Ace Investor Pockets Rs. 375 Cr (In 1 Week) In “Mother Of All Bear Squeezes”

A few days ago, we read the tragic story of Joe Campbell, the novice investor who short-sold the stock of KaloBios Pharmaceuticals and was forced to cover it a much higher price, suffering huge losses in the bargain.

The counterpart to the story is the magnificent riches raked in by Martin Shkreli, the 32-year old Hedge Fund whiz-kid. Martin Shkreli is developing a formidable reputation as the man the Bears must run scared of. He shot into fame (notoriety?) when he bought a controlling stake in Turing Pharmaceuticals, a manufacturer of a life-saving drug for treatment of AIDS, and got it to overnight raise its prices by 5000%. The move was severely condemned by the intelligentsia, including the Presidential candidate Hillary Clinton, as “price gouging”.

However, Shkreli showed that he is not disturbed at all by the criticism:

I've heard disturbing rumors of capitalists infiltrating the pharmaceutical industry.

— Martin Shkreli (@MartinShkreli) November 17, 2015

In the case of KaloBios Pharmaceuticals, Shkreli may have brilliantly orchestrated the short squeeze.

KaloBios announced on 13th November that it was winding down its operations. It even asked its employees to leave. This was the cue for the Bears to pounce on the stock and beat it to the ground. The stock plunged to an all-time low of 42 cents.

However, unknown to the Bears, Martin Shkreli and his associates were surreptitiously accumulating the stock all the while. When they had their fill, they announced that they would take over KaloBios and turn it around.

This lead to the “Mother of all Bear squeezes”. As the desperate Bears scrambled to cover their shorts, they sent the stock price into a vertical climb (see chart).

To make matters worse, Frobes opined that KaloBios has a fundamentally sound business model and that there is more upside to the stock.

The result is that the stock surged from 42 cents to $46, resulting in unbelievable gains of 9500% + for Martin Shkreli and his associates. Yesterday itself, the stock surged 116.44%. The gains over the past five days are 2196%.

Even Paul R. La Monica, the battle-hardened journalist with CNN Money, was stunned at the turn of events:

A week ago, $KBIO hit a low of 44 CENTS. Today, it hit a high of nearly 46 DOLLARS. Insane.

— Paul R. La Monica (@LaMonicaBuzz) November 23, 2015

(A week ago, $KBIO hit a low of 44 CENTS. Today, it hit a high of nearly 46 DOLLARS. Insane.)

Martin Shkreli is reported to be sitting on gains of nearly $58 Million (Rs. 375 crore).

As expected the punters who had short-sold KalBios were shell-shocked.

Anyone involved in $KBIO shld be arrested, reasons TBD. The kid who crowd-funded margin call short at $2. Now $46 pic.twitter.com/FqiG0saSSa

— Jeff Macke (@JeffMacke) November 23, 2015

Someone should go to prison for this $KBIO fiasco.

— NYC Trader (@szaman) November 19, 2015

Before I die I have to do a Martin Shkrehli bioturd short squeeze. So many nuts were cut off. Lol $KBIO

— A. Wolf (@InceptionTrader) November 20, 2015

@mmrosati_ Yeah im definitely gonna remember $KBIO as long as I live.

— A. Wolf (@InceptionTrader) November 24, 2015

One interesting lesson that emerges from the fiasco is that a stop-loss is totally ineffective in these circumstances. If you have short-sold at 42 cents and have a stop-loss at 50 cents, it is meaningless because no one is willing to sell you the stock at 50 cents. The earliest you will be able to buy the stock is when it pauses for breath at $46, by which time you are already bankrupt.

So, remember that the next time you feel tempted to short-sell a stock!