Follow-Up NY Times Article

PETER EAVIS has written a follow-up to the original NY Times article that started all of this… and, no, you’re not going to like it, either (it quotes an anonymous source):

snip: Mr. Erhart, who said in his lawsuit that he had been fired, is not the only internal auditor who has left Bank of Internet. Mr. Erhart’s supervisor, Jonathan Ball, also left this year. When asked why he had left, Mr. Garrabrants said he did not fire Mr. Ball, but he described a conversation with Mr. Ball in which he passed on comments about Mr. Ball’s management.

A person close to Mr. Ball, however, said he left Bank of Internet because of concerns about how the bank was responding to regulators. This person, who requested anonymity to avoid potential retaliation by Bank of Internet, said Mr. Ball believed Mr. Erhart’s audit work to be excellent.

http://www.nytimes.com/2015/10/16/business/dealbook/bank-of-…

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I saw nothing new to speak of here… just churning the waters.

Bob

I agree. No new information here and quite frankly I expected better from NY Times then to write this junk. It seems they just want to chum the waters a bit more so they can profit from watching the sharks go at.

I agree Bob. Also, I just dont know why Peter Eavis of New York Times does not want to drop this off… Interesting…

Johnny

" I agree. No new information here and quite frankly I expected better from NY Times then to write this junk. "

Not to start a whole new thread but I do not really expect better from the NY Times. Increasingly the NY times is turning into a one sided biased rag and one which in my mind has rapidly declining credibility. JMHO

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The NY Times is essentially an unintentional parody of itself by now. At least some of what they write can be construed as comedy if you use that perspective :slight_smile:

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It worked, the stock dropped again!

Zangwei

It worked, the stock dropped again!

Remember, options expire today, and the short sellers have a lot of them. They have enormous financial incentive to do everything possible to push down the price today to make sure their options are as profitable as they can be.

Barring a big drop in the overall market, my guess is we’ll see the share price rebound next week as the pressure eases off. I may very well do some more buying today, depending on how things go.

Again, just my opinion! I could be very wrong.

Neil
Long BOFI

Remember, options expire today, and the short sellers have a lot of them. - Neil

You’ve touched on a critically important point, Neil. Wall Street loves to push a mythology of a stock market that serves individual investors, reflecting the opinions of folks such as you and I.

That may have been true decades ago, but it’s nothing further from the truth today.

Retail investors (folks such as you and I) constitute less than 5% of daily trading activity. There’s been a sea change over the course of several decades. In truth, the vast majority of trading is machine-based - the algos, quants, hedgies and flashboys. Furthermore, the incredible explosion in options trading has dramatically altered market dynamics.

Folks trading on fundamental analysis face a tough row to hoe. Granted, in the long run, the financial fundamentals will win out. In the meantime, the rational fundamentalists will be whipsawed mercilessly.

That’s just the way it is. That’s why I choose the stocks I wish to own based on the financial metrics, but why I study charts carefully (technical analysis) to determine entry/exit points.

Machine trades don’t do fundamental analysis. They’re focused on the technicals. The distinction is important to know/understand.

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Also, with the large open put options, the market makers that sold them are forced to short the stock to hedge themselves against the puts they sold going in the money if they are not appropriately hedged. Many may have thought they were more in the clear yesterday, but the additional story on OPEX friday definitely adds more fuel to the fire.

As a side note, machines can trade on fundamentals too, and almost every fundamental trader uses some form of technicals whether they realize it or not. All are perfectly rational ways to invest (or trade, whatever your timeframe is). They are just different tools, and different blends of each suit people and trading strategies differently. But it does help to be aware of how the other players play.

Now, if only the markets disallowed the HFT frontrunning like the fantasy sports sites are starting to do…

Folks trading on fundamental analysis face a tough row to hoe

I guess I see it differently. If you mean literally trade, like short term, then maybe. But I think it’s exactly all of the volatility and craziness with respect to the fundamentals that gives us our ability to outperform. What’s going on with BOFI right this moment is a perfect example: assuming you believe all is okay with the business, it can now be bought for 40% less than a week ago. That’s a huge boon to long-term investors who are willing to ride out this bout of volatility. Short-term pain leads to long-term gain :wink:

So while I’ll never understand the short-term craziness, I think it makes long-term success for us much easier than it otherwise would be, not harder, because it results in such amazing long-term opportunities being offered.

Just my 2 cents, of course!

Neil

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Neil:

“Remember, options expire today, and the short sellers have a lot of them. They have enormous financial incentive to do everything possible to push down the price today to make sure their options are as profitable as they can be.”

I am pretty green to options and I learned a bit. Can you explain to me how this would drive down the stock price and so much?

I don’t see any news today (aside from that follow up article) regarding BOFI. It not only unsettling but strange that this stock price drop rebound and drop again like this.

What do you do when you see this kind of movement? you wait for news or you move out?

tj

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Hi tj,

Can you explain to me how this would drive down the stock price and so much?

I can’t claim to know exactly what the short sellers are doing, but I’ve seen this exact kind of behavior happen on other stocks I’ve owned that were targeted by short sellers. Sometimes they’re successful, sometimes they’re not.

Basically, they buy a lot of options that become more valuable as the share price drops. Options for a given month expire on the 3rd friday of the month (which is today for October options). They target small companies where the volume they’re able to generate will be enough to move the share price. Then they begin releasing articles that insinuate bad things are happening, usually picking some very obscure aspect of the company where it’ll be very hard to disprove their allegations. They especially like financial companies, because they are naturally a bit opaque anyway.

They will release multiple articles, under multiple names. They’ll tell their story to anyone who will listen, always looking for a gullible reporter at a mainstream publication. For one of my other companies, they got Barron’s to publish their article. In this case, it’s some guy at the NYT that fell for it. Once those guys publish their first article, their reputation is on the line and they become “invested” in being right (if they don’t actually have money on the line). So they continue to give the short sellers the benefit of the doubt, telling their story in follow-up articles.

These articles are often timed to be released just before options expire, looking to drive down the prices. Then they’ll pile on and sell shares (my guess is they accumulate them ahead of time, knowing that a short-sale restriction will go into place), intentionally setting lower and lower prices with each small sale to move the bid/ask down and down. That attracts momentum traders, who begin jumping in (they don’t care at all about the business, but just picking up a few bucks as the stock keeps moving) and driving it down more. As it drops enough, people begin getting scared and selling too, driving the price down lower and lower, and it eventually becomes self-fulfilling: people assume the market “knows something” and begin panic selling, driving the price down even further, causing more people to panic. All of this plays right into the hands of the short sellers.

I would speculate that the short sellers made two big runs of it this week. I think the first, they shorted a lot of shares and purchased a lot of options that would otherwise have been considered long shots, and so were extremely cheap, but would appreciate massively in value on a large drop in the stock. I think they did this in preparation for the filing of the lawsuit and the NYT piece, and made a huge amount of money on Wednesday. Then I would guess they covered their short positions and began buying shares on Thursday, helping with the big pop we saw, so that they could become sellers today and help drive the price way down again – maybe they even bought more options yesterday (I don’t know and haven’t looked). They will almost always try to get a negative piece published on the day their options expire, ideally with a major outlet (like NYT today), otherwise at least on SeekingAlpha or somewhere else they can make some noise, frighten people, and bait the momentum traders.

They’ll usually make multiple attempts at it over time. Sometimes investors become wise to what’s going on and further attempts are less and less effective (that ultimately happened with the other company I owned): but sometimes, after hearing enough allegations over and over again, investors begin to become nervous and eventually capitulate (“where there’s smoke there’s fire” mentality, though in this case I think it’s noise, not smoke). Others simply aren’t comfortable with the volatility and will sell. Regardless of the reasons, it’s all beneficial for the short sellers, and they’ll continue to make attack after attack over time as long as they can make a lot of money from it.

So anyway, that’s how I view today’s events. I don’t think it had anything to do with a bunch of very rational investors suddenly deciding the allegations were true: I think the short sellers were simply very good and very determined, and had another very successful day.

My hope is that the negative pressure will ease off a bit now that the options have expired, and we’ll see a bit of a rebound over the coming weeks. But who knows: some people who otherwise were buyers will now simply avoid the stock and move on to something else, so it may take time.

Again, this is all just my opinion, and much of it is pure speculation. It’s just how I tend to connect the dots that I’ve seen play out time and time again with companies I own that have been targeted.

I bought more today at $100.78, right before the close, when I figured they’d be making their final push. That’s just me, though. Please come to your own conclusions.

Neil
Long BOFI

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Neil:

that’s an interesting game that most cannot play. Could that be illegal?

To recap- tell me if that s right:
they bought PUTs when the price was higher and shorted the stock at the same time. They synch up their short with the PUT expiration to get the max profit from their PUTs (no more time value).

From where could they borrow enough stocks to short to trigger such a move in the price (they do not move it all by this single action but triggers others to sell)?
usually who can lend short sellers stocks? Would for example my online brokerage firm be able to take my BOFI shares and lend them to the short sellers? can I say no you cannot?

There are some stocks that cannot be borrowed hence shorted. Why wouldn’t small companies like BOFI not be able to make their stock un-borrow-able?

tj

“Please come to your own conclusions.”

No thanks Neil. I’ll use yours. They are much better than mine. I wasn’t watching the market today and didn’t notice BOFI going down. However, I could use a few more shares. It was 7:50pm when I finished reading your writings. I checked the charts and bought the last 100 shares offered at 100.87 before 8PM market closing. Thank you. Rob.

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Neil: that may just be noise but wanted to ask your opinion about the following from Cramer:

"BofI Holding: “You have to understand the way I work. I leave here, I see the stock down $40, I try to do profiles. I read things, I try to figure it out. And I have to tell you the other day I had no idea. So I would be a fool to tell you it’s a buy or a sell. Because I could not understand a word about why it was down $40 or up $20. That’s no-go for me.”

My idea of Cramer is that he is a pretty good trader. Why do you think he didn’t have his own little theory about what has happened to BOFI stock price these past days?

tj

tj, it’s just my opinion. FWIW, Cramer used to do the same thing when he ran a hedge fund. Here’s an interview with him where he talks about it:

https://m.youtube.com/watch?v=GOS8QgAQO-k

Neil

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Why do you think he didn’t have his own little theory about what has happened to BOFI stock price these past days?

Because he’s not as knowledgeable/clever as he thinks he is?

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“Please come to your own conclusions.”

No thanks Neil. I’ll use yours

Rob, Saul has posted that he liquidated the bulk of his position today, and he’s a much, much better investor than I am, and has a talent for sniffing out trouble to boot.

I wouldn’t recommend that anybody use my conclusions without doing their own analysis and very carefully considering the risks. I could be terribly wrong about what’s going on, and even if I’m right and BOFI eventually goes on to do well, Saul has pointed out many times that it doesn’t matter what the stocks you sold do as long as you’re happy with the performance of the stocks you own.

It’s very easy to get attached to stocks you own, which can make it hard to recognize the investment as a mistake. Saul is very good at spotting and ruthlessly correcting his mistakes, and I personally believe that’s a big part of his outperformance. I’m pretty muleheaded, on the other hand, and would like to see some real evidence of wrongdoing in this case. I’ve been through this before, and have seen how the shorts can throw their weight around, and this looks suspiciously familiar to me (as I posted). But that doesn’t mean it’s a good investment decision: I could be very wrong, and things could go very south from here, and there may be other perfectly good places for your capital. Nobody should stay invested just because I am. Please, do come to you own conclusions.

This is going to be my last post about BOFI for a while.

Neil

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That’s just the way it is. That’s why I choose the stocks I wish to own based on the financial metrics, but why I study charts carefully (technical analysis) to determine entry/exit points.

Machine trades don’t do fundamental analysis. They’re focused on the technicals. The distinction is important to know/understand.

Amen. The market reminds me of the old multi-purpose stadiums that used to host a football game one day and a baseball game the next. Except in today’s markets, the two games are being played at the same time, using the same ball.

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