Friday, September 22, 2006

House Keeping

No, I haven't disappeared from the blogosphere, but I thank those of you who have expressed an interest in my stance on "naked short selling" and who are searching for more investment ideas in this field.

There are no new candidates on my radar right now. We're intra-quarter which, from an earnings perspective, is a truly dull part of the quarter and, as you may have noticed, I prefer to use longer-dated put options when taking a position against one of these Baloney Beauties. In fact, though January is still over three months away, we are looking closely at finding ways to push our exposure out further into the 2007 calendar.

We are ever mindful of John Maynard Keynes' cautionary statement, "Markets can remain irrational longer than you can remain solvent." And as you look at the companies we profile, you can well imagine that their shareholder ranks are flooded with the irrational.

So, with that in mind, there is no guarantee that "rationality" will come to visit the markets for these profiled companies before our options expire. This leaves you, as a portfolio manager, with some house keeping tasks. You have a plethora of choices, but one simple approach you can take is to turn a plain long put position that's coming closer to expiration into a spread, by shorting a lower strike put, and to take the premiums you collect and dedicate them to another plain long put position that's further out on the calendar. It's one of the simplest ways for you to preserve some capital while maintaining your downside exposure to a stock you perceive to be overvalued.

Reg SHO Antics

Connecticut was never a state I had previously associated with inbreeding. I figured Ralph Lambiase was an anomoly, someone's dead-beat brother-in-law who couldn't otherwise hold down gainful employment who was inserted into the Connecticut division of securities by some well-connected politician to keep him from showing up every other night to bum some sleep on the couch. Now, suddenly, we come upon proof that perhaps Ralphie Boy is not such an anomoly afterall. It would appear that Richard Blumenthal, Attorney General for the state of Connecticut, has been caught up in this scam as well. He graces the SEC comment section of the Reg SHO Amendment proposal with his own tirade that begins with the predictable nonsense about FTD's and then, interestingly and entertainingly, devolves into an anti-hedge fund rant that has nothing whatsoever to do with Reg SHO or "fails to deliver".

Note to would-be new hedge fund managers: If you're considering the state of Connecticut as a candidate to domicle your new fund or your management company, take them elsewhere. Connecticut does not deserve your capital or the capital of your investors.

Maybe it's something in the water up there...

Wednesday, July 26, 2006

Turning Stupidity into Cash - Round 3

This DISCLAIMER applies.

$15 January '07 PUT
BID: 4.20
ASK: 4.70

As a general rule, with but one exception (Viragen), I would never naked short biotech stocks. There is just no way of knowing who might or might not pull a rabbit out of the hat, regardless of how poorly managed the company's finances might be.

But buying puts has a very different risk profile than naked short selling. Even though both generate gains when the price of the stock in question declines, the puts present investors with the means to manage downside risk to capital. Wiping out with a put is to be expected from time to time and it's not the end of the world if a stock quadruples and the risk capital you commit to a put position disappears. It's a very different... potentially lethal... situation if you're holding a naked short position when a stock does that.

Atherogenics is, financially, in really bad shape. And, of course, there is the prerequisite group of investors out there blaming Atherogenics' problems on... you guessed it... naked short sellers.

So Atherogenics is a logical choice for a put position. However, that premium is pretty rich for a $13 stock. Once again, the smart money in the options pits seem to be telling us something.

We're listening.

PRO: One of the ugliest balance sheets I have ever seen for a publicly traded company.
CON: Company has a good two year's worth of working capital. They won't need to raise money any time soon. Also, unlike so many other bogus "development stage" companies, Atherogenics is actually spending their money on R&D. 89% of their operating budget went to R&D over the past three years.

Wednesday, July 19, 2006

Turning Stupidity into Cash - Round 2

This DISCLAIMER applies.

$25 January '07 PUT
BID: 4.60
ASK: 4.80

We were led to Overstock long ago by the antics of her loopy CEO. Now that we've confined ourselves to the world of stocks with listed options, it is unlikely that we will find many other companies with CEOs that behave like pink sheet/penny stock operators.

Just because we might not find another "Dr." Byrne in our quest for put candidates doesn't mean that we won't find groups of loopy shareholders convinced that "naked short sellers" are harming their investments and that the way to "fight back" is to loyally hold their shares, come what may, as the company spirals into the ground.

Netflix provides such an opportunity. The first warning sign that Netflix would be a good put candidate was the widely disseminated story within "Get Shorty" circles that David Patch had latched onto Netflix. As anyone who follows the "naked short seller" scam is well aware, David Patch is the kiss of Death for any company that attracts his attention.

There is a lot of stupid money following the "naked short seller" movement and some of that stupid money has found its way into Netflix shares. Our selection of Netflix as a put candidate is in no way an indication that we feel Netflix management is either incompetent or criminal. However, they operate in a business environment that has become extremely cut-throat. And while the use of the postal service may have been a great way to cut out overhead from the "physical retail floor" model of video rental, both models will eventually succumb to digital forms of delivery in the very near future.

PRO: Absurd valuation, slowing growth, and stiff competition in a media delivery format that is technologically obsolete.
CON: Company actually has earnings. And while the valuation is silly, the company is in not in imminent danger of financial insolvency.

Wednesday, July 12, 2006

Turning Stupidity into Cash - Round 1

This DISCLAIMER applies.

$20 January '07 PUT
BID: 3.50
ASK: 3.70

Because the small investor must rely upon the options pits in order to benefit from the "naked short seller" scam, a lot of worthy candidates must be excluded from consideration. There are no put options that trade on the pinkest of the pink sheet disasters nor will you find options listed for most of the trash on the OTCBB.

But one excellent candidate that does have listed options is Overstock. In many ways, Overstock, with its CEO Patrick Byrne doing his best immitation of Chris Farly from "Tommy Boy" (except for the part where "Tommy" actually manages to save the family business), is a "naked short seller" poster child. There's not a quarter that goes by where "Dr." Burn doesn't manage to find an opportunity to lash out at those evil "naked short sellers" who have somehow caused him to miss revenue targets, stifle Overstock's growth, and trashed the company's working capital situation.

Overstock is also a great example of the odd pricing we will find in the options pits. The guys in the options pits are a lot smarter than you and me. They don't fall for this "naked short seller" nonsense which is evidenced by the pricing you see for the puts of companies we will target.

Take a typical day in the pits with a typical company like, say, Walmart. Walmart trades this morning around $ 46. With the common trading at that price, we then check out the January '07 calls and puts for the $ 45 strike. The calls are priced 3.60/3.80 , the puts 1.85/1.95 . With most stocks, you will find that the options pricing shows a bias that suggests modest gains are to come.

Overstock's options pricing shows an interesting contrast to typical options pricing. With the common trading just under $ 21, the January '07 calls and puts for the $ 20 strike tell a much different story. The calls are priced 3.50/3.80 , the puts 3.50/3.70 . The sharpies in the options pits are in on the joke. They know that the "naked short seller" excuse is nothing more than a poor excuse for executive ineptitude and have priced their instruments accordingly.

Unfortunately, this means it will be more difficult for us to make money off of these puts than we could otherwise make if the options were priced like those for "normal" stocks. But take some comfort in knowing that the "smart" money has voiced its opinion in the options pits. "Smart" money doesn't always win, but there's worse things you can do with your speculative capital than to put it with the "smart" money.

PRO: Decelerating growth, tenuous working capital situation. No ability to "brand" in a low-margin, cut-throat sector.
CON: "Fulfillment" business has relatively attractive margins and could be the focus of a shrewd restructuring.

Tuesday, July 11, 2006

Turning Stupidity into Cash

Over the years, we've made some decent coin taking positions against companies that blamed their problems on "naked short sellers". Unfortunately, it's something that 99% of the investment community can't do. Even though "naked short selling" is legal (despite what so many scammers would have you believe), it's a pain in the neck. The compliance issues are complicated, it requires a lot of capital, and the transactional expenses make it impractical for small blocks.

That doesn't mean that there aren't opportunities for smaller investors to take advantage of those companies OR investors that complain about "naked short selling". A good place for small investors to turn stupidity into cash is in the options pits. Buying puts on the shares of these companies gives investors an opportunity to profit when those stock valuations are completely unjustified by their fundamentals.

Buying put options entails a great deal of risk. You may lose all of your investment if the anticipated move in the underlying stock's price does not materialize.

The material contained within this blog is not intended to serve as investment advice. It is presented for informational purposes ONLY. By accessing this site, you agree to indemnify the blog manager and all entities responsible for its delivery to your internet device from any and all claims for losses or damages that you may incur while attempting to pursue the investment strategies discussed here.

The manager of this blog or the manager's associates MAY take, or MAY have ALREADY taken, positions in some OR all of the securities discussed on this site.


The information here is provided to you free of cost. However, if you benefit from the information presented on this blog, I would ask you to consider a donation to the following charity:

All Faiths Food Bank
717 Cattleman Road
Sarasota, FL 34232

(Please put "Naked Short Selling Lie" in the Memo field of your check.)

NOTE: I have NO affiliation with All Faiths Food Bank beyond seeing them as a worthwhile charity that serves the needy in this community. Don't hassle them if you hate what I have to say about your stock. They have one of the most impressive ratios of services provided to funds raised that I have seen.

Time to find some candidates...

Thursday, June 08, 2006

Ban Short Selling Now!

Yes, you read that right.

We should ban short selling.

Yes, yes, I'm serious.


Yes, yes, yes, all of it. No more borrowing shares for short selling. No more hypothecation calculations or affirmative determinations or any other back office headaches. Let's just bring it all to an end, here and now.

Well, maybe not RIGHT now, but how about within the next year? Let's give the scammers what they want: a world where the short selling of common stocks doesn't exist, by, say, July 1, 2007.

So long as there is a sliver of truth to the allegations that scammers like Mark Faulk, "Bud" Burrell, David Patch, DeWayne Reeves, "Bob O'Brien", or the rest of these crooks engaged in this scam level against short sellers, the investment community will constantly be on the defensive.

So give the crooks what they want. Give them a world where there is no short selling of common stocks... no "naked short selling", no Stock Borrow Program, no hypothecation, no leasing, no lending. Get rid of all of it. If you want to sell a share of stock, you must deposit your certificate into an account and someone in the P&S department must verify that it is a genuine certificate, freely transferable to another party after being traded on a public exchange or over the counter, with proper endorsements to guarantee transfer. If you don't have a "genuine", "certificated" share in your account, then you can't sell. No exceptions. Not even for market makers. Every transaction in the shares of a company's common stock will result in an actual transfer of all ownership interests. There will be no more games with proxy rights and no more games with the tax status of certain, advantageous dividend plays. Your company declares a dividend, you get the dividend with no questions about the taxable status of the dividend that's been paid.

There are too many loose ends in the world of short selling of common stocks that, frankly, can't be properly remedied. There is no way to reconcile the voting rights of a company with a million shares outstanding if there are two million shares held long in various accounts against a million shares held short. The scammers cling to this small sliver of truth of voter dilution to advance their fraudulent cause. Take it away from them. If you own a hundred shares of a company with a million shares outstanding, you have a right to weighted vote of 0.01% of the company's voting shares. It is not right that your voting power should be diluted by short selling of any flavor.

Of course, if this recommendation alone were enacted, the scammers would clean up in the markets. People like Gary Valinoti, Urban Casavant, Robert Simpson, and Rodney Young would love nothing more than to be able to drill investors into the dirt without the hindrances of a bunch of short selling financiers who might recognize them for the crooks they happen to be.

I'm not saying that these crooks should be given free reign to rape investors with impunity. On the contrary, this proposal comes with a caveat.

For now is also the time to extend the single stock futures market to the OTCBB and the pink sheets... and to every other listed or over the counter common equity security with a CUSIP that does not currently have a series of futures listed on the CBOE. The decision to forbid short selling of common stocks in all circumstances should be accompanied with the MANDATORY listing and trading of single stock futures for every common stock with a CUSIP. In this day and age, it just can't be that difficult to add another digit to a CUSIP. It only needs to be a 0 or a 1, for even and odd years of delivery. Make it uniform, with December expirations. The third Friday of every December, one of the futures CUSIPs leaps forward two years. The current contracts get settled, with real shares of course. Any party to a futures contract that fails to deliver by Monday morning gets immediately bought in, debited for their buy in, with ultimate financial and administrative responsibility for resolving the delivery of shares behind the trade resting with their broker/dealer. This system should be put together and in place by June 1, 2007.

This should alleviate all of the objections that these scammers pretend to have about "naked short selling".

But it won't. Because the issue was never about "naked short selling". The issue has always been about diverting attention away from pitiful, or crooked, managements that run their shareholders' equity into the ground.

So go ahead, write your favorite scammer. Unmask these cretins. The email addresses of Faulk, Patch, "O'Brien", Reeves, and the rest of the crooks are easily found on line. Ask them what they think of getting rid of ALL short selling altogether and bringing a uniform futures exchange to these markets.

They won't like it one bit.

Because they know it would mean the end of their ability to rip off investors.

Friday, May 26, 2006

Dennis Rodman was right about Utah

Sorry, Mr. Lambiase. Time to move you on down the blog, for now. I never thought your dumbassedness could be topped in the sphere of securities regulation.

I hadn't counted on the State of Utah and neither, apparently, had the rest of the securities industry. SB3004, the "Byrne Bill" has been passed and signed into law by Governor Huntsman.

What to do?

Well, don't panic. Because in all likelihood, none of its language pertains to you. If you're a fund manager engaging in naked short selling and you're domiciled anywhere else but Utah, you can go back to screening through the trash for gems like Overstock to add to the short side of your fund.

But what if you're a broker/dealer, registered in the State of Utah, and you've had this heap of shit legislation dropped on your compliance officer?

Well, the news is not quite as bad as it may seem. The usual scammers, "Bob O'Brien", David Patch, and Mark Faulk, are all touting this legislation as being key to the elimination of "naked short selling".

It will do nothing of the kind.

Your only duty, as a broker/dealer, is to report a fail to deliver. That is all. If you report the failure to deliver, you're off the hook.

In fact, if it is your broker/dealer, through a principal trade done against one of your proprietary trading accounts, that is responsible for the fail to deliver, all you have to do is report it. This bill provides no penalty for a failure to deliver, merely a penalty for failing to REPORT a failure to delivery.

It is a do-nothing bill because it does nothing... besides add to your compliance and reporting requirements which are already horrendous.

Unfortunately, Dennis Rodman couldn't avoid Utah. You can. At the very least, you should consider shuttering any branches that are marginally productive in the State of Utah. You may want to institute rules that require confirmed, satisfactory delivery of stock certificates in your retail accounts before you let customers place sell orders. You might also consider a surcharge on tickets for trades executed on behalf of Utah residents. When they complain, just blame it on the Byrne Bill.

Byrne, baby, Byrne.

Let that asshole reap what he's sown.