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Technology Stocks : VALENCE TECHNOLOGY (VLNC) -- Ignore unavailable to you. Want to Upgrade?

To: Harold Hertzfeld who wrote (14652)	9/18/1999 2:58:00 PM
From: Rich Wolf	Respond to of 27311

Hi Harold, There was probably some confusion from my speaking loosely about the 'short MMs,' since what was meant was the investors/funds who used particular MMs to short the stock, not the MMs themselves. Though I don't know if they can be ruled out, since isn't it also true that MMs can elect to take a position in a stock, and won't necessarily 'zero out' their accounts at the end of each day? Thanks again for your thoughtful analyses. I think you nailed the strategy behind the transaction involving the apparent rollover of the 700 contracts, and the confusion probably initially arose because of the lack of exercise from the transfer of the contract for the Sep 5 calls. Regards, Rich

To: Harold Hertzfeld who wrote (14652)	9/18/1999 4:11:00 PM
From: John Curtis	Read Replies (3) \| Respond to of 27311

Harold: MM's can, and do, short stocks they make a market in, usually in an attempt to keep it under control. If I'm not mistaken they don't necessarily have to close these positions out at the end of the same day they initiate them. If memory serves, I posted an article some time back(I'm using a friends machine hence cannot access it right now) here on the VLNC thread which was an articulation of MM methodology as it relates to shorting, etc.. Indeed, the gist of the article strongly implied MM's oft-times don't have an intrinsic understanding of the company's business, they're just there to insure a proper market is maintained. Of course in light of all they can do with the power they have, much of "evil", heh, intent is proscribed to their action, particularly by those on the receiving end. ;-) This is not to say they won't run a short under the command of someone else, but it's that someone else who'll reap the positive, and negative consequences. They're just the "go-between". Anyway, just some thoughts. One question. You made a VERY interesting statement about VLNC no longer being defined as "shortable". To which I say..."Whaaaa?" Is this true? It'd certainly go a long way towards explaining some things, but where did you hear this? And can anyone confirm? Regards! John~

To: Harold Hertzfeld who wrote (14652)	9/20/1999 1:10:00 AM
From: kolo55	Respond to of 27311

I don't think its the market makers themselves. You wrote: I was reviewing your explanation of how the market makers can use their long stock position to drive a stock down by selling at the bid prices. Although I have shorted often I am still trying to come to terms with this dialog between you and Rich. I really do feel somewhat lost. Let me take a different approach. I hope you do not mind correcting and commenting on the following. Thanks. Harold, I would like to comment on your post, but I will break it down a bit into pieces. Let's start with the market maker questions. First, I don't believe that the market makers are the big sellers. I suspect hedge funds or other professionals who are following a program of shorting stocks that have floorless convertibles. I believe these guys are the real "floorless bandits". Also I believe that Castle Creek has jumped in at some points to take advantage of the floorless conversion feature. The market makers' business is quite different from the game these guys are playing. Although I don't dismiss the possibilities of MM manipulation, I usually ignore these theories because of the very short periods (one day) involved. I'm an investor, and not a day trader. In the instance of Valence, and the so-called "death spiral" cases referenced by Zeev, the time periods last over 4-5 weeks, and in some cases months. I don't see the MMs as the key players here. In my posts I have alluded to a selling coalition that seemed to be attacking the stock in a semi-coordinated way, especially in August. I use the word "coalition" because the attacks seem to have be timed to occur together, which implies some communication between at least some of the sellers. I have talked about why I believe such a "sellers coalition" exists, and in the next post I will go into this in more detail. Now lets review the next part of your post: If a market maker is selling stock aggressively to push the stock price lower he would certainly expect to scare some innocent stockholders into selling their stock "at the market"--at the bid price--in hopes of salvaging something of their original investment. The MM anticipates that this panic selling will take place as a result of his selling actions. The MM then expects to profitably buy back the stock that he sold earlier at the new lower price. But a market maker normally would not carry an inventory of stock over night. And therefore bright and early in the morning he would not have a stock position to sell for the above purpose. I believe that John C told us that a MM can short a stock on a downtick in the normal course of "making a market' for the stock. This would give the MM the right to "sell" the stock at the beginning of the day at the bid to encourage the desired selling wave. And as long as he covers this short position before the market closes the same day he would not have to worry about "borrowing the stock to make the short sale possible." (He is governed by a different set of rule than the rest of us.) At the end of the day he goes home "flat" i.e, with no inventory of the stock and hopefully for him a profit. Harold, I have heard this explanation of a market maker shake-out before, but this isn't the kind of thing I'm talking about. Again, the manipulated sell-off in Valence stock has taken place over a much longer period of time. Next point: Now if the above market maker also had a customer who has a stock position that he was intending to use to to drive the stock price down the market maker could sell this stock at the bid also. At the end of the day he could simply buy the stock back for his customer at the new lower price and also buy back the stock he needed for his own account. With the team approach the investor sells at the bid.. And "his" marketmaker would short at the bid. And the process would continue as long as they can buy the stock back in the market at lower prices at the end of the day profitably. We don't know exactly who is selling the stock down, but we can see the activity of the market makers. Assuming that a big seller uses primarily one market maker, then we can try to observe the action of that marker maker. In the August sell-off, most of the selling came through three market makers, out of the dozen or so that make a market in VLNC. When the stock got down in the low 4s, around September 1, most of the selling came from one MM. Since that time, the other two MMs have been mostly absent, with the exception of the days the stock climbed over 6. But one MM has still been selling a lot of stock for their client(s) (more on this later). It is quite possible that this MM is handling CC's trades. During the August sell-off, there were many times we saw the pattern of apparently shorting on the ask, followed by an immediate attack of selling onto the bid, in a very short period of time. The selling was thus done in a very splashy obvious way, usually in spurts, and especially around 10:30 AM ET and in the last 30 minutes of trading. These frenzied selling spurts, could very well have been the floorless bandits, shorting at the ask, and selling from any long position, and could easily been exacerbated by their MMs who played along side their clients, for a short time. Now about the long and short position of Valence held by the same investor. If a customer owned Valence stock he certainly could also be short any number of shares of Valence stock....providing that he borrowed the stock to initiate the short weeks ago. Severl weeks ago to add to the selling pressure he could have sold stock from his long position at the bid...or sold short more stock on an uptick. I think this is exactly what I believe happened in August. There were several periods when we saw selling consistent with this pattern. The next question is why would anyone sell/short more and more stock at lower and lower prices? Lets discuss that in the next post. Paul

To: Harold Hertzfeld who wrote (14652)	9/20/1999 1:12:00 AM
From: kolo55	Read Replies (1) \| Respond to of 27311

What is motivating the selling coalition? If there is a number of professionals shorting the stock, what is motivating them? I think that there is fair amount of money following a shorting program aimed at stocks that have outstanding floorless convertibles. From what Zeev is telling us, most stocks that issue floorless securities get hit with some sort of death spiral. If this is true, then a pool of short positions in stocks with floorless convertibles, could do quite well. Say they shorted 10 different stocks in the period when the floorless provision is activated. Then its likely that over half would get caught in death spirals with declines of 70-90% as Zeev so often quotes. Another 3-4 of the ten might suffer modest declines or stay relatively flat over the several months we might normally see the death spiral develop. And probably only one in ten stocks with this condition, beat the death spiral, and appreciate sharply. If they cover this stock, even after it doubles, they would still make a very good return on the pool of shorts. The operators who control this pool of money, probably don't even know that much about the underlying businesses of the stocks they short. They are operating using primarily a statistical model, whereas studying and understanding all the different kinds of businesses for companies that employ floorless convertible financing would be a very time consuming task. The floorless has a hyperbolic range; as it goes lower the convertible feature provides an increasingly larger number of new shares. For example, in VLNC's case the first dollar drop in price added 20% to the original shares, the second dollar added another 30% more, but then the third dollar drop would add 50% more, and the fourth dollar drop would add another 100% of the original shares. As the price dropped the dilutive impact increased hyperbolically. These "floorless bandits" may not even be in cohorts with the owner of the floorless convertible security. If they are successful in pushing the stock down far enough, such that it hits well into the hyperbolic range, then the owner of the floorless would jump in and sell in their own best interest. This would complete the death spiral, and give the floorless bandits an opportunity to cover their short positions at very low prices. The floorless bandits want longs in the stock to think that deteriorating fundamentals caused the sell-off. This in spite of the sell-off's timing coincidental with the activation of the floorless provision. This why they sell in such a 'splashy' manner, and hit the stock just before the close. The selling is designed not to get the most for their shares, but to discourage longs, stop them from buying, or even better, encourage longs to sell out themselves. But what the floorless bandits didn't reckon on, was Valence's deep pocketed insiders, and the ability of longs not to panic and sell out. We only saw one or two days of this kind of activity where the selling seemed to be coming from sources other than the three sources I mentioned earlier. And in the end, CC decided not to try and continue to push the price down further, and instead partially converted. So the steadfastness of the longs have thwarted the death spiral. Now what? Paul

To: Harold Hertzfeld who wrote (14652)	9/20/1999 1:14:00 AM
From: kolo55	Read Replies (4) \| Respond to of 27311

Dilemma for the naked shorts. Now to the next points in your post: I have been told that now it is no longer possible to borrow Valence stock for shorting purposes. An investor now cannot short Valence. So the above investor now can no longer short additional Valence stock. His only fire power remaining is to sell his long stock at the bid. Half of his firing power is gone. But wait....that also means that now someone with a newly acquired position of VLNC common stock can not short additional Valence stock to hedge his new stock position! And what if a CC is currently not fully hedged? If they cannot short they are open to the same market risks as the rest of us with a major portion of their stock holdings. So ........? Since September 1, the nature of the selling seems to have changed… Whereas we once saw the sellers attack the price with significant volume, mostly now we see a delaying action, and aside from a few fairly low volume attacks, selling that seems to be at the ask and attempting to keep the stock price from climbing. Take Friday's action; there were two attacks, one in the morning, and one only three minutes before the close. Aside from this, most of the trading was at the ask, by only one market maker, the same one I believe has been handling CC's orders. There were usually only two other MMs on the ask with small orders, and the rest were sitting about a quarter point higher. They knew if the one MM stopped selling, the price would jump a bit. I estimate that half the volume sold on Friday, came from this one MM. Over and over this MM would sell all the shares they had on the ask, but then 're-load' and place more shares out at the same ask price. This went on all day. I think the a lot of the selling is coming from CC. The other big players who were selling have pretty much stopped selling, but almost certainly still have significant short positions. We haven't seen the tape action indicating that the clients of these MMs who were selling heavily, have gone back and started buying. CC could be selling because they want to hedge some of the shares they got when they converted. Incidentally, it would be interesting to find out if CC converted more shares last week, after the Monday conversion. John Curtis, perhaps a call to the transfer agent is warranted. Your information on the inavailability of stock to short is interesting… although I find that somewhat hard to believe. I would think that there would be at least 3-4 million shares available to short. So if this is true, then it could put a lot of pressure on the shorters when the stock starts to take off. I believe the longs left in the stock have seen the worst, and aren't about to sell now. The only thing keeping the stock down appears to be CC selling some amount below their daily quota, to hedge some of their position. Longs are absorbing this volume, but aren't trying to bid the price up until CC eases off. But of course, if we get news, then this will attract new players to the stock. Also recent statements by the company officials to analysts and other investors appears to be getting more and more positive. The implication is that while they can't predict the first big PO, that we are very close, and could see one any day now. Then the shorts will just fuel the rise in the stock. Paul