Cramer story/comments on I* in thestreet.com
Yahoo chat last night
pkkani asks: Jim, What do you think of Iridium as a trading
stock? Long or short?
Creme_Delacramer: Iridium is in a short squeeze mode
right now. In other words, this is one of those situations
where you cannot borrow the stock and people who are short
it are panicking and buying the stock back because they
cannot deliver it.
___________________________________
COMMENTARY >> WRONG! REAR ECHELON REVELATIONS
Iridium Could Prove a Painful
Squeeze
By James J. Cramer
7/16/99 9:13 AM ET
You think Iridium (IRID:Nasdaq) is going to zero. Talk of
bankruptcy -- a bankruptcy that would surely wipe out the
common stock as that it the first level of corporate structure
to be taken out and shot -- has you thinking, hmmm, 7
points down.
Hold it!
This stock can't be sold unless you own it. On my machines
a big flashing R tells me that it is restricted. If you don't own
this stock, you are breaking the rules if you short it. If your
machine doesn't alert you and you want to short it, you
could be out of luck.
Lately, perhaps because the market has had such a run, I
am getting a ton of inquiries about shorting. The Iridium
inquiries are jamming my box. Everybody wants to bag
these 7 points down. Everybody.
I say forget about it. Don't even think about defying the rules.
You can't short a stock that can't be borrowed.
To go over the cadence again, when you want to short
something, the first thing you have to do is find out if it can
be borrowed. Sure it looks like there are 7 juicy points of
downside to Iridium if the company files for bankruptcy. But
those are points that will always elude you if you can't get a
borrow.
What does a borrow entail? Remember the ABR
Information Services (ABRX:Nasdaq) debacle? I described
the process that allows you to call the stock loan
department of your brokerage house to see if you can first
locate some Iridium stock to sell.
Even though you don't own the stock you short, you have to
deliver something to the buyer. Your brokerage house has to
find stock somewhere from some vault to lend out to you to
sell. Right now every conceivable share of Iridium that can be
borrowed is borrowed. It is lent out. There is no stock to
send to buyers if you short it. If there are shares around,
they have been shorted.
Consequently, bottom-fishers who don't know better --
maybe one of the few thousand satisfied Iridium customers?
-- and people who want to profit from their existing shorts
(short coverers) bought the stock yesterday. If they bought it
from other short-sellers --illegal ones because it is restricted
from shorting -- these new sellers won't be able to deliver
stock.
You could be subject to a painful squeeze.
So what happens? Go back and read the ABRX story. The
brokerage house that did the buying for the customer will
demand that the client who sold the stock buy it back to
deliver some shares. If he won't, the buyer's broker will go
into the open market, buy the stock and just hose you, the
short-seller, with whatever price he wants.
That's a squeeze, the deadliest fear of a short-seller. It is
when merchandise that should go down goes up.
Now, you say, how about those lucky folks who already have
a locate. What are they doing?
They are sweating. Even if you have located stock to borrow,
it can be called away at any moment. The short-seller has
no guarantees that he won't be bought in anyway even if he
has a locate. As I described in the denouement of the ABRX
story, I was bought in viciously by a trading desk even
though before I executed the short sell originally I had
arranged a bona fide locate.
It doesn't matter. Locates are "subject" to change. Just like
the weather.
I know, it seems arbitrary and capricious. It is. But
remember nobody ever feels sympathy for the short-seller.
Don't weep. Accept it as one of the hazards of betting
against stocks. The rules are different in capitalism when
you want to profit from a company's woes than when you
want to benefit from the company's good fortunes.
The moral: Selling stock short may be the mirror image of
buying stock long, except when you can't borrow it to begin
with.
Random musings: This Microsoft (MSFT:Nasdaq) news is
generating some pre-market buzz. I am a part of it, taking
stock at 95 and change betting that MSFT might get beyond
its 95 options strike. (Please see archives for numerous
articles about how stocks tend to be pinned at the strike.)
Remember, summer Friday rules. Nobody big at a sell-side
firm works past 11:46. It is way too unfashionable. ... No, I
am not mad about Aaron Task's comment about first prize
being a morning with me in the trenches and second prize
being a week with me. Showed it to my wife and she said
she had obviously won the booby prize. By the way, I like
Task's column. It is kind of like early Letterman mixed with
early Abelson, before the former was really funny and the
latter was really cranky. That's good. It just needs more
hedge fund commentary and more TV criticism. It needs
less navel-gazing, as I don't think anyone is that interested
in a TaskMaster's navel.
James J. Cramer is manager of a hedge fund and
co-founder of TheStreet.com. At time of publication, his
fund was long Microsoft. His fund often buys and sells
securities that are the subject of his columns, both before
and after the columns are published, and the positions that
his fund takes may change at any time. Under no
circumstances does the information in this column represent
a recommendation to buy or sell stocks. Cramer's writings
provide insights into the dynamics of money management
and are not a solicitation for transactions. While he cannot
provide investment advice or recommendations, he invites
you to comment on his column at jjcletters@thestreet.com.
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