Zeev -- OK, here's a more detailed response to your post.
First, let me note that you don't really respond to my arguments.
Instead, you adopt a somewhat condescending, professorial tone, admonishing me to study things I already know and to recognize things I'm already well aware of.
Nevertheless, here's my reaction to what you wrote:
<< What you somehow fail to recognize are two major factors, first
floorless have a conversion ceiling (HEC's last European debenture's
ceiling is $6.5/share, which was close to the price when issued, the AND ceiling is at $16.5) and that most of the short position is set up at or just above the ceiling. >>
You speak of HEC's European debenture as if it were a floorless. If you and I are thinking about the same issue, it's not a floorless; it's a straight convertible debenture.
The HEC floorless issues ($15 MM Series F Preferred and $35 MM development financing) have no ceiling. While some floorless issues do have ceilings, it's not a universal feature.
BTW, I would agree (if you were to offer the argument) that the presence of a conversion ceiling makes it easier for a predatory floorless "bandit" to avoid a short squeeze. If there is a ceiling, that is.
<< The second factor you fail to recognize that floorless are "look back" situation, you decide on converting by looking at the price action of the last 30 or 22 or some 45 days. >>
The lookback is important, but what it means is that the "bandit" has to convert immediately after completing the selling or risk the possibility that the stock might rally in his face once the selling pressure subsides.
<< That is why it is extremely rare (and I know of not one single case) for the floorless bandit to be exposed to having to convert above his short stated position. >>
Unless the "bandits" converted immediately after completing their short selling, this implies that no stock of a company with a floorless has ever rallied once the bandits finished shorting. I don't have the data you claim to have, but I'd have to see it to believe it.
If you don't mind me asking, how do you come by such detailed information about the "bandit's" average selling price that you can state this conclusion? Only one of the bandits would have such knowledge.
<< In all this I have not taken the "discount to the lowest price
in the last 30 days" feature yielding an additional safety blanket. >>
When and if there is a discount, it helps ensure that the owner of the convertible makes a return equal to the discount. I'd agree (if you were to offer the argument) that a discount would tend to encourage short selling by the owner of the floorless. But, like the ceiling, a discount is not a universal feature of floorless instruments. HEC's two floorless issues, for example, include no discount. In fact, one of them has a premium (a negative discount) for part of its life.
<< Last, as a large investor (who has probably assigned an individual to follow up on the company, or even has a seat on the board some times), the floorless knows ahead of you and me what is coming down the pike, and thus can implement temporary strategies to exploit minor price variations, and because of its position, it can even cause run up into which to short (like in HEC near the close on Friday). >>
Before you argued that management would collude with the floorless holder to help him short at advantageous levels. I called this corruption (arguing that it would rarely if ever happen), and you objected.
Now you have softened the argument, suggesting that the seller is merely an informed insider. Can you give me some specific examples of a BOARD MEMBER shorting shares against a floorless position. Such insider transactions would, of course, be disclosed in SEC filings.
<< Go and read a number of the documents associated with normal (fixed
conversion rate) and floorless debentures >>
Been there; done that.
<< and stop falling in love with a stock.
My own personal rule is very simple, you see a company issuing a
floorless, get out. If you are inclined to short and you can borrow the shares, short it. >>
Your personal rule? So you are short the stocks you are criticizing?
Joe |
