FWIW, I reiterate your strong sell. PVN is a hell of a good short not only because of their balance sheet full of stuff that doesn't sell, high leverage and liquidity problems but also for the ridiculously high PE for a business that will actually shrink. Pink, what is your highest short sell rating? Well, take that one and move one notch higher.
A good one by Creamer may explain the run up Friday. Stocks with high short interest are no secret to those who make a livin scaring away chicken shorts (this is why one needs to lmit the size of the bet)
Wrong! Take Two: Cramer's Rewrite of His Broken-Field Running Piece
By James J. Cramer
10/10/98 12:18 AM ET
Tons of requests for this one, so here goes.
We call it broken-field running. That's when stocks seem to vault up and down in bizarro fashion. Someone reaches to buy Minnesota Mining (MMM:NYSE), up two today -- don't worry, I sold it to him. (An aggressive buyer of MMM was looking for stock and swept it all the way up to 76.25. It had been around 75. When he finished his work at the end of the day, I had my broker contact his broker and sell him his last 25,000 short. I did not own MMM. I bought my stock back the next day for a gain of about a half-point. Hard-fought, but a win.) Another guy buries some Merrill (MER:NYSE) three feet under. It looks like there is no one between the running back and the touchdown except a couple of hapless diving cornerbacks.
What gives?
It's that liquidity thing again. It is a nightmare out there. (All week I got blasted by people for my negativity. But when I say it is a nightmare, what I mean is that the market itself simply doesn't function right. It is more irrational than usual. And that is not a sign of health. That's a sign of sickness.) So, let's go back to my National Gift Wrap and Box Co. example, so the hedge funds out there shooting against me will have to waste a lot of their time looking for the symbol of my dad's company.
(Shooting against is a time-honored tradition. When people hear that Julian Robertson lost a lot of money, they look up his holdings and they short them. It is a stupid, stupid game. Anybody who did it this week got killed on Friday. But the point is that the hedge fund business is shark-infested waters and you don't want people betting against you. That's why I make up the names of small-cap stocks rather than use real ones. I don't want to influence the trading of small-caps or look like I am promoting them. And I get a kick out of using my Dad's business in these stories. So does he!)
National Gift Wrap trades 2,000,000 shares a day. The screen market on National Gift is 65 1/4 by 65 1/2. (When you first get in the business, you learn that the term "screen market" means where you can buy and sell small amounts of stock. The bid for the stock is 65.25, meaning you can sell a couple of thousand shares at 65.25. The offer is 65.5, which is where you can buy a little stock. That's the "market" in National Gift.) It trades pretty easily in 25,000-share lots with those parameters. (In other words, those quotes may be good enough for about 25,000 shares, give or take an eighth of a point.) First, let's do the trade in a normal tape, before all of the Long Term Capital bearishness. (Again, this is an allusion to the sickness of the current market. It does not trade easily. Every jump up seems like a short squeeze, every downturn like a sell program.)
Rock Creature LLC goes into Cheat 'Em and Kill 'Em, his favorite broker, and asks, "Where can I buy 200,000 shares of National Gift?" The trader looks up the holders, knows the stock and says, "I will short you 100,000 at 65 3/4, a quarter-point above, and work the rest in." Rock Creature agrees to this. Then the trade gets done, and Cheat 'Em quietly brings in the rest, including his own short, at about the same price that he sold it to Rock Creature. He makes the commission.
(This is the guts of "trading" institutional style. When a large account wants to get stock in, he can't just enter an order and expect to get it filled. There are supply-demand constraints. If someone wants 200,000 shares of a stock and is impatient to get it in, he needs to have that stock "facilitated." He must go to a "block trading" house like Goldman or Merrill, and ask for "help." The trader who "makes" National Gift knows how the stock trades. He knows who owns it, where the supply might "live." He makes a two-way market in the stock, meaning that he wants to be your supermarket for National Gift. He will sell it to you or buy it from you in size. But it is done "at a price," and not the screen price.
The 200,000-share order overwhelms current supply, and like in Economics 101, you have to move the price up to find sellers. That's that the trader does. But he gets involved, meaning that he shorts some of the stock to you to "win the order." He doesn't want you to "go away." He wants the commission for his firm. If he can, he wants to get the other side of the trade, find the seller, and get the commission on that, too. To do that he has to accept some risk.
If you go in to him and ask him to short you some National Gift and one minute after he has done that, National Gift gets a bid from Remarc Industries, you can bet you are in trouble and he will come after you. Your name will be mud and I would not be surprised to hear that you get a call from the SEC. But normally, you are simply trying to get the stock in for the simple reason that you think it is going higher.
Sometimes the broker has some in inventory. Sometimes he is even shopping a piece of National Gift and you can find out, through an AUTEX, an institutional trading system, whether someone has "something to do" in National Gift. If he isn't, he shorts you some portion of the order to keep you there and then he works it in. It is a risky, hard business and those who do it well are true artists.
Once he has shorted some stock to you, he has to try to keep the stock down so it does not run away from him and he has to "go over the system" at his firm to see if someone might be willing to sell National Gift. The amazing thing about this block trading business is that there usually is someone who is willing to sell the stock. And that's how markets are made.)
Now, the new bizarro broken field running time: Rock Creature LLC hears that National Gift is going to go on the E.F. Hutton buy list tomorrow morning. He's got to get this one. He has no restraint, even though he knows you aren't supposed to trade on this stuff. He's losing too much money to care. (It is illegal to front-run investment research. If you hear that something is going to go on the buy list, you are not supposed to trade on it. If you get "the call" and you act on it, you are risking being investigated and nailed by the SEC. In this example, Rock Creature can't resist and wants to make a quick couple of bucks.) So he goes into Cheat 'Em and Kill 'Em, his favorite broker, and he asks, "Where can I buy 200,000 shares of National Gift?" (That's the initial inquiry. Typically it would not be so brazen. It might be something like, "Hey, I have some National Gift to buy. You working any?")
The Cheat 'Em trader says, "You want me to &^$*&$*&$*&$(&^$ short you this? Haven't you heard? We don't do that stuff any more. Boss says he doesn't want us committing any capital or getting short since Long Term Capital gutted our bottom line. Take a &^%$*$*%&^ hike." (Right now every trading desk in the country is up to its eyeballs in merchandise, typically commercial mortgages. They have no room to take on any more risk. They are short capital because they are all involved in the bailout of Long Term Capital and because they have no underwritings, which are a principal source of revenue. Trading desks are losing money hand over first right now and are very capital-depleted -- although no one likes to admit it. So, firms don't want to take on added risk. That's why this trader was unwilling to short the stock. He doesn't want to lose his firm money. He does not want to lose a dollar to earn 6-cents-per-share commission.)
So Rock Creature LLC then goes into Bag 'Em and Gun 'Em and asks, "Hey, where can I buy 200,000 shares of National Gift?" Bag 'Em's trader says, "Hey, I'll short you 50,000 shares at 66 to get started, and I will try to work the rest in. Is there anything I should know about this?" (This is pretty typical parlance. The trader, a nice enough guy, doesn't want to get hurt. He does 50,000 figuring he can take that amount of pain if the stock starts flying. He wants to protect himself by asking whether he could get injured by something near-term that could impact National Gift's stock positively.)
Rock Creature says, "Nah, just like the stock. Put me up." (This is why I call him Rock Creature. A good, noncorrupt guy wouldn't do the trade to begin with. A good corrupt guy would at least let the Bag 'Em trader in on the good word by saying "yeah, you don't want to be short this one for too long. There is good news coming down the pike." The "put me up" lingo is shorthand for put the trade up on the New York Stock Exchange tape.)
The trade gets done. (Sometimes it could get blocked by someone who has something to do on the floor of the Exchange. This trade is being done "upstairs" without ever going to the Stock Exchange except to "cross it" and have it put up on the tape.)
The Cheat 'Em trader, the first guy, sees the trade, and he knows that Bag 'Em had no National Gift in inventory. Heck, nobody has any inventory right now, again, because there is no money on these trading desks. The mortgage-backed desks are lugging so much inventory that nobody has any room for plain old equities. The rest of the equity is earmarked for Greenwich. (This is another reference to my personal fixation with Long Term Capital because I can't believe that all of these firms are involved and have to bail out that joint with their own capital, as depleted as it is already given how tough the tape has been and how few underwritings, stock or bond, there are.
The idea of "inventory" again means that the trader has no National Gift "natural," the word we use for whether you have actual stock in hand or not. If there is no "natural" seller, the trader creates stock through shorting. That's why shorting is great; it provides orderly markets, which we do not have right now.)
The Cheat 'Em trader then calls some hedge fund buddies, who are also getting killed in this market and looking for any edge, and says, "Go take some National Gift. I think Bag 'Em is short them." (Man, is this ever the height of dog eats dog. It is everything that is crummy about our business but I won't deny that it happens.) His scummy buddies make their calls, and they find out that Hutton is going to put National Gift on the buy list too! (Okay, so the Street can't keep a secret.) Next thing you know, National Gift is up three, and the scummers have a real good trade going against Bag 'Em, who is still short the stock.
(All of these other hedge funds just take the offerings that are available on the New York Stock Exchange floor. Don't forget that as a stock moves up, it creates sellers who are eager to take profits. These people don't know the good news that is coming and are happy to get out a couple of points above where the stock traded earlier.) As Bag 'Em can't go home short because you are supposed to be flat at the end of days like this, he scrambles to cover National Gift at 69. (Bag 'Em doesn't have the firepower right now, and his boss probably doesn't have the juice, to ride out a short. Every desk is getting killed. Nobody is making any money. You don't need another hit to your bottom line. So you cover the darn position now, with the idea that it will be even higher the next day if you do not.)
Everybody sells it to him, and it's hedge funds 1, brokers 0. Real bad day for the Bag 'Em trader. That's how money has been made. (Yes, by shooting against a trader who is short, money can be made. I have been shot against and it is the worst feeling in the world. Take a look at a piece of mine from a year and a half ago about how I was short Noxell through a squeeze. It is so funny and so painful.)
Now, this stuff goes on for a days at a time, until everyone has had the ^#&^%#^% kicked out of them. (We have been in this phase for a while now, and tempers are getting ugly.) So now here is what happens: Evil Devil Hedge Fund comes in and asks Bag 'Em to short him 200,000 National Gift shares. Screen market's 65 to a half. Bag 'Em says, "Not after all of the money I lost the other day. But I will work your order." He then goes and tries to find a real seller of National Gift. He will not short a share himself. The real seller he locates is willing to sell at 67. So, the Bag 'Em guy takes what stock he can, walks the stock up to 67 on light volume -- there are no big sellers -- and the trade goes on at 67.
Natural seller to natural buyer. No shorting. (This is the new, illiquid world and I hate it. Stocks seem to be jumping like jumping beans, but that is because no trading desk will short anything for fear of losing even more money than they already have. So everything is walked up to where the real supply is, rather than providing supply. Same on the sell side. Instead of the broker "taking the stock down" and then trying to merchandise it, he lets it fall to the level where buyers are certain to be found. So suddenly a big stock like Kimberly-Clark (KMB:NYSE) can move two points on 150,000 shares worth of demand or supply.)
So, in normal times, National Gift goes up a quarter-point on this order. In these times, National Gift goes up two. Without the ability of brokers to provide liquidity and short stocks, we have a tape that seems hapless and stupid and downright irrational. Because it is.
(Again, I know that when the market rallies like on Friday, people say, what is Cramer talking about? Cramer is talking about an unhealthy market that rallies every Friday on concentrated short covering by people who don't want to be short over the weekend. I would love this market if it were lower, had more liquidity, and the earnings prospects were brighter. I would love this market if there were mergers and acquisitions. I would love it if there were plenty of demand for stock. I would love it if the fundamentals pleased me.
But I WILL NOT LOVE IT SIMPLY BECAUSE IT IS THE STOCK MARKET AND IT ALWAYS GOES UP LONG-TERM. That's simply not true. There are stocks that never recover, there are sectors that never come back. There are people who justify terrible investments by making them "long-term." Myself included. I go stock by stock. I don't have a lot of stocks right now backed by companies with great visibility to next year's earnings. If they had more visibility and were more upbeat, then I would be, too. But I am a creature of my homework, and I can't find a lot of conviction out there among the executives we speak to.)
James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. 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 by sending a letter to TheStreet.com at letters@thestreet.com.
See Also
WRONG! TAKE TWO ARCHIVE
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