Wednesday, August 03, 2005

The OSTK 300K Share Conundrum

Dr. Byrne had a good conference call today. Especially towards the end, when he started doing the math on the number of shares that were owned by his family, friends, and institutions. The way the math works out is that all but about 300K shares issued are owned by these folks.

That is insane.

300K shares legitimately issued by the company, insiders and family who aren't trading or selling, and institutions that aren't trading, judging from their filings.

So here's a question: Today 2.5 million or so shares traded hands, on blockbuster earnings (the company was projected to show a .22 cent loss, and beat that by almost 50%, with a .13 cent loss), and yet it was methodically sold off, from the ECN's - BRUT, CINN, and ARCX responsible for 90% of the trades from the sell side. Where did all those shares come from, if nobody on the Byrne side of the fence is selling?

Answer: They are phantom shares created by the system, and traded as though they are real. FTDs. Or at least a good portion of them likely are. Some are no doubt shares lent by a few of the institutions to legitimate short sellers. But most are likely FTDs.

Question two: What happens when the institutions finish up their trading today, and run the math, listen to the call, and figure out that there are only 300K legitimate shares from which to cover around 10 million shares, give or take?

Bonus question: What happens when the institutions simply call back their loaned shares - and there are no actual shares with which to cover? What happens to the millions and millions of shares that must be bought, immediately, no excuses, and there are only 300K shares? Does anyone believe that the institutions won't comprehend the ramifications, and be thinking in terms of 5 or 10 times the money?

Why not?

Did anyone notice that you can now buy September call options up to $100? Wonder why that is?

I commend Dr. Byrne for alerting the legitimate shorts as to the danger of their situation, and further would advise one and all that criminal behavior like illegally naked shorting to manipulate the price of a stock can sometimes end badly. This looks like one of those times, where a tightly held company owned largely by folks that know each other on a first name, if not familial basis, decide that they don't want to play the game any longer.

If I was one of the three prime brokers that supports the hedge funds involved in this, I would be asking some very hard questions, and stopping any short selling that isn't accompanied by a legitimately issued share of stock immediately. This contingent liability for these houses could be astronomical pretty quickly, as the other stocks these hedge funds are short also must get bought in to cover the damage. And there will likely be heavy hitters watching to ensure that no funny business goes on, so the usual tricks won't fly. So the bankers now are on notice that they have an issue.

Because at the end of the day, it's not just the hedge funds that have a problem now. What's that old saying? If you owe the bank a dollar, you have a problem...but if you owe the bank a billion dollars, the bank has a problem....

Dr. Byrne, IMO, just alerted the banks that they have a problem, and it could be triggered whenever the institutions want to call the shares, or if Dr. Byrne decides to take the company private, or any number of other scenarios. And this isn't some penny stock where it will all go away - everyone will be looking at the trades from this point forward, expecting some sort of shenanigans.

So longs, get your paper certificates now. Legitimate shorts, understand that you have just been warned that you could be put through a thresher, without warning, at will, where your fortunes will be lost in a matter of days. And manipulators, your days are now officially numbered.

That's what I took away from the conference call.

For the record, I have no affiliation with OSTK, nor am I endorsing the buying or selling of their shares, for any purpose whatsoever. Do your own diligence, and invest wisely.

12 Comments:

Blogger uncleed said...

Bob,

I've got a question for you: If all those institutions are willing to loan out their shares than the FTD's might not be so astronomically high, right? (alternatively, if all those inst. had posession of the shares, or were held in a cash account unwilling to lend, then it would appear there's a huge number of phantom shrs.)

If you loan out your shares, can you call them in when ever you want? Any comments appreciated.

Thanks
Uncleed

3:55 PM  
Blogger bob obrien said...

You can indeed call them in whenever you want.

I would encourage Byrne to conduct a census of his institutions to find out how many have what percentage on loan, so they can know with precision how many are FTDs.

My guess is that none of the Byrne family's are loaned, and that many of the institutions aren't either.

But it would be easy to know for sure.

We do know that there are some fails, due to the SHO list. We further know based on today's trading of around 2.5 million shares, that likely a lot more FTDs were created just today. The numbers don't work out otherwise. Let's assume that all but 100K were legit shares loaned to shorts - that is still 6.6 million shares that need to be bought back, with 300K actually in existence that can be bought back.

That is the stuff short squeezes like TASR are made of.

Here's a post I just left on Jeff Michaels' blog - a hedge fund manager that is likely short OSTK, who deletes posts that are critical of him, and who never saw a piece of news from the company that didn't spell disaster. He studiously avoids this situation, for reasons that are abundantly clear to me.

"Isn't that fun? Jeff (surprise) spins the fact that OSTK beat the street's estimate by a huge margin (.13 cents vs. .22 cents expected) as bad.

He evinces the whimsical notion that using money to retire debt at favorable levels and booking that cash to offset expenses is bad.

He only leaves the posts on his blog that congratulate him on his minority perspective, preferring not to have to deal with upright bipeds that see him as a hedge fund shill bashing a company he is short. No, it's so much easier to just delete your critics than have to face them.

He takes considerable pains to not discuss the huge implications to anyone stupid enough to be short OSTK that Dr. Byrne's last few slides discuss, namely that there are, best case (for the shorts) maybe 300K shares that aren't owned by Byrnes or Institutions that are on a first name basis with Byrnes, and yet at least 7 million, and possibly 10 million or more, shares sold short or FTD.

He doesn't want to explore what that means to the share price when the institutions call back their loaned shares, and the shareholders request their paper certificates. He doesn't because from a pure supply and demand side, this is the stuff that 10 times the money short squeezes are made of. And he is likely short, and wants to avoid that from happening, even though the numbers are what they are, and even though it is financial suicide to be short now that those facts are known.

But he also doesn't want to have to cover.

So he will try to convince others to sell, or to short, ignoring the 300K conundrum, and inviting others to their doom.

Nice gig you got there, Jeff. Enjoy the bed you made. It will likely get ugly from here for anyone short this.

300K 7-10 million short. Shares that can be recalled at will, anytime, without warning.

Ouch. "

It is pretty easy to see that Dr. Byrne and the institutions have the shorts in a box, and without a total collapse of the company, they are going to have to pay astronomically to clear up their foolhardy positions. But judging by today's sell off and churn, they still don't get it, or can't afford to stop the game of musical chairs. My bet is one of their banks will pull the plug when they figure this out. It is as dangerous as any I've ever seen for a short.

4:40 PM  
Blogger uncleed said...

Bob,

Well, it's actually 100k, if you include the shares I hold in a partnership, and in all likelyhood even less than that when you take into account other small hitters like myself. I talked to fidelity today about recieving our shares. They said they would get back to me tomorrow morning.

Uncleed

5:00 PM  
Blogger Tommy said...

I think the shorts have more tools available :
1. If shares are recalled, just FTD them
2. If certificates are recalled, don't deliver (can't anyway) see Wells Fargo emails on similar situation
3. If company goes private, there would never be a short squeeze, as the shorts would only have to pay the buy-out share price.

Worst case is if a predatory investor or fund just starts buying up OSTK to the point where the shorts will get margin calls and start a TASR like short squeeze.

That is why I think Rocker was adamant in a past CC to know how Byrne fount out that he was short. He's afraid of just such a predatory scenario bearing donw on his short positions, IMHO.

5:03 PM  
Blogger uncleed said...

Bob,

Also, I agree with your comments about J. Mathews, in regards to spinning anything about ostk into something negative. It clearly looks to me as though he's letting personal emotions get in the way of rational investment decision as I've yet to hear a valid point about ostk's model or the comp. However, I understand his position that on an operating basis ostk didn't live up to expectation. That doesn't negate the fact that it was an intelligent use of capital to buy back the debt cheap. In the long run these minor Q to Q fluctuations won't really matter.

Uncleed

5:09 PM  
Blogger bob obrien said...

Uncleed, send me an email at ncansinfo@gmail.com with information as to what state you are in. You may find that the states are very interested in billion dollar companies where investors can't get their shares, and it would be a good idea to tee this up early. I would bet a lot of money that you are going to get the runaround, and your state AG or Securities guy looking over your shoulder at the broker can only help motivate them to be honest. Your recourse to a failure to deliver your shares in certificate form would be a contractual breach via mediation in NY, per the brokerage agreement you signed, however there are pretty severe penalties from the states for this sort of thing.

And I have quite a few contacts that could be illuminating for you to have as a resource.

5:12 PM  
Blogger bob obrien said...

Uncleed, another thought. While you have your discussion, switch the shares to a cash account tomorrow morning, and have all communications from this point on with Fidelity in writing, to memorialize their responses.

By switching the shares to a cash account you remove them from the lendable pool instantly. Also tape your phone call after politely asking if that would be alright - they need to understand that you are not screwing around, and that you are building a case should they choose to string you out versus call the shares back - remember that at the end of the day they are choosing to not deliver the shares, versus just recalling the shares. They don't want to do that as they are making money by lending your asset out, but at the end of the day, it is your asset.

5:17 PM  
Blogger bob obrien said...

Uncleed as far as OSTK's use of capital to retire debt, that will have an impact on interest paid moving forward, so it does have a longer term benefit than just the single Q's impact. As far as Jeff goes, it isn't emotion, IMO, it's that he is up to his neck in a short position that has just turned as ugly as they get.

IMO, of course. He may not be short, and just be on some bizarre jihad. But I doubt it - it is too calculated.

Money is no doubt the root of the problem here, and he requires a bully pulpit to talk his book and bash his shorts, IMO.

That's why he deletes critical posts - he's not man enough to deal with them, and it hurts his agenda. When he first started censoring my posts, it was because he claimed there was vulgarity. Now it is just because the tone is not to his liking.

Yeah. Critical.

Hates that tone.

His deal is pretty transparent, in my mind, and his blog is so thinly followed it would amaze me if anyone actually cared - note the only time you ever even hear about it is when one of the hedge fund bashers reposts one of his tirades on a MB, to get it visibility.

Kind of pathetic, actually.

5:22 PM  
Blogger mfairview said...

Interesting, 100K left? I can't believe between the remaining 100's (if not 1000's) of OSTK investors that number will hold up.

6:31 PM  
Blogger bob obrien said...

Mfairview, the S is going to hit the fan. If one tenth of the shareholders order their certificates, that will start a serious stampede for the few remaining legitimate shares. And I will start a poll of folks who have their certificates if anyone thinks that will be of value, so we can see how many millions of shares have been counterfeited in the system.

This is a unique opportunity to open the lid on the system and see how it actually works when people demand their property.

My hunch is that OSTK's institutions will be contacted shortly by the prime brokers, who will offer wild incentives to not recall their shares, and if that fails, threaten them.

I also predict that we will start to see chronic failures of brokers to deliver certificates to their customers, and a resultant S-storm of regulatory action against them, until the pain threshold becomes so great that they do the inevitable: Make the hedge funds cover their shorts.

This is a billion dollar NASDAQ company, not a penny stock shell. This isn't supposed to happen at this level.

And it apparently has.

And the SEC and state regulators and AG's can't pretend that they don't see it with their own eyes, now that Dr. Byrne has made it part of the public record.

6:53 PM  
Blogger uncleed said...

Bob,

I think you misinterpreted what I was saying. The main business is online liquidations retailing, so it seems reasonable to separate that from the capital management. On an operating basis they lost a little more than expected, however Q4 last yr they made a lttle more than expected. I don't think these short term fluctuations have a real meaningful impact on the long term value. Anyway, I don't know if I articulated that very well. I do believe the retirement of debt was a great at the price they paid.

I'll send you an e-mail shortly.

Uncleed

7:05 PM  
Blogger uncleed said...

Bob,

I sent you that report on OSTK. I'm fairly sure you have my email

7:06 PM  

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