The stock market is a numbers game, but what if the numbers are wrong?
Accurate numbers on public float for recent IPOs are hard to
get and that leaves investors in the dark
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
Sept. 9 -Does anyone out there really know
what's going on with the stock price behavior of
Amazon.com? That's one intriguing question to
emerge from the recent turmoil in stocks in
general, and Amazon.com in particular. Yet
surprisingly enough, the best explanation for
what has been making Amazon.com's price
bounce all over the place lately has little to do
with the behavior of the overall stock market.
Corporate earnings
Corporate dividends
Company news from Microsoft Investor
Recent SEC filings from Edgar-Online
Amazon.com
THE ANSWER seems to lie instead with some wildly
misleading investment data that is being circulated about the
company on Wall Street these days - data that a murky
cartel of Internet stock traders seems to be exploiting to full
advantage.
As everyone knows, the overall stock market's recent
convulsions have all but rewritten the book regarding price
volatility, with the Dow industrials careening 8 percent
downward then bouncing back like a financial super ball in
just six trading days.
Yet these convulsions are nothing compared to the
gyrations that Amazon.com has been going through. In just
two trading days (Aug. 31 and Sept. 1), Amazon.com's
price dropped more than 39 percent, then rebounded an
even more startling 42 percent, all the way back to $92.25,
during the four days that followed.
Data provided
by Microsoft Investor
Are we thus saying that on Aug. 30 this 3-year-old
company that has yet to report its first dime of profits was
worth $5.23 billion ... then four days later was suddenly
worth only $3.2 billion . then four days later still was
abruptly worth $4.6 billion all over again?
No, I don't think so. What the market gyrations in
Amazon.com tell us instead is that this stock in particular -
and more broadly, the stocks of all sorts of recent Internet
IPOs - are being viciously manipulated, both up and
down, by a small ring of speculators in the current market
turmoil.
More troubling, the manipulations are taking place
behind a veil of misleading market data published by
organizations ranging from New York-based Market Guide
Inc. to Investors Business Daily of Los Angeles. Both firms
gather, compute and distribute so-called "market float" data
that purports to tell investors how many shares of a
company's stock is being actively traded in the open market
at any given time.
Though everyone
seems to agree as to
what the term
"market float"
represents in theory,
there is no
agreed-upon
methodology as to
how to compute it
in practice.
This market-float data is vital to help investors keep
from getting exploited in the manipulations that have lately
characterized Amazon.com. Yet in too many cases, the data
looks to be downright wrong.
Market Guide Inc. makes its data available, free of
charge, on a Web site it operates, where browsers can
download a software research tool called Stockquest. The
Stockquest tool contains market float numbers for the more
than 8,000 companies in the Market Guide database.
Market Guide also distributes more complete packages
of its data - including the market-float information - to
Track Data Corp. of New York. Track Data in turn resells
the market float data to more than 20,000 high-end Wall
Street customers ranging from investment firms to major
retail brokerage houses. Bloomberg Financial Services also
publishes market float data which it acquires from a
company called Technimetrics.
Investors Business Daily also publishes market-float
data, making its own in-house calculations, then listing the
results next to each company in its daily listings of stock
prices on major exchanges.
All these firms count market float data for Amazon.com
in basically the same way, and in each case the result
appears to be wrong. Too bad for investors, who pay close
attention to these numbers because they provide - or
appear to provide - extremely valuable information for
anyone who thinks he's spotted an overpriced stock and
contemplates selling it short.
Amazon.com, Inc.
(AMZN)
price
change
$79.25
-5.250
Data: Microsoft Investor and S&P
Comstock 20 min.delay
Short-selling involves the sale of borrowed stock - in
effect a bet by the seller that the market price of the shares
will thereafter fall. The declining price enables the short
seller to buy the shares later on the open market at a cheap
price and pocket a profit when he "closes out" his position
by returning the shares to the lender from whom he
borrowed them in the first place.
The risk for short sellers is, of course, that instead of
declining, the seemingly overpriced stock simply rises still
higher, creating the possibility of enormous losses indeed if
the lender demands return of his shares and the short seller
has to buy them on the open market at a vastly higher price
than he "shorted" the stock for in the beginning.
In a worst-case scenario, a stock may turn out to be so
thinly traded that short-sellers find themselves unable to
acquire close-out shares at almost any price. This sends the
stock's market price into orbit while exposing the
short-sellers to potentially limitless losses.
To reduce the risk of that happening, smart investors,
traders and speculators alike all routinely look to see how
much uncovered short-selling already exists in a stock
before deciding to "short" it themselves. If so-called "short
interest" in a stock constitutes more than about 30-40
percent of the stock's market float, then smart investors
steer clear because they know that it's risky to "short" in a
rising market and dangerous to hold a "long" position in a
falling market.
And that's where the whole concept of a stock's
"market float" comes into play. The market float of a
company refers to that portion of the company's total
shares outstanding that are freely tradable in the public
market at any given time. When weighed against a
company's short-interest exposure, those companies with
large floats are much more likely to be less volatile than
companies with small floats.
"It's basic," says professor Jay Ritter, an expert on
finance at the University of Florida. "You can learn much
more about a stock's price and the dangers of a short
squeeze if you compare the stock's short interest to its
market float instead of to its total shares outstanding."
But actually determining the float of a given stock isn't
easy. Only shares registered for sale with the Securities &
Exchange Commission can trade in a public market. Yet
shares can be registered in at least two different ways: either
by a registered stock offering (an IPO, for example), or by
a so-called Form 144 filing by a holder of unregistered
shares - an early investor in a privately held company, for
example.
Though the situation is further confused by complicated
rules that limit the number of actual shares a holder of Form
144 shares can actually sell, no matter how many he or she
has registered for sale, there is ultimately only one way to
make even a rough calculation as to how many shares of a
company's stock are publicly traded: tally up all the stock
offerings and Form 144 filings ever filed for it with the
Securities & Exchange Commission.
Since the SEC does not require the companies
themselves to conduct such tallies, companies like Market
Guide, Technimetrics and Investors Business Daily have
moved to fill the void, hoping to profit by providing
investors with what would seem obviously valuable
information.
Unfortunately, though everyone on Wall Street seems
to agree as to what the term "market float" represents in
theory, there is no agreed-upon methodology as to how to
compute it in practice. This has in turn led to a wide array of
approaches - none of which seem to be fully accurate or
reliable all the time.
Rather than count up each stock offering, Form 144
filing and S-8 employee stock option registration filing for
each company in its database, Market Guide simply takes
the company's total shares outstanding, as reported annually
to the SEC, then subtracts from that sum all shares held by
officers, directors, other insiders and 5 percent-plus
institutional shareholders - whether such shares are
registered and thus publicly tradable or not.
In the case of Amazon.com, this has produced a
bizarre outcome indeed: a Market Guide tally, as reported
on its Web site and on Bloomberg as well, of a market float
of roughly 19.4 million shares. Investors Business Daily uses
a similar but not identical calculation, and is currently
reporting a roughly similar number of approximately 19
million shares in Amazon.com's market float. Bloomberg's
number from Technimetrics is likewise in the same ballpark:
18.39 million as of Sept. 9.
But Amazon.com's own spokesman for investor
relations last week told me the company's market float may
actually be as little as only 10 million shares, and that no one
at the company really knows for sure.
In fact, Amazon.com's float is 10 million at most. A
count of every Amazon.com stock registration and Form
144 filing since 1997 suggests that, even adjusting for a June
1998 two-for-one stock split and the exercise of employee
stock options, there appears to be no more than 9.5 million
shares in Amazon.com's authentic, real-world public float.
Officials at Investors Business Daily, Bloomberg and
Market Guide now say they're re-examining their
methodology in light of the discrepancy.
But the discrepancy goes further than just one
company. Take Broadcast.com, which went public in a
super-hot IPO that soared from $17 to more than $50 per
share on opening day only two months ago. The offering
featured a grand total of only 2.5 million shares, yet as of
Tuesday, Sept. 8, Investors Business Daily was reporting
Broadcast.com's market float to be 9 million shares - the
result of erroneously including in the float some 6.5 million
unregistered shares that can't be sold to the public until next
year at the earliest.
Why are these miscalculations costly? Amazon.com
has already caught the eye of short-sellers who think it is
overvalued, and as of mid-August (the latest data period
available) short interest in the stock had reached nearly 7.4
million shares. That's an already hefty 38 percent of the
total even if the company has 19.4 million shares now
trading in the market float. But it's a staggering 78 percent
of the float - a virtual corner on the market - if there are
only about 9.5 million shares in the float to begin with.
Who in fact owns those shares? Conventional wisdom
maintains that most of Amazon.com is in the hands of
individuals. The Microsoft Investor Web site, for one,
reports that institutions only own 22 percent of the
company's shares. But this is 22 percent of Amazon.com's
49.4 million total shares outstanding - and is probably too
high in any case since it means that institutions own 11
million shares when that is more than are even in the float.
In fact, the ownership of the float is not that hard to
establish. From so-called 13F filings with the Securities &
Exchange Commission, it appears that as of June 30, more
than 8 million shares, or nearly 85 percent of the public
float, was in the hands of just 10 mutual funds and other
institutions. One of these funds is listed in yet other SEC
filings as the current holder of nearly half the total float in the
above-mentioned super-hot IPO, Broadcast.com.
Such concentrated positions in thinly traded stocks like
Amazon.com and Broadcast.com give a small number of
institutional holders enormous influence over the price of
such shares - influence that can help propel a company
with shaky fundamentals to interstellar valuation multiples at
the expense of misguided short-sellers, then leave hapless
individuals holding the bag as they scramble to grab a hot
stock, even as the funds quietly sell out into the rising price.
Says a former short-seller for financier Carl Icahn, who
now runs one of the Web's most popular financial research
sites, "I'm totally convinced there's a lot of games-playing
going in the shares of these stocks. I can recognize it when I
see it."
For investors who thus think Tuesday's rebound in the
Dow Industrials signals a new buying opportunity for
Internet stocks, what else is there to say but, "Beware."
Without reliable data regarding the market floats of these
and other recent IPOs, the deck is simply stacked too
strongly against them.
|
