More X Files Stuff....But Interesting None The Less

29 May 2005, 02:46 PM EDT
Msg. 75988 of 75994 Jump to msg. #

There’s a new game in town and it’s just getting started. The group playing this game is called “The Cannibals.”

They are a group of very opportunistic hedge funds who have decided to take advantage of a new market phenomenon - that of excessive “naked shorting.”

In the past 4 or 5 years there has been an alarming increase in naked shorting, most of it illegal. It started in earnest when some of the Internet momentum players of the 90’s realized that the game was over, the bubble was bursting and they better start making money on the short side of the market running hedge funds.

They soon realized that with their new power they could actually deny smaller companies access to the capital markets by shorting them into oblivion, especially those with losses (burn rates). They have probably destroyed hundreds of companies, some say thousands. In some cases they have collectively shorted several times the entire number of a company’s outstanding shares. As crazy as this sounds, it happens. But one person’s abuse can be another person’s opportunity, and now, along come “The Cannibals.” Their game is to identify companies which have been victimized by these shorts to the extent that their stock is now well below any objective level of intrinsic value and where certain minimal investment standards have been met.

The company must have decent technology or products, adequate management, meet certain aspects of viability and have a large enough short position to provide substantial economic gain. Information recently obtained from inside sources say that this is how the game is played. First the funds will very quietly accumulate a large number of shares at the already low price. Since the shorts would still be shorting they would look at the buy orders as “free money” The key will be for the funds to make their initial purchases with considerable stealth until a significant position has been established. It is altogether possible that they will acquire as many or more shares as the company has outstanding, since at first, the shorts will be very accommodative.

Then, once the core position has been established they will likely approach the company and consult with them about possible strategies such as de-listing from the Berlin Berman Stock Exchange (which has been a hotbed of illegal shorting), declaring a stock dividend, maybe initiate a corporate maneuver requiring the issuance of new shares and probably working with outside consultants to do an in-depth shareholder audit to determine the extent and source of the shorting. Then comes crunch time! The Cannibals come out of the closet and start buying with gusto. Buy orders will be coming from every direction, on shore, off shore, hedge funds, well-heeled individual investors, chart readers, momentum players, etc. The Internet can be a useful tool in spreading the message.

Once the market knows the shorts are on the run the pressure can get relentless. Unlike a soaring stock where most buyers have a choice of chasing or not, shorts have no choice but to cover at any cost as margin calls dictate the timing. The hedge fund community is one of the most opportunistic in the world. Results over the past year or so have been sub-par which means their 20% fees aren’t being triggered. Here comes a chance for a handful of hedge funds to take advantage of a once-in-a-lifetime opportunity to strike it rich over the next year or so. The Cannibals are greed-driven and they plan to take full advantage of this unprecedented moment in market history, even if it comes at the expense of their fellow hedge funds (hence the name “Cannibals”).

Some have already started to accumulate shares, but the fruits of their labors probably won’t start to show up until later this summer of early fall. Don’t be surprised to see this catch on in a big way. Once others see how the game is played there will be lots of copycats. Some of the cannibals are already planning for web sites, market letters, trading rooms, etc. It’s even possible that one or two mutual funds of distressed stocks will surface before this is over. What comes around, goes around,. Now the Cannibals are coming to town to eat their young and to create a new batch of billionaires.