Ask Mr. Wallstreet: Shorts by Shelly Kraft

aSk MR. WallSTREETaSk MR. wallSTREET

IFIF SHORTS SHORTS ARE ARE THE THE ONLY ONLY NATURAL NATURAL BUYERS…WHYBUYERS…WHY DO DO THE THE MAJORITY MAJORITY OF OF INVESTORS, SHAREHOLDERS,INVESTORS, SHAREHOLDERS, CC LEVEL LEVEL MANAGERS, ANDMANAGERS, AND BANKERS BANKERS HATE HATE SHORTS SHORTS SO SO MUCH?MUCH?

Idefinitely have my own opinion about shorts and here it goes: Since my early days on Wall Street “shorts” have been hated, feared, disrespected, reviled and for microcap & smallcap CEOs and their boards, simply the bane of their existence. Shorts get blamed by CEOs for everything wrong with their underperforming stocks. Poor performing CEOs conveniently blame price drops on “the shorts” and far too many times investors are willing to accept this excuse hook line and sinker. “The illegal naked shorts are killing my stock”, I wish I had a buck for every time I heard that said by a pressured CEO. How about CEOs during interviews with analysts trying to defend how great a job they’re doing while sitting with a giant reported short by sellers who have legally borrowed shares. Most CEOs hate to answer questions about their stock being shorted. Many CEOs go to great lengths spending serious money hiring consultants or numerous investor relations firms, or lawyers or buy services specializing in identifying the shorts in their stocks. Behind close doors and within the board room walls, identifying who is shorting stock leads to ordering shareholder lists from DTC and NOBO lists… How much time is actually spent watching changes in shareholders? The rallying cry in the board room: Let’s fight these shorts any way we can after all it’s our responsibility, but is it? I ask myself, what do shorts know that no one else knows?

Idefinitely have my own opinion about shorts and here goes: Since my early days on Wall Street “shorts” have been hated, feared, disrespected, reviled and for microcap & smallcap CEOs and their boards, simply the bane of their existence. Shorts get blamed by CEOs for everything wrong with their underperforming stocks. Poor performing CEOs conveniently blame price drops on “the shorts” and far too many times investors are willing to accept this excuse hook line and sinker. “The illegal naked shorts are killing my stock”, I wish I had a buck for every time I heard that said by a pressured CEO. How about CEOs during interviews with analysts trying to defend how great a job they’re doing while sitting with a giant reported short by sellers who have legally borrowed shares. Most CEOs hate to answer questions about their stock being shorted. Many CEOs go to great lengths spending serious money hiring consultants or numerous investor relations firms, or lawyers or buy services specializing in identifying the shorts in their It has been my experience that short players stocks. Behind close doors and within the board do deeper due diligence than longs, even more room walls, identifying who is shorting stock leads to than buy side analysts. Shorts have their own ordering shareholder lists from DTC and NOBO lists… criteria beyond reading company financials, press How much time is actually spent watching changes releases, SEC filings and conducting interviews with in shareholders? The rallying cry in the board room: management via conference calls or in person. In Let’s fight these shorts any way we can after all it’s particular shorts read and track public press releases our responsibility, but is it? especially ones that include financial projections, references to milestones, or reference to potential I ask myself, what do shorts know that no one else corporate developments that have caused stocks knows? to hit new highs. Stocks that advance in price for no apparent reason often times make it onto the

It has been my experience that short players do deeper due diligence than longs, even more than buy side analysts. Shorts have their own criteria beyond reading company financials, press releases, SEC filings and conducting interviews with management via conference calls or in person. In particular shorts read and track public press releases especially ones that include financial projections, references to milestones, or reference to potential corporate developments that have caused stocks to hit new highs. Stocks that advance in price for no apparent reason often times make it onto the

shorts radar and continue to be monitored. Shorts traditionally follow big gainers with increasing liquidity. Shorts are diametrically opposite of longs in that longs buy low hoping to sell high while shorts sell high hoping to buy low. Both can be profitable, and both have varying degrees of risk but historically when the “great news” press releases and buying dries up since profit taking occurred market support for buying the stock slows or disappears. Slowly but surely the stock drops from its new highs therefore making it difficult for a stock to hold a strong bid. Some say that shorts keep companies honest and clearly bet against hype and promotion.

What happens when stocks lose their momentum, and their price begins to fall? Some longs may cost average down and we know how that usually ends. The shorts, patiently waiting for this moment, after having sold on the offer patiently into buying, can now sit and pick their spots and buy back to cover their shorts on the bid or below, or even buy in a private placement with the company or find a block for sale from an insider, or watch the market makers until a block shows up. Most longs hit the bid or use market orders to get out which in turns feeds stock for shorts to cover. So, there’s the outcome of shorting and getting paid to wait for the inevitable. Shorts are the only natural buyer in town, in many cases they are the market equalizer. It’s not that they believe “long is wrong” but rather they continue to seek the justification for unwarranted price increases. Furthermore, every time a short sell occurs the sale provides cash to the seller which is available when necessary. Of course short players can get caught and get squeezed by the longs as well, which is the back and forth, give and take in the market between longs and shorts! And that’s what I think about shorts!

Ask Mr. Wallstreet is Shelly Kraft. He began on Wall Street in 1984 as a penny stockbroker, investment banker, rising to President of Emanuel & Company, a boutique IPO underwriter and microcap market maker.