This is so good I want to see it, rather than click on it.
The only thing that he hasn't zeroed in on was the move by the manipulators just before Amzn became 'The mothers of all mothers'.
<Wrong! (Archive)
Jun 22, 1998
Wrong! Take Two: Cramer's Rewrite of His Column on Why Stocks Go Up
By James J. Cramer
Ever since this piece appeared OTC traders have been thanking me for explaining the hell they have had to live through because of the Internet short-squeezes. So I have decided to reprise this piece and hope to make it more understandable to those new to the game. Until you have actually attempted to buy 25,000 shares of Amazon.com (Nasdaq:AMZN - news) on the fly, you will never understand the critical component of how an over-the-counter stock can explode like a truckload of old TNT rumbling on a bumpy jungle tote road. (Only one guy caught this, Mark Kantor, our head trader, who recognized the allusion to The Sorcerer, one of my favorite movies, immediately.)
Before I got into this professional trading stuff, I thought stocks went up because each day smart people painstakingly revalued the worth of a business. (I presumed a degree of rationality about stock movement that is very misplaced. Stocks often have nothing to do with the companies, and vice versa.)
Hey, I'll pay x for Amazon, but not 3x because doesn't Barnes & Noble (NYSE:BKS - news) make 3x as much money now as Amazon will in the year 2007? (This Barnes and Noble canard has lost billions for short-sellers. Relationships that make sense on paper often don't make sense in stocks. As a trader I never short on valuation alone, let alone relative valuation. There will always be somebody so dazzled by Amazon's Web site that he will buy the stock, no matter what relationship it has with Barnes and Noble. )
Or, let's see, if you cut back Amazon's ad spending and you figure they will sell more CDs than Columbia House and Sam Goody do, then wouldn't you pay $7 billion for that company some day? (Amazon's stock jumped huge on the announcement that it was now selling CDs. This announcement was not revelatory at all -- meaning it should not have moved the stock in a calm rational world, but we are in a vicious irrational world and the stock jumped 40% on this news, which was readily available and known by many people.)
As a thinking individual these rationalizations would make me sick. I know that in the real business world so many things go wrong that these suppositions are ridiculous. None of these valuations can be justified by the stuff called security analysis, at least by anyone with any intellectual rigor, which is something I value in the real world. (I am a person who has strong views. You see that on TV. But internally I am known as a numbers guy, willing to figure out the true worth of a business. I got where I am by doing so. But I also got where I am by recognizing that such a measurement doesn't apply to particular situations.)
I know that because it is what I used to be great at before I bought a stock from an OTC desk that they didn't want me to buy. Huh? What did he say? Go read that sentence again. If you are short these stocks, read it again and again. "They didn't want me to buy it." I know, it seems a little counterintuitive. I mean, aren't all of those trading desks set up to accommodate this kind of buying? Isn't that what they want me to do? Aren't they there to provide me with stock to buy? (This paragraph is the crux of the piece. What I am postulating here is that there are some stocks that traders don't want you to trade. They are so hot, so difficult to obtain, that they don't want to bother. And if you force them, as you will see, they will lose a lot of money.)
Yes and no. In the case of Amazon, no. These trading desks don't have anywhere to go to get the stock. Nobody has any stock for sale to sell them to sell to you. They can't create the stock, either. They can't borrow the stock from someone else and sell it to you. There are no shares to be borrowed -- although they would certainly be willing to do so if they could find the shares.
That's called "shorting" it to the buyer and these guys are incredibly accomplished at doing that, when they can find stock. (We've explored this concept before. It is incredibly important. When you short a stock, you are betting it will go down. Lets say you short Amazon at $100. Your hope is that you will be able to buy it back lower. Let's say at $95. If you shorted 1,000 shares at $100 and it sunk to $95 immediately, you could buy it, ore cover, as it is known, and make $5,000. Now, let's say it did not drop immediately and you did not cover.
(When the trade is processed that night, someone at your brokerage house will come looking for the thousand shares of Amazon to deliver them to the buyer -- remember you did sell them, short or not, and the buyer doesn't care; he just wants his shares. If you don't have them, you can borrow them from the brokerage house. The broker might have some spare shares of Amazon in the vault.
(Most stocks can be borrowed. But the vault at Goldman Sachs, for example, has no Amazon. There is none. So, someone at Goldman will call the "locate" office, to see if anybody else around The Street has some Amazon shares. The answer, in a true short squeeze like this one, is that nobody has any shares to lend out to you. So, Goldman or any other broker, will simply go into the open market, purchase that 1,000 shares at whatever price currently prevails, and then send it to the rightful new owner.
Goldman does not care that Amazon has jumped five, or ten or even 20 points. That's your loss, not Goldman's; when you signed that account form you agreed to deliver these shares no matter what when you sold them. So you are "bought in." That's how squeezes work.)
Many eons and follicles ago, when I was a broker at Goldman Sachs, I handled some to-be-nameless Microsoft (Nasdaq:MSFT - news) execs' accounts. Microsoft has been a great big stock for so long that it is probably hard to remember when it was an itty-bitty billion-dollar company, but it was.
The OTC desk used to call me constantly to get me to see if anyone had any Microsoft for sale. That's just part of their job. Of course, those owners weren't dumb; they were buyers, too! (You have to picture the flow of a large order at one of these firms. First, Cramer Berkowitz comes in and says it wants 50,000 Microsoft. The Microsoft trader then goes over the loudspeaker system inquiring if anybody has some Microsoft for sale. When the trader is desperate, he then looks to see who, internally, holds the stock and then calls their brokers. This process is the basic building block of a brokerage. It is what brokerages on Wall Street do, match buyers and sellers.)
So, believe me, even though Goldman brought Microsoft public, there were plenty of times when you could not find any stock for sale. That's why the market makers offer you a couple of thousand shares and then demand that you pay up for the rest. They keep hoping that you will either say no, that is outrageous, or OK, and let them work on taking the stock higher to see if supply develops. ("I'll sell you five to work the order," is common parlance in our business. That's the typical response for when you go in to buy 50,000 shares of a hard-to-buy -- meaning hot -- stock. That means the sell-side trader sold you 5,000 shares and then agreed to promise to work to find, call around, borrow and ultimately sell to you the other 45,000 shares, potentially at higher prices. If the stock takes off right after you buy the 5,000 that may be all you get. Or you may not be price sensitive and you continue to pay up.)
But this is not Econ 101. While they are walking the stock up looking for sellers, they are getting hit by all sides: stealth buyers of the call options, both deep and out of the money, Small Order Execution System bandits who prey on these situations, large accounts that can't be said no to. (This paragraph confused all but the most knowledgeable of our readers. When you want to buy a stock, you can buy the common stock or you can buy a derivative that represents the stock. Often I will buy the deep-in-the-money calls as a proxy for common stock and then make that call seller scramble to find the stock. Let's walk through this. I want to buy 25,000 shares of Yahoo (Nasdaq:YHOO - news) at $130. I can go give an OTC trader that order.
(You don't electronically trade an order of that size, you need human to human contact, typically. He might sell me 5,000, if the stock is dancing up, with a promise to buy me the rest. The stock might get away from him,, though and that would mean I don't get any more. Or I might go into the options world and buy 250 July 110 calls for $23. I'd have to pay a little premium, but I could do it all at one level and move on if my options broker were savvy. Mine are. None of this "5,000 to work" stuff; just a good clean fill.
(SOES traders are folks who can move fast, typically by specially programmed computers that allow them to lift 1,000 share offerings faster than humans can pull those offerings. They create havoc in the marketplace when others are already working on buy orders, but they are what we are stuck with.)
And because of Justice Department supervision they can't even talk to each other to figure out whether any of their buddies at other firms have stock. You couldn't pay me all the yen the hedgies are short to do that job. (In the old days, before the government put an end to the collusion, over-the-counter traders used to talk to each other to try to find stock and to make deals, typically of the "don't move up on Amazon" variety.
(Most of this stuff was pretty innocuous, but some traders got caught ripping off people and that was that. Since the Justice Department's work, though, the market has become a bit more crazy as it seems that the OTC guys can't gang up together to control some stock situations. No one is in control, for instance, of Amazon. No one.
(Some of you noted that I seemed too sympathetic to Nasdaq traders and that warmth is misplaced. That's just BS. These guys are just doing their jobs. Periodically they will get caught working a buy order for a big client and they will have to short stock, which will then fly up before the can recover it. Then their boss comes in the next day and says "cover that loss before it turns into a million dollars and the trader is forced to go into the open market and buy the stock back, probably at a premium. This is painful and costly to a trader's profit-and-loss statement at the firm, a statement that determines what he is paid.)
So they ratchet the stock up. And up. And up. Eternally hopeful they will find buyers. (This lifting of offerings goes on and on until sellers finally can't wait any longer. We are not at a level in Amazon where large sellers have surfaced.)
And then one day the Financial Times reports that a real buyer -- not a mutual fund, not a short coverer, not a yahoo, if you excuse the pun -- wants in the game, at a premium. ATT (NYSE:T - news) . Not sausage-casing king Zapata (NYSE:ZAP - news) , but Ma Bell. Talking north of $120 for America Online (NYSE:AOL - news) . (We can argue all we want about how to value a company, but in the end if a big company tenders for one of your companies, the ballgame is over. I don't care what General Re (NYSE:GRN - news) was worth. If you were short it, you got a rude awakening at the close yesterday.)
Now, not only is it impossible to find the stock, it is lethal to sell it. And the OTC guys want to crawl into their caves and shells and pray that you don't ask for some Amazon. At any price. That's how stocks go higher in these here United States. (Bogus reference to the way all articles seemed to end in Reader's Digest.)> |
