9/4/00 StreetCom:" Respect the 'UP' Machine ".Part II Anatomy Of a Short Squeeze :
thestreet.com
Respect the 'UP' Machine
By James J. Cramer
Originally posted at 10:00 AM ET 9/4/00 on RealMoney.com
Why don't I talk about short-selling more?
Why don't I spend more time hacking down stocks?
Two reasons: one is that America is not yet ready for people knocking stocks.
I know that from Wavephore, the stock I knocked on CNBC at
$15. It's now at less than a buck. I don't hear any
cheers. And if you want to pay my $50,000 legal bill for
the investigation into whether I profited from the
decline -- I didn't and was never short the stock -- be my
guest.
There's no public service award for knocking stocks, even
if in your head and heart you think they should be lower.
But the main reason I don't talk about short-selling is
because it's dangerous.
It's too hard for people, even professionals, at times,
and so should be discouraged, not encouraged.
One look at the tragedy that falsely felled Emulex
(EMLX:Nasdaq - news) tells you that.
Mark S. Jakob, who allegedly dropped this highflier,
didn't approach this ruse, which will now destroy his
life, because he wanted to profit from buying low into
Emulex. He issued the release because he was short Emulex.
The pain of being down so much on a stock that looked like
it was going to go to infinity -- the shorts' real
nightmare -- was the motivating factor behind this amazing
fraud. It was at the root of Jakob's downfall from honest
short-seller to perhaps soon-to-be convicted felon.
Believe me, if he'd been long a stock and it was getting
hammered, he would have dealt with the pain in a much less
felonious manner.
I've been there.
I 've been short a stock and watched it go up and up
-- and I don't mean Amazon (AMZN:Nasdaq - news),
which is just a few points from my basis --
and daydreamed about some fraud or debacle that might bring
the target low.
I have watched, in horror, as a stock I've been short
gravitated up endlessly. (I wrote about this once, with
the stock of Noxell, which was subsequently purchased by
Procter & Gamble.) I have lost millions shorting.
But I have also made millions shorting. And I know the
risks and the pains. Most don't.
When my wife and I were reading about the unraveling of
Jakob, she said to me,
"You could do a real service on TheStreet.com and write
about how people who aren't pros should never short.
They don't know that the pain of a bad short is so much
worse than the pain of a bad long." That's the
understatement of the year.
When you sense that the whole world is high-fiving a short
of yours, which I'm sure Jakob felt because Emulex has had a staggering run,
the burden can be with you every waking
second.
You can see Emulex everywhere.
You wake up with a chart of Emulex going to $2000 in your head.
You imagine splits.
You fantasize about horrible new contracts that might come Emulex's way.
When you're short a stock like Emulex, you see your whole
financial life pass before your eyes.
You start thinking about how it has wiped out two or three
years of earnings. And that's before tax.
You think your parents will turn their backs on you, as
they would never understand shorting anyway.
You wonder whether anything will ever bring the stock down.
Then you take matters into your own hands.
And you get caught in no time.
What was the short case on Emulex anyway?
That it was "too high?" In a world where stocks routinely
sell at 500 times earnings, or have no earnings at all,
who's to judge whether Emulex is too high?
That it was about to miss?
It had just shot the lights out with its quarter.
That it was going to be downgraded?
With rare exceptions, stocks only get downgraded because
everybody knows that they've become dogs, unworthy of the
sponsorship machine.
There was no great short bet here other than one that
would apply to dozens of other stocks: It went up real
fast, so maybe it will come down real fast.
What's the conclusion you should reach if you're playing
this game at home or from an underfunded perch as a
nonprofessional trader at work? How about don't short if you aren't a pro.
The pain isn't worth the potential gain.
On Wall Street stocks are meant to go up. They are promoted
and flogged and pushed and loved.
Respect the "UP" machine.
Short-term, it almost always wins.
And all you have, when you are shorting,
is the short-term.
It's just too hard to do.
=================================================
From The Street Com
by James Cramer
8/28/00 Buy-In Blues
thestreet.com
What happens when you can't borrow a stock? What happens if you are short 15,000 shares of Krispy Kreme (KREM:Nasdaq - news)
and you get the call from your broker than you have to deliver your stock because it is needed by someone who has purchased the equity?
Here's what you can't do.
You can't get on the phone and say, "Don't take my stock, I need it."
Or,
"Don't take my stock, you gave me a locate."
Or,
"Get someone else to give up and cover, not me."
The brokerage firm is only interested in one thing, completing the transaction for the real buyer by finding stock to send to him.
The brokerage firm that told you it could locate stock for your short has every right to turn around and say,
"Hey, man, sorry about that; your locate is now no good. We can't find any stock to borrow. We are buying in your stock."
Sometimes they don't even tell you.
They just close the short out for you.
That's what I think is happening now in Krispy Kreme. I think that brokers are going in and simply closing out shorts at the market.
They have lent out too much stock and now they have to recover it because failing to deliver stock to a real buyer is simply not allowed.
I know this doesn't seem fair. It seems wrong that you could have played by the rules, gotten a borrow and only to get closed out anyway.
But when you set up a margin account to do short-selling, one of the things you agree to is the right to be hosed by a brokerage firm
desperate to bring in shorts so that it can deliver shares that it owes to real buyers.
You granted the broker that right. You can't retract it in the heat of battle.
In my experience, the brokerage firms usually cut you some slack. They send you a notice saying that they need you to close out your short.
Typically in these cases you are getting clobbered because the stock has been taken up by the squeeze. The last thing you want to do is call it quits.
You would rather put out more stock with the hope of getting a better average. Some bold scofflaws short more anyway in a fleeting hope
of getting lucky intraday. When the stock doesn't come in at the end of the day, they rush to cover those shares because they know that the shares can't be borrowed.
I never put out more. I figure I will just be compounding the squeeze and I don't want to risk the righteous wrath of my broker.
I know that to short without getting a borrow is a violation of the rules that we must play by.
Sometimes, I get lucky and the broker will find some stock at the last minute. Some natural sellers materialize.
Someone else capitulates. Somebody knocks the stock down with a downgrade and it frees up shares.
But most of the time, after a couple of days of stalling, I get a call that goes like this:
"Your choice Jim: You either cover your short yourself or we buy you in at the end of the day."
I immediately go into the open market and take the loss.
Always better to buy it yourself than have them do it for you.
Sometimes, though, I don't even get the call.
I could come in one day and find I bought 15,000 shares of Krispy Kreme at 92 in a prearranged trade after the bell.
It's a nasty business, especially because in every case where I was bought in,
I paid well above where the stock was trading. Again, that's perfectly legal, although hardly honorable.
That's what happens if you let it go until there is no hope left.
This hard-to-borrow syndrome is why I frequently use puts to play the short side rather than short
common stock. With puts you are limited to your investment. You can't lose more than you put in.
Whereas if you short common stock at say, 50, you could find yourself down hundreds of thousands of dollars on those 15,000 shares.
But remember, just because you are in puts doesn't mean you are home free. The puts almost always reflect the tightness of the borrow.
You will have to overpay to buy them.
Still, there isn't much worse than being bought in. It is better to throw the put money away than it is to take a report well
above the market from some trader who doesn't care what happens to you, as long as his firm gets the stock. Nothing's worse than a buy-in in this business. It is the ultimate loss of control of your own money.
8/28:The Floating Donut
thestreet.com
How does it happen that Krispy Kreme (KREM:Nasdaq - news) can go up every day?
How does it happen that it can go up by leaps and bounds? Pretty simple.
So many people are betting against Krispy Kreme that it can't go down unless things plummet drastically.
Just so we get this straight, I was thinking, "Wow, this thing is incredibly overvalued and is probably due for a fall.
Maybe we should short a little of this one." But before you can short a stock you need a locate.
We called Goldman Sachs, where my account is kept, and asked if it could be borrowed.
"Absolutely not" was the answer. Not a chance.
And that explains why this stock can keep going higher. I
t goes higher because it can't be borrowed and yet many people shorted the stock,
betting it had to fall. When it didn't, new buyers came in and took it up.
When they went to get their stock, the stock turned out to be lent to short-sellers.
Now these buyers want their stock. They have call on the stock.
The shorters are having their borrowed shares called away from them.
And they have to buy.
They have to cover.
Because they can't stay short without the stock in hand.
So it goes up and up and up and up. Until? Until who knows.
8/29/00 Donut Holes
thestreet.com
You could spot this Krispy Kreme (KREM:Nasdaq - news) short squeeze 100 miles away.
We don't "play" short squeezes at my shop, but this one had so much going for it I am kicking myself,
especially because I love Krispy Kreme donuts. I think you could have gamed this squeeze, big-time.
Probably still could if you wanted to be a daredevil.
How do you spot a coming squeeze? You take one part cult following
(in this case, a following of something that really isn't that special, as much as our palates say it is)
and one part small float (that happens when you IPO something and toss in a gradual U.S. product roll-out) and you have a short squeeze.
We saw a similar thing in Snapple,
which, it turns out, was a lot like Nestea.
We saw it in Boston Chicken, which, it turns out, was a lot like KFC, except not fried.
And now we are seeing it in Krispy Kreme, which, it turns out, is just a donut.
Sorry -- I love them -- but this donut does not make you healthier, wealthier or wiser than the competition's donuts.
I knew it when I was interviewed on Channel 5, the New York City Fox affiliate, before Krispy Kreme came public.
I knew I was zeroing in on a cult fetish. But what made me reluctant to play was that I know how all of these end.
In the end, someone gives in. Someone breaks ranks and sells. Someone registers shares or does a secondary
or lets lose a salvo of stock that ruins the whole tightness, and, next thing you know, you can borrow the stock
and the shooting match collapses on top of you.
I have to hand it to the folks at Krispy Kreme. They do their part smashingly well. They issue just enough cautionary
statements to entice you into shorting the stock, but then deliver just enough superior results to make you cover one step ahead of the "locate" department.
So every day the game will go on.
The shorts will say, "Maybe today will be the day the longs come to their senses
and blow out of the stock. Maybe this will be the day when the insiders register and recognize that their wealth is ephemeral."
And the longs will say,
"This will be one more up day, as long as no one breaks ranks and sells."
And,
"Maybe I should buy a little more to make sure that the squeeze stays on.
" And this tug of war tends not to resolve itself until almost everyone who is short gets cleaned out
and then almost everyone who is long loses money. It is a remarkable, pitiable sideshow.
I remember when I would trade with my wife and I would ask her why a company doesn't take advantage
of the situation and create more stock. And she would laugh and say, "There would be no situation if they did that." Ain't that the truth?
8/29/00 The Buzz Beat: Cooking Krispy Kreme to a Crisp
thestreet.com
Buzz called me today. I didn't feel like taking the call, frankly, because his whole beach thing always wears thin with me come August. I mean, it's always the same with him, he's always having a Bloody Mary if it is before 12 and a Tanqueray and Tonic if it's after. And I get sick of him asking me for quotes, like "I am away from my machine right now, how's Vertex (VETX:Nasdaq - news)?"
And when I tell him it is up 8 -- he only asks for stocks that are up 8 -- I have to hear how he just bought 100,000 shares yesterday, and whether he should flip it now.
But I always learn from Buzz Gould because he always has a new trick. He is as inventive as all get-out and you have to enjoy the pure bloodlust in his game. He really doesn't care about anything other than fooling the public into sending more money to his firm, and the way he does that is to continually walk his stocks up until they blow up, when he sells them down 10 or 20 or 30 points. So what, he says, he walked them up 100 split-adjusted points, and a win is a win.
With only a few days left before Buzz is back on my floor again, though, I figured, what the heck, be neighborly and listen to this young gasbag as he legend-izes himself one more time. Soon he will be back flipping IPOs and smoking some of Castro's own 75 feet from me, so I better get used to it. So, listen and learn.
Buzz: "Cramu, how do?"
Cramer: "Terrific Buzz, my International Paper (IP:NYSE - news) just rallied five-teenies and I am feeling real good about this Mead (MEA:NYSE - news)."
Buzz: "Oh, man, what are you doing, going to become a paper-bag and school-supply salesman? You don't honestly still trade those stocks do you?"
Cramer: "Well in 1994..."
Buzz: (Cutting me off)... "I wasn't even born then, Crames, come on, get with the program. Anyway, I wanted to let you in on a game we have been playing all summer. Need a few more players though."
Cramer: "Sure Buzz, what's on your mind?
Buzz: "You are a good man, Cramu, let me tell you, I think that Todd-o is having a positive impact on you. I think he's getting you to think more like us at Scores and Tens after a few 'tinis. Love that Todd-o. Anyway, here's the deal, the stock is Krispy Kreme (KREM:Nasdaq - news). We need you to buy a hundo, and then immediately take the stock out of the vault. Put it in your cash account."
Cramer: "I dunno Buzz, that one has had a big run. Seems a little overvalued. Make that a lot overvalued."
Buzz: "Oh #@%$!#%@ the fundamentals. I mean, like, who gives a @#$%@@# about the fundamentals? What are you coming to me with the fundamentals?"
Cramer: "You came to me, Buzz."
Buzz: "I am letting you in on something big. Squeeze of a lifetime. We can really send this one to the moon if you come in. All the guys are doing it. We are taking our stock out of circulation immediately. We are having a field day. It is without a doubt the best squeeze since Diana. Remember Diana? Remember how we got that one going? That seafood and semiconductor play? Or was it fish and chips? Damn, I forget. Anyway, we know what Krispy Kreme makes. And the JP Morgan analyst just said that no one makes donuts like Krispy Kreme, they are really very different from all other donuts, like its proprietary, really special."
Cramer: "What happens after I buy it? Are there some analysts who are warming to it? Is it having a good same-store month? Are they opening in a new city?"
Buzz: "More ice, and can you get the Cherrystones, these Littlenecks are too chewy. Oh, sorry Cramu, had to get something done on the food front. Anyway, where was I? Oh yeah, none of that stuff, that I know of, although that is a possibility. What I do know, though, is that Remarc Brothers is scrambling like mad to find stock, and nobody has a share -- not one red share to be found. It is tighter than a drum. We think we can put a couple of short-selling firms out of business. And when they come in and cover we will be able to sell our stock at $120, easily. I think there's a hundred points here when they have to come in. Somebody's short a monster amount and they are going to take him out and do the buy-in if they can't find any shares. Your buy of 100,000 should trigger the buying if you take that stock out of the vault. That's key, though you have to take it out. You can't just buy it. That accomplishes nothing. We need stock taken out of circulation.
Cramer: "How do I know you won't sell into my buying?"
Buzz: "Nah, I am enforcing this squeeze. I catch anybody selling, I am going to pay them a visit. Write some false posts by them on the boards saying that they leaked the DLJ bid. Get 'em in a heap of trouble. Nobody breaks ranks on this squeeze until the short-sellers go bust. You got me? I don't want you in if you don't take the pledge.
Cramer: "Let me pull the file and do some work on Kreme."
Buzz: "Why you scum-sucking goody-two-shoes, Batchmo told me you wouldn't do it. Well, anyway, when I get back into the city next Tuesday, I'll get you on board. I know I will. I gotta couple of other firms that I have to pitch this to and make it all ironclad-like. Gotta run, man. 'Jints go 9 and 7, you heard it from me, boss."
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