Eddie...This article appeared on the daily morning newsletter from TheStreet.com dated yesterday 2-10-98. Your "friend" may have been pulling your leg. By the way Cramer is on Squawk Box this morning.
Wrong! Tactics and Strategies: Cramer on the Sinister 'Short Offering'
By James J. Cramer
Short-sellers fight like guerrilla warriors. They sharpen punji sticks,
toss Molotov cocktails and disrupt the enemy at night with confusing forays
behind lines. I documented one of their more sub rosa tactics last week to
confuse long-side Cisco traders.
Long-side soldiers don't feel bound by conventional weapons. They willingly
go nuclear when their performance counts. We just don't think they are
harming anybody when the atomize sellers -- short or any other variety --
with their arsenal. Big money's got a lot of tricks up its sleeve, but its
most sinister destructive ploy is the "short offering." Old hands at this
business scroll down to the next story, others gather around the
screenfire, because you won't believe the sheer megatonnage an institution
can bring to bear to move a stock a couple of points. Put your RayBans on.
Let's say you work for a mutual fund, let's call it Infidelity, with the
usual caveats that this story is fictitious and any resemblance to real
masters of the game is strictly coincidental. (That ought to throw you off
the scent.)
Infidelity decides it want exposure to tech. Its managers have gone
underweighted, one of those great Wall Street terms that means "don't like"
this growth group, and now that tech is flying, Infidelity wants to get
back involved in a big way.
If mortals like you and me want to get involved in tech, we buy some
Compaq, Dell and Microsoft and go on. But Infidelity is no mortal.
Infidelity issues orders from Mt. Olympus Bostonius, and its orders are
like Zeus' lightning bolts. When you get hit by one, you tend not to forget
it.
Anyway, if Infidelity wants to get in some Compaq, I mean enough Compaq to
make a difference, it has to go to a block trading firm -- a brokerage
house that handles large orders -- and ask for help in getting some Compaq
in.
This is not some Nikko Tinbergen study of reciprocal altruism. When
Infidelity wants "help" that means hurt, as in hurt the brokerage firm it
needs the help from.
You see, the way money is run today, if Infidelity decides it doesn't have
enough Compaq, it does not want to sit idly back and wait for Compaq to
come in for sale. It does not want to wait a few weeks to get the position
in. By that time Compaq may not even be "any good" any more. Infidelity,
like Zeus, isn't in the taking-no-as-an-answer business.
So Infidelity calls up its broker at Golden Slacks Corp. and says "make me
an offer I can refuse if it isn't big and low-priced enough." Of course,
that would be too Corleone-like, so the conversation goes something like
this. In fact let's listen in as I have.
Infidelity Guy (IG): "Hey buddy, got anything going in Compaq?"
Golden Slacks Guy (GSG): "What do you have in mind?"
IG: "Well, I need to get a little in." (Translation: I need to get millions
upon millions of shares in and the last thing I am going to do is tell you
that.)
GSG: "I'm your man." (Meaning, what choice do I have, you do billions in
commissions with us and take down all of our underwritings, so I'm ready to
take a bullet for you.)
IG: "Can you get me started with a million shares, as tight as possible?"
(Translation: With Compaq at the last sale of $35, would you sell me a
million shares short as close as possible to that last price?)
GSG: "Hmmm." (That's the sound that comes out of a sellsider's mouth when
his brain says, boy is my personal profit and loss going to get crushed by
this trade.) "How about up a quarter?" (He is making Infidelity a short
offering -- nobody has a million shares of Compaq in inventory sitting
around -- at 35.25.)
IG: "Hmmm." (That's the sound Zeus-like figures make when they are
thinking, maybe this guy is even a bigger loser than I thought. It sounds
very similar to the GSG utterance, but don't be confused.) "How about 2
million shares?"
GSG: "Ouch." (Even hapless sellsiders sometimes squeal like stuck pigs.) "I
can do that at $36." (up a point from the last sale).
IG: "Done, put me up." (Shorthand for I will buy 2 million at $36, put it
up on the New York Stock Exchange tape. Notice he did not haggle, because
he wants the stock so bad.)
The trade then gets done. The trader announces to his desk via intercom
that "we are trading 2 million Compaq up a point from the last, open on the
sell side" (meaning, if you can give me a hand and sell some stock it would
be greatly appreciated).
Here's where the game gets interesting. Good salespeople out to help Golden
Slacks hit a bunch of wires and say "we are trading 2 million Compaq at $36
and you can make a sale." That's actually not a bad call.
If you didn't have it, you might have been trying to sell Compaq lower, and
now you can make a little extra money. If you were long Compaq, you just
made a dollar, and you might want to ring the register.
But more double-agent Golden Slackers might make the following call: "Some
big guy just took us on 2 million Compaq up a point and we are short all of
it, so do what you want."
I have gotten that call. I value my reputation on Wall Street. Your
reputation is made or broken by trades like this. If you pick up another
line and try to take Compaq at where it still is on the screen -- remember
the trade hasn't hit yet and the screen is flashing $35 and change -- fully
knowing that the Golden Slacks trader is short the stock, welcome to the
badlands. You've made money off the trade, for sure, but you are forever
known as a scummer, and on Wall Street, unlike Washington, D.C., and the
White House, reputation counts the next time you need help. If you sell on
the print or do nothing, you can pal around with me any time.
But that's not the end of the story. Remember how this whole chain of
nuclear fission got started, with Infidelity needing tech. Infidelity may
wait a decent interval, maybe an hour, maybe even a day if the gods are in
a charitable mood, and then they will go to Merrill Reese and do the exact
same thing. Ask for 2 million shares, get the trade done, and now have 4
million CPQ.
Fine, he's got his stock in. But it is more than likely that the traders at
either Golden Slacks or Merrill Reese have never been able to "bring in
their shorts," as Compaq sellers will be scarce when a buyer as big as that
is on the prowl. As pain tolerance on the sell side is not unlimited, both
the Golden Slacks guy and the Merrill Reese guy will have to go into the
open market and buy Compaq to cover their short. Sometimes the stock will
jump three or four points during this desperate period, as by this time all
of the big holders know that Infidelity got two big firms short and nobody
wants to give them any Compaq to help them out. Sometimes this frenzy will
take a stock to breakout, and yes, they read charts at Infidelity, too, and
a whole new crowd of buyers comes in.
In the meantime, Infidelity is now up about $10 million for its Olympian
efforts. And Golden Slacks and Merrill Reese have kept an important
customer happy.
Oh yeah, and the two traders from the sellside who have to be scraped off
the trading room walls? Well, their bonuses are looking bad right now, but
maybe Infidelity will remember them with some easy business going forward.
Or maybe they won't.
That's the stock biz. |
