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Strategies & Market Trends : Floorless Preferred Stock/Debenture -- Ignore unavailable to you. Want to Upgrade?

To: drjoedoom who wrote (10)	8/1/1998 12:37:00 PM
From: Zeev Hed	Read Replies (1) \| Respond to of 1438

Dear dr. Doom, I am starting to think that you may not be as smart as I thought. Let us try and take these issues slowly. Do you agree that shorting stock put some pressure on the stock price (simply because there is a larger pool of sellers than it would otherwise be). Do you agree, that once the floorless bandit has hedged his whole convertible position, he no longer has any funds at risk in this specific stock? Do you agree that he collects interest on the face value of the instrument without having capital at risk if he has completed his hedge? Do you agree that if the stock has gone down, by a marginal amount (let say 10%) he can now increase his short position by the same 10% thus maintaining the above mentioned pressure on the price? Do you agree that unlike normal short, the floorless bandit does not create with his short position a reservoir of future buying, since he can cover his short with NEW stock from conversion? Normal short have to cover creating a pool of buying power, bandit do not cover, period. They convert during the "end game. Sometimes, when they have access to special information, they may partially cover just to reset their short at partially higher prices (see HEC on the close yesterday), making more money in the process. Do you agree that if the stock has now been halved, his short position can be doubled? (and I can give you more than 10 cases where that has happened and as many cases where the final denouement was at less than 10% of the original price). Do you agree that to add insult on injury, not only does the bandit collect interest without having any capital at risk (once the hedging has been set) but as the stock declines, he increases his capital by all additional shorting, money he keeps and does not have to dish out to buy back stock (because his conversion rate increases as the stock's price decreases). How can you be so blind and not see how a floorless makes it like a thief? Finally, do not put words in my writings that are not there, I have not implied any management corruption, stupidity, maybe, lack of any other choice, possibly, all I am saying is that the floorless bandit has better access (like any other large investor) to management and thus to knowledge of upcoming events that help the bandit optimize the timing of its nefarious activity. These nefarious activities are not corrupt or anything like that, it is called "returns optimization" and it is the job of the bandit to optimize his returns on whomever's back, and particularly the common stock holders's backs, as long as his actions are open, legal and above board. Well, HEC's floorless instrument contains a specific allowance to the bandits to short against the block, and the bandits would be fired by their management if they did not maximize the profits available from that special feature in the instrument. Wake up, it is the real world, and whatever one party win, another party loses. The bandit is going to do whatever he can to make sure he is the winner, not the common stock holder. After he has set his hedge, he cannot lose (particularly that all these floorless have a very solid ceiling on top of the look back 30 days feature to determine the conversion price). Look at a recent semi floorless, AND the issue came out at 16.5 or so, and that was the ceiling, unlike HEC, these are variable conversion, but they have a floor of $5/share (which HEC does not have), guess what, the stock is already at half the issue price ($8/share) and at $5, if you still like the company (which I do not), you may want to jump in, because the floorless will have no incentive to bring it under $5, no additional gains. I'll repeat, any nitwit should know that as soon as a floorless instrument has been set up, the stock is doomed until the floorless instrument has been closed out. Since you do not understand this simple financial tool, you really should not be playing with stocks in this class. Zeev