from street.com
Cramer Rewrites
'Short Squeezes and
Backfired Bets'
By James J. Cramer
3/3/00 9:02 PM ET
I felt like writing this
piece over because I
think people are still
mystified by the
process of a short
squeeze. Most people think stocks go up because
of the fundamentals. But those people who've been
in the game long enough know better. They know
that stocks can go up because they are promoted
or because someone who is betting against some
stocks has to buy them back or cover them. In the
last few years, the latter has increasingly been the
reason why stocks have flown up. I guess you could
say that's when good things happen to bad stocks!
Now that Herb's cried uncle, it is
important to recognize that many of
these outsized moves are
outgrowths of some of the most
amazing short squeezes in history.
(We saw something I thought I'd
never see: a column by Herb in
which he basically threw his hands up, saying
he just couldn't take it anymore. As Herb
speaks to short-selling sources, many of whom
are excellent at their craft, I think he
epitomized what I hear happening around the
street.
Good shorts don't go down. Great shorts go up
furiously because so many people are short
them. That's because in the last 10 years
thousands of hedge funds have been
established, and hedge funds are supposed to
be short bad companies and long good ones so
that they cushion you on the way down and
still make you money on the way up. But,
remember, I am a hedge fund manager and I
think that's a big crock. The time when stocks
represented companies' fortunes accurately
ended a long time ago. I care about bad
stocks, not bad companies. There are plenty of
great companies with stocks I wouldn't want to
own, such as Merck (MRK:NYSE - news -
boards) or Bristol-Myers (BMY:NYSE - news -
boards). And there are plenty of companies
that may not even exist in a few years that are
represented by stocks I wouldn't mind trading.
I thought of this dichotomy when speaking to
Robert Samuelson, business columnist for the
Washington Post/Newsweek syndicate. Oh, he
was all over me about my so-called "damned
the fundamentals full speed ahead" logic. Of
course, that's hogwash. I live and breathe the
fundamentals. But I'm like the general on the
front lines, and I see the chaos out there
firsthand. I know that the stocks that are going
up don't represent the ones with the most
profitability. They represent claims on the next
potential Microsoft (MSFT:Nasdaq - news -
boards) or Cisco (CSCO:Nasdaq - news -
boards). That's what the game's now about.
And why not? Many of us have met
millionaires courtesy of Dell (DELL:Nasdaq -
news - boards) or Microsoft or Intel
(INTC:Nasdaq - news - boards) or Cisco. We
know it happened. If we can find that next one,
even if it means losing on a bunch of others,
we're going to make a fortune.
I think Samuelson's beef -- and I suspect it's a
beef because when was the last time someone
from the press called who wasn't trying to put a
pickaxe through my cranium? -- is that this
process is somehow less rigorous than
examining companies on a price-to-book or
value basis. To which I say, if you don't think
what I do is rigorous, then tell me why the
heck it's so mentally exhausting and difficult,
and lucrative.)
I want to focus on four particular squeezes, where
bets against stocks backfired in a big, big way.
Remember, when you short stock, you have to buy
it back at some point -- unless it gets delisted. In
these four cases, the stocks "got away" from the
shorts. They just kept climbing and climbing and
climbing, causing a house of woe to be visited upon
those who sold shares short.
(Here is the core of this piece. So let's use the
case of National Gift Wrap & Box company
because these days when I suggest a short I
run the risk of being skewered by
BusinessWeek and I'm getting sick of having to
call my lawyer to defend myself. Let's say I'm
on the phone with the gift wrap analyst from
Remarc Brothers Investments. Remarc
Brothers, a brokerage, covers dozens of firms
and its analysts are quite popular. The gift
wrap analyst, Matt "FinePaper" Jacobs, tells
me that he hears of a potential for a shortfall
for National Gift because Champion papers is
pulling its gift wrap line from National. It could
mean a miss of as much as a nickel from his 15
cent estimate. Jacobs also swears that National
GiftWrap.com is losing National Gift a fortune
and is not going to be profitable until 2017.
Holy cow! The first thing I'd have done when I
got that call is call the Stock Loan department
of Goldman Sachs, where I keep my account,
and say, "I want to borrow 100,000 shares of
National Gift Wrap so I can short it." The Stock
Loan department then tells me they have a
"locate" on that stock. They can lend it to me
because there are many National Gift
shareholders at Goldman and they have kept
their stock in the vault and it's available for
hypothecation, and can be let out. That allows
me to basically pretend that I own 100,000
shares so I can sell them. That's what short
selling is. So, after I get my "locate," I go out
into the open market and sell short 100,000
shares of National Gift at the prevailing price of
$60.
A week later the stock is at $65. I call Jacobs.
He says he hears that things have worsened at
National Gift, that they may lose the St. Regis
line of fine papers. I call Stock Loan again and
borrow another 100,000. And I short that as the
stock climbs to $80. Now I'm really getting
killed. Sure enough, National Gift announces
that it's selling the new Climax line of gift wrap
and that Climax has taken a strategic stake in
the company at $100 a share to help fund its
dot-com initiative. Earnings are 10 cents better
than the street was looking for. I'm livid. I'm
dying!
The stock opens the next day at $120. Goldman
calls me at the end of the day and says they
can no longer locate the stock they lent me.
They have to find stock to send to real buyers
and they're taking the stock they lent me and
sending it out to them. I have to buy in my
short or they'll buy it in for me. I'm outraged.
I'm palpably frightened. I'm fearing I'll go out
of business. I argue that if they wait, maybe
other stock will come in for sale and I won't
have to cover. They are nice; they give me
another day.
The next day the stock goes up again as
Remarc Brothers recommends it. It's at $160.
Goldman's stock loan department is no longer
arguing with me. They go into the open market
after the close and buy the stock in themselves,
closing out my short. That's the biz! It's a
perfectly legal action. They spike the stock in
doing so, bringing it up to $200. I have to take
a $200 buy price on my short to close it out. I
have lost millions upon millions of dollars on
these shorted 200,000 shares. I call FinePaper
Jacobs and ask how could he do this to me. He
reveals that he'd spoken to a hundred hedge
funds all eager for short ideas and that he got
everybody short, and that he feels real bad.
And then he says, "Better luck next time" or
"Easy come, easy go." There are so many
hedge funds looking for short ideas that if you
get one, someone else has it. And you get
squeezes -- and that's precisely what happened
to National Gift.)
The first is Rambus (RMBS:Nasdaq - news -
boards), which was effectively chronicled here -- if
not predicted -- by Marcy Burstiner in our fine tech
coverage. People thought Rambus would be
designed out; they are in big-time. Now the stock is
grotesquely overvalued as the shorts try to reel the
stock back, but the longs won't let them. (Many
people kept thinking that Rambus wouldn't get
a key design win and then wouldn't deliver. So
many hedge funds were short this that when it
panned out, they were cooked.)
Second is Oracle (ORCL:Nasdaq - news - boards).
People were worried that Oracle was having a soft
quarter. Shorts pushed and pushed against this
one, betting on some sort of negative
preannouncement. Instead the company delivered
on a colossal win in the B2B space. Shorts were --
and are -- being annihilated. (We heard rumors
that January was soft for Oracle. Sounded like
a good short. But all of this other good stuff
came along and the shorts were clobbered.)
Third on the short hit parade is 3Com
(COMS:Nasdaq - news - boards). The smart money
was betting that 3Com was going to have a crummy
quarter, hit by Cisco's aggressiveness in the space.
But the Palm (PALM:Nasdaq - news - boards)
spinoff wrecked those nightmares. The losses for
the shorts here are just huge. (The short logic
here is awesome. Palm is overvalued, the
business of 3COM 'aint that great. Combustible.
But what if Palm is worth $50 billion? Oops,
didn't count on that!)
Finally, how do you spell pain if you are short? Take
a look at LHSP (LHSP:Nasdaq - news - boards).
Just check out the chart. I don't need to say any
more. This was a massive squeeze and it is taking
people apart. Daily. (This one is gruesome. I
have no comment on it, except to say that this
is one of the great battleground stocks of all
time.)
James J. Cramer is manager of a hedge fund and
co-founder of TheStreet.com. At time of
publication, his fund was long Cisco, Dell, Goldman
Sachs, Intel and 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.
Send letters to the editor to letters@thestreet.com.
Read our conflicts and disclosure policy.
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