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
