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.
Sunday, August 24, 2014
Friday, May 30, 2014
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. . . .
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. . . .
Sunday, April 13, 2014
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.
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.
Sunday, March 16, 2014
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.
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?
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?
Friday, January 24, 2014
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.
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.
Sunday, December 1, 2013
Shorting Pump and Dump Stocks
One of the wonderful things about shorting stock promotions, or pumps and dumps, is the chance that the regulators might come in and nail them while you are short.
This makes for instant profits.
Let's take the example of Life Stem Genetics, Inc. LIFS.
I received in the mail a promotional brochure telling me that buying LIFS is like owning stock in the fountain of youth.
Checking the chart, I found that the stock was making a steady climb, indicating a successful promotion.
However, things seemed to have gone astray:
This makes for instant profits.
Let's take the example of Life Stem Genetics, Inc. LIFS.
I received in the mail a promotional brochure telling me that buying LIFS is like owning stock in the fountain of youth.
Checking the chart, I found that the stock was making a steady climb, indicating a successful promotion.
However, things seemed to have gone astray:
SECURITIES EXCHANGE ACT OF 1934
Release No. 70933 / November 25, 2013
The Securities and Exchange Commission ("Commission") announced the temporary
suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the "Exchange Act"), of trading in the securities of Life Stem Genetics Inc. ("Life Stem"), of Beverly Hills, California, commencing at 9:30 a.m. EST on November 25, 2013, and terminating at 11:59 p.m. EST on December 9, 2013.
The Commission temporarily suspended trading in Life Stem because of questions regarding the adequacy and accuracy of information about Life Stem, including, among other things, its business operations.
_____
Oops!
Here is the chart, courtesy of those nice folks at Stockcharts.com:
Naturally, an aggressive, professional short seller will be happy to inform the regulators of the fruits of its research.
However, this does not always work. In fact, it may be more often that it does not work. Regulators are overloaded and may not feel motivated to attack your particular stock. Companies fight back and will be ready to counter any presentation you may make. You may even be sued by the company for slander.
Nonetheless, informing the regulators of a documented fraud is a good thing to do. It serves the public good and your pocketbook. There is little downside risk and the profit potential is enormous.
Wednesday, November 20, 2013
Economic Shorts
There are two basic unannounced theories of short selling, or indeed long investing.
The first you might call cheap investing. The investor buys something that is under-priced. He is looking for a value, a cheap stock.
In this method, you run the risk of having false information from the company.
The second depends on predictions of the future, usually based on some economic analysis.
Now there is nothing wrong with economic analysis. I have nothing against those who struggle with inaccurate government reports, sudden surprises, unforeseen developments, and all the twists and turns of fate. However, somehow economists have developed a reputation for being mostly wrong, like long term weather forecasts.
The effects of losing your capital are so crippling that exposing it to the risks of economic forecasts is a very brave act that is well known to many hedge fund managers who have large losses.
There are just too many imponderables in the future to be betting your money on it.
Even when you buy $1 for fifty cents, you may find nasty surprises. There are investors who have purchased stock in a company at a price below the cash per share that is in the company, only to find that they still lose money.
However, these losses are very rare compared to the losses to those who predict the stock market or the economy.
We are often told that market timing is a losing game. In fact, it may be.
Now when you go short, you want to be shooting fish in a barrel, not stabbing blindly into the ocean.
The truly aggressive short seller is not content to take position and wait for the future to happen, he makes it happen.
At the least the short makes a big public announcement of his discovery so that the long holders will be stampeded out and new shorts may come in to assist.
He may go further than that and try to start government or media investigations, inform customers, employees, suppliers, sources of finance and those who assist the victim.
In doing so, he risks suits for slander, interference with business relations, and securities law claims.
A wise victim investigates the accusers and any dirt found may be used against the short.
So some shorts have developed the strategy of using fronts or attacking from a hidden position.
The allegation has been made that the people who were short mortgage securities for large profits financed various seemingly independent entities to expose mortgage problems.
So these are the three positions in the game, bet on the future, buy cheap, or make it happen.
The first you might call cheap investing. The investor buys something that is under-priced. He is looking for a value, a cheap stock.
In this method, you run the risk of having false information from the company.
The second depends on predictions of the future, usually based on some economic analysis.
Now there is nothing wrong with economic analysis. I have nothing against those who struggle with inaccurate government reports, sudden surprises, unforeseen developments, and all the twists and turns of fate. However, somehow economists have developed a reputation for being mostly wrong, like long term weather forecasts.
The effects of losing your capital are so crippling that exposing it to the risks of economic forecasts is a very brave act that is well known to many hedge fund managers who have large losses.
There are just too many imponderables in the future to be betting your money on it.
Even when you buy $1 for fifty cents, you may find nasty surprises. There are investors who have purchased stock in a company at a price below the cash per share that is in the company, only to find that they still lose money.
However, these losses are very rare compared to the losses to those who predict the stock market or the economy.
We are often told that market timing is a losing game. In fact, it may be.
Now when you go short, you want to be shooting fish in a barrel, not stabbing blindly into the ocean.
The truly aggressive short seller is not content to take position and wait for the future to happen, he makes it happen.
At the least the short makes a big public announcement of his discovery so that the long holders will be stampeded out and new shorts may come in to assist.
He may go further than that and try to start government or media investigations, inform customers, employees, suppliers, sources of finance and those who assist the victim.
In doing so, he risks suits for slander, interference with business relations, and securities law claims.
A wise victim investigates the accusers and any dirt found may be used against the short.
So some shorts have developed the strategy of using fronts or attacking from a hidden position.
The allegation has been made that the people who were short mortgage securities for large profits financed various seemingly independent entities to expose mortgage problems.
So these are the three positions in the game, bet on the future, buy cheap, or make it happen.
Subscribe to:
Posts (Atom)