Monday, September 9, 2013

When Was the Last Good Market Corner? Volkswagen?

We've written about corners before: Joseph Leiter, the Hunt brothers, K-V Pharma's drug Makena, and Malaysian tin. Corners seldom happen now, perhaps because ownership disclosure requirements (e.g. 13D/G) have taken away the element of surprise.

It could happen again with Sears. Posters at CB&F have figured out that almost all the shares of Sears Holdings are owned by true believers with more than the remaining float sold short. (Between 85 and 95% "locked up", depending on how you define, and somewhere around 15% sold short.)

Baker Street Capital today released a very thorough report on Sears valuation, which also showed their calculations of short interest and float. They believe that 93.5% of shares are held by "committed shareholders," leaving 6.5% as the effective float, versus 14.8% sold short.

That would be 200% of the float sold short, about the same ratio (and absolute level) that was sold short at the start of the infamous Volkswagen squeeze. Which, by the way, was a thought that had occurred to people in advance. From a article in 2008:

"Before the short squeeze occurred, various analysts had published research warning investors of the perils of trading VW stock. Adam Jonas, an analyst at Morgan Stanley in London, had cautioned clients of the dangers of playing 'billionaire's poker' in his research note on October 8, and suggested the size of short positions on VW far outweighed the true economic free float of the company. He added that Porsche needs VW to ensure its long-term survival, noting the company would not develop or manufacture a car in the future without significant resource sharing with VW or Audi (a car brand owned by VW). 'This 'need' for Porsche to control VW, combined with Porsche's long-term horizon, can create shorter-term share price anomalies that could take investors by surprise,' Jonas wrote."
Even though shorts are systematically smarter than many other types of investors, that academic research is more applicable in situations where institutional ownership is small and declining. In this case Sears is practically a private company.

Shorts can be wrong sometimes.

We've seen it from both sides now.

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