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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Mark H. Bornfeld who wrote (927)	1/18/1998 2:43:00 PM
From: Ploni	Read Replies (2) \| Respond to of 18691

By "floorless", do you mean the conversion price is not set, so the conversion ratio (if the stock price at conversion time is very low) is unlimited, leading to a substantial dilution of the stock float? That's exactly correct, Mark. And if that's the case, why would those holding the convertible preferred rush to convert them if holding them while the stock price bottoms out would result in them converting to a larger number of shares? I'm not sure how it's best played out. I unfortunately suffered my greatest investment loss by buying and holding Cityscape, which has lost about 95% of its value. There is speculation that the holders of the convertible shorted the stock, thinking that this selling pressure would drive down the price, and then they would be able to convert and claim a big percentage of the company. However, this is only speculation, and I don't know if anyone will ever be able to prove it, unless the holders of the convertible admit it some day. In the case of Cityscape, there are still many convertible holders who have not converted. This may be because they are limited by time, and still have to wait a while. (If NASD delists the stock, as it wants to, the convertible holders will then be able to convert instantly.) However, now that the stock is almost worthless, do the convertible holders really want to convert, even if it means they'll own half the company? It seems it would be better for them to cover their short positions (if they exist) for a huge profit, and retain the convertible position for the dividends. I'm sometimes skeptical when I see a stock's price movement attributed to a particular cause. Does heavy shorting of a stock necessarily cause downward price pressure? Yahoo hasn't seemed to suffer too much. What if the Cityscape convertible holders had shorted the stock, and it had instead moved upwards? Once Cityscape started down, one contributing factor in its rapid plunge may have been that margin calls forced management to continue bailing out of their stock positions. (Likewise, if heavily shorted stocks start moving up, there are sometimes short squeezes, as the shorts hurry to cover to minimize their losses). So I understand that once price movements begin, they can be magnified by short squeezes or long margin calls. But it's difficult for me to grasp what action can guarantee an initial significant move in one direction or the other, so as to spark the short squeezes or long margin calls. I'm therefore not certain that floorless convertibles are a mark of death. It is possible, though, that negative publicity about them (e.g., look what happened to these companies that did issue it) will be enough to slamdunk a stock.

To: Mark H. Bornfeld who wrote (927)	1/18/1998 3:08:00 PM
From: Roger A. Babb	Read Replies (4) \| Respond to of 18691

Mark, Yes floorless means that the conversion price does not have a floor (but often does have a ceiling) and is set at some percentage (usually about 85%) of the previous weeks price. This means that the holders can not lose unless the company is de-listed. But the larger problem is that the holders can short the stock, and just keep increasing their short position as the price falls and their share entitlement increases. They do not have to ever buy to cover, but can cover the short position by converting. It is in their best interest to drive the price down, and often company mangement is in cahoots with them. The fall continues until the price is under $5 and can no longer be shorted. The holders then convert and the price falls again as the new shares are dumped on the market. Sometimes these stocks rebound a bit after the holders finish converting and the new shares are all dumped (Zycad/GATE is an example) but one must be careful. Management that has a history of taking advantage of its stockholders with such a deal is likely to repeat the performance. Floorless convertibles are extremely profitable (often over 100% including short profits) to the holders and are almost risk free to the holders. It puts cash in management hands for salaries and deals. It makes big money (usually over 50%) for short sellers like me. And all of this money comes out of the long stockholders pockets. In my opinion it should be illegal.