Let’s say you have a sound profitable company, but people short your stock to $1. Will your company go bankrupt? Should it be delisted and not exist?
It depends. If you have a sound profitable company, with less total liabilities than hard assets, then the company can’t go bankrupt. If this the case (which more often not the case) and stock is $1 but worth considerably more, I will be buying stock of this company.
But is C this type of company?
In my opinion, Citi is a stinking corpse. The more you find out about this company, stinkier it gets. I have a feeling that the company has more losses hidden in its cooked book. So I would not long this stock now, it can go to zero like Fannie and Leh. I would not short this stock either, the market is so crazy I would not be surprised if C goes up 50% on some good news. In conclusion, I would not touch this thing right now. I feel safer playing Blackjack in casino.
what is a hard asset? noncurrent assets?
A sound comapny does not trade at $1. Market price is always right.
For my MSF program, we have a class on financial institution and risk management. At the beginning of the semester the professor chose Citi as the bank we would analyze throughout. Each week we work in teams to dig through the statements and build a solid risk assesment from one of the many risk aspects they face. The report is going on 20 pages now for our group and I can say the tone throughout this semester in group meetings has been one of mixed disbelief and overall negativity regarding the ability of C to maintain a going concern. It all boils down to this, due to the astounding size of their balance sheet (I believe approximately $2T in comparison to their equity (just over $100B at year end 2007, ancient history…i know) and the crappiness of their assets, these guys are toast. That is not even accounting for the nearly $3T in OBS junk (the stuff on their balance sheet is what they deemed stuff worth presenting to the public if that says anything), their interest rate exposure (rising effective spreads are killing their NIM), and a plethora of other obstacles. These guys were dead in the water in January and the only reason they outlived Lehman was the fact that their size gave them an exteneded period of time to bleed out. I really do not trust their books as someone stated above, they frequently have a history of lowballing risk measures, and many portions are simply opaque. The big question here is what happens over this weekend / coming week, and how the h$ll do we prop this giant up / slice it apart?
Nike Wrote: ------------------------------------------------------- > Let’s say you have a sound profitable company, but > people short your stock to $1. Will your company > go bankrupt? Should it be delisted and not exist? Do sound profitable companies layoff 15% of their workforce?
C is apparently not a sound, profitable company. I don’t exactly know how to find out because the disclosure on this whole financial crisis has been minimal. (I would really enjoy reading BlackSwan’s report, so if you want to send it to me for comments prior to turning it in I’m here for you) Anyway, I think that sound profitable companies can get shorted into the ground. I read some estimate awhile ago (probably BS) that getting rid of the uptick rule has resulted in 3000 sound profitable companies being shorted into the ground. I’m not sure I believe it, but it surely happens.
If sound, profitable companies get shorted to the ground, won’t the entire company be bought up by mgt or investors as they see the real value?
If the assumed psychological effect a declining stock price has on customers and their buying habits is great enough, then yes a compay can go belly up. In reality, this does not happen.
From Forbes (a fine article, btw) http://www.forbes.com/2008/09/23/naked-shorting-trades-oped-cx_pb_0923byrne.html?partner=email According to former Undersecretary of Commerce for Economics Dr. Robert Shapiro, “There is considerable evidence that market manipulation through the use of naked short-sales has been much more common than almost anyone has suspected, and certainly more widespread than most investors believe.” His research turned up at least 200 companies that were destroyed, for “a combined market loss of more than $105 billion.” Shapiro added, “we believe that this type of stock manipulation has occurred in many hundreds and perhaps thousands of cases over the last decade. … Illicit short-sales on such a scale or anything approaching it point to grave inadequacies in the current regulatory regime.”
You can presumably short a stock to the ground, but the question is what impact will that have on the company as an economic enity? If it is simply due to stock manipulation, the company should not be affected by much, except for the minor psychological effect.
[Look of bafflement] If your stock has been completely hammered, it is utterly impossible to raise equity funding (for pretty obvious reasons), nobody wants to buy your bonds (for pretty obvious reasons), banks don’t want to talk to you (for pretty obvious reasons), etc… You can’t get funding. Abusive short sellers don’t target companies with lots of excess liquidity; they target companies that have a regular need for new capitalization and deprive them of funding. In really extreme cases, they can even hold it out to them. Pet Quarters a few years back needed funding from someone a few years back so they borrowed operating capital from someone who sold them convertible debt and of course learned all about their fragile financing picture. He then shorted the bejeezus out of the company until it was worth nothing, and then covered with a combination of purchased shares and converted debt (thereby not affecting the market price which was near 0). The company went under taking all the principals with it. This kind of story can be repeatedvastly more times than I am going to repeat it. Abusive short sales are a really easy way of making money and destroying value.
Dreary Wrote: ------------------------------------------------------- > You can presumably short a stock to the ground, > but the question is what impact will that have on > the company as an economic enity? If it is simply > due to stock manipulation, the company should not > be affected by much, except for the minor > psychological effect. You should really learn about how companies operate before making dumb comments like this.
^ Not fair. Dreary knows lots of stuff, just not this.
Joe, no bafflement needed, the question asked at top is not about a company in a precarious position as you describe. He is asking about a “sound” company and how it might be impacted by short selling, which I don’t belive is by much
If the company is sound, and the stock is shorted to some ridiculously low level, I don’t see how it should matter all that much. The company got its equity capital in the IPO and subsequent issuances, and that money is already in the bank no matter what the current stock price is. If the company is healthy and sound, then there would be no need to issue more equity. In fact, management should use any excess cash flow to buy back its own stock. Hard to imagine a better ROE than buying back one’s own massively undervalued stock. If there is no excess cash flow to do that, then the company is not really sound, as supposed. That’s the financial theory part of things… Joey brought up the liquidity issue, which I hadn’t thought about. If debt needs to be rolled over, and the equity value is low, then debt issuers might demand a higher return or yield, because a low stock price might raise worries of bankruptcy. If you can’t roll over the debt, that could actually impact the company’s functioning, becoming a self-fulfilling prophecy. It would be helpful to have a set of case studies on predatory shorting. I’m sure it exists, but it would help me to read how it works.
It bothers me that in today’s world companies are built on borrowed money. How about going back to the traditional conservative business model. A business should be started by using your saving. Taking excessive or any leverage to expand a business is just wrong. I guess I am too Chinese. I never understand how people think borrowing money to make big purchase is a good thing. I myself would not buy a house unless I have about 50% of down payment and guaranteed future cash flows for the next 5 years.
Good luck getting suppliers & customers to continue doing business on a regular basis with an apparently distressed company. Anyone who relies on credit extended from suppliers can have their working capital negatively impacted soley by negative impressions, regardless of the actual reality of the situtation. For some companies/industries (e.g. insurance, brokerage, etc), public perception of the firm is of paramount importance to their continuing operation.