not?

Huge battles between two well financed adversaries are seldom conclusive; they just wound both sides.

Continuing the battle is expensive for the company as it continues to be under a cloud, stifling its survival.

Continuing the battle is expensive for the short as he has to pay interest on the money to carry his position,, has to pay to borrow stock, and still has to make a return for its investors. This all adds up.

The trick is to find that one point that causes the enemy to lose power and collapse like a balloon stuck with a pin.

This is why you look for air bubble stocks to short, they are easy prey. Chinese companies have been fun shorts as they do not know how to defend themselves and there has been a number of scams that inflict the reputation of the whole sector. One wonders if anyone is enthusiastic about protecting Chinese companies trading in the U.S. given these past scandals.

This is why you do not short stocks that have many millions in cash flow. While you may get a fast win that feels good, like the attack on Pearl Harbor, the enemy becomes enraged and comes after you with all their resources, like bombing two cities with nukes. See the chart above. Notice that Ackmann had his fast drop from his surprise attack, and then HLF came back and caused him huge losses.

Now if you are locked in one of these battles, you still need to find that one point that will deflate the enemy instantly.

You will know you have found it when the enemy runs away so fast you cannot folllow him.

Then it is not a war any more than stepping on a cockroach in your kitchen is a war.

Yet you had better find this attack point fast or you will be slowly losing energy while you expend big bucks holding your position while the enemy gains strength.

I am not going to tell you any more valuable trade secrets in public. If there are those expending many millions to fight these battles, hiring the smartest and most powerful people out there, and they still have not found it, it must be rare and valuable information, yes?

This may give you food for thought -- what type of thing could this be, how do I find it, how do I exploit it?

Herbalife and the Short Sellers

Herbalife (HLF) has been under attack for months by short sellers but the stock has performed well, urged on by long traders like Carl Icahn. 

It is now announced that Senator Mackey of Massachusetts has written to the SEC and the FTC asking them to investigate HLF.

California Atty. Gen. Kamala D. Harris' staff has agreed to meet today Friday in Los Angeles with a coalition of critics who believe that Herbalife Ltd. preys on poverty-stricken immigrants with false hopes of easy money.

When you have predatory or activist short sellers, you can expect a public relations battle to begin.

Just as the lion kills its prey by grabbing the prey's throat in its mouth and squeezing off blood to the brain, a predatory short seller will gradually cut all supp0rt for its victim.  

We have in HLF an interesting situation because the company's case is flawed at best -- 88% of its distributors do not make a dime, because the company has almost $800 million in EBITDA, and because we have an investor with relatively unlimited resources, Carl Icahn, buying up the stock with the intention of squeezing the lead short seller, Bill Ackman, with whom he has a grudge.  Carl is an expert at using the media to publicize his investments. 

We see the resources each side has, we can expect an excellent public relations contest.

The shorts, with almost 20 million shares short as of the end of the year, are probably pushing these latest two announcements. 

In retaliation, HLF has said it is "eager" to address the Senator's concerns at his earliest convenience. This is a good reply by a competent staff that is used to defending the company and its business.

The shorts seem intent on recruiting powerful allies in the government, both in California and with two federal agencies. 

As a short you want the attack vectors focused on the target. You want force multipliers from entities that are more powerful than your target. 

These attacks come at a good time for the shorts as the stock seems to have been high priced even if its business model is a valid one.

Chart courtesy of Stockcharts.com

Thus we see a lovely move from over $80 to almost $60. I am sure the shorts are hoping this will start some momentum on the downside. No doubt they would like to panic and institutional holders into seeking a safer stock and one that is not accused of preying on the public. In fact I doubt that the stock will ever see $80 again. I believe the shorts will eventually bring it down but the battle will take years and be very costly. 

What seems unusual to me is that the shorts would attack a company with billions in revenues and almost $900 million in cash to protect itself. 

After all, lions, crocodiles and other predators all go after the weakest member of the herd, not the strongest. In war, you attack where the enemy is weak. You do not make a frontal assault on a heavily defended position. 

As a short seller, you want stocks that tank fast after a big hit, not a long, drawn out expensive war. 

There are many tools left for both sides to use. I believe it is a mistake not to use them all at once. 

The power of Herbalife is that it can recruit new distributors. All this publicity cannot be helping. While it is good to try to recruit the government, to rely on that as your only attack is a big mistake as you cannot control it. 

On the other side, the longs just seem intent on talking up their position. I do not see them directly attacking the shorts, other than making the price go up.  As we saw this week, it is a mistake to rely only on this. 

In a life or death battle, shorts only stop attacking when you are almost dead. 

We look forward to being a spectator on this one.