Thursday, January 13, 2011

Thoughts on Short Selling - Reference Bloomberg

Very long, with lots of short-selling tidbits.

The main thrust is that Short Sellers have been generally making bank off of Chinese listings in the US. In particular, it's reverse mergers that are discussed, but you know that some of the same people have been targeting LDK even with its full IPO, and with the documentation and credibility that go with it.

Asensio is mentioned as the original source of a short target, and he has also previously put out a hit on LDK.

As LDK Investors, we have to our advantage the fact that there is such a culture of distrust of Chinese companies on Wall Street. When the selling culture gets so excited about an entire group of easily connected companies, they'll hit all of the companies, and in time, the ones that hit the wrong companies (LDK) will be destroyed, to the benefit of Longs.

In particular relation to Chinese Companies, it's quite likely that there are at least several "LDK's" out there. The growth in so many industries is simply so fast, that a bunch of Wall Street number crunchers can't handle it. They are naturally skeptical (and many are led by race / culture / nationality, rather than objective economic fact).

One point that I thought was interesting was a connection between the following statements describing the article's main character, John Bird of Austin Texas, and regarding Bird's short on Sky One ( CSKI ):

"By August 2009, Bird was ready to place a serious bet. He logged onto his account and sold short 30,000 shares at $15.70"

"Sky One’s shares retreated 69 percent in 2010, and Bird put $500,000 of his $1 million-plus in profits into a startup cancer drug company. His suit against Sky One’s auditors drags on. He’s still short 175,000 shares of the company and hopes the next salvo will come from the SEC."

So, in August of 2009, Bird sold 30,000 shares at $15.70, or $471,000. Per the article a 69% decrease in the price of the shares provided over $1 Million in Profits. So, he had to have shorted more around the peak of $22 at the end of 2009 (a margin call is described in the story). He takes out $500,000 Dollars in profit and ends up with currently 175,000 shares shorted.

Looking at CSKI at puts their short interest at around 1.6 Million Shares, so Bird is sitting on a fat chunk of this interest, and he's helping to keep the supply of shares higher than the demand, and as of right now he and his buddies appear to be succeeding.

Fair and square.

Yet, he's pulled out $500,000 in "profit," and his short position has grown by almost 6 times, while the value of his short has only gone up around 4 times, at best (from $22 to $6).

So Bird has borrowed and sold a piece of this little company to the tune of 175,000 shares, or about a Million Dollars worth (at $6), he's sitting pretty with Greek Statues in the yard, as long as he doesn't ever end up having to value those shares at, say, $15. He's got lawsuits against the company, and everything. We know how this works.

But, what happens if some global "Sputnik Moment" were to dramatically raise the valuation of CSKI, overnight? He'd be screwed, wouldn't he? Remember, he started out with less than half a Million dollars in short risk on this company, and now, though he's taken profit, he's still sitting on more than twice the short risk, at less than half the price of the original short.

What does it mean when you take profit on a short, invest that money into some other company for shorts to shred, and end up with twice the short debt? I guess I don't know what it means, but I'd say that it's pretty clear that your lifestyle very much depends on those shares never coming into vogue (his position in this stock is about equal to one day's trading volume), because unlike buying long, if the trade goes badly the wrong way, he can't just sell the shares and capture some profit; he has to take money from SOMEWHERE ELSE and BUY shares (or his Broker will do it for him).

Ah well, something to think about in terms of general shorting practice, as potentially applied to LDK. As for CSKI, I don't know anything about it, and for all I know, Bird might be right.