Jesse Livermore, in his legendary bestseller, “Reminiscences of a stock operator”, utters memorable words:
“He that sells what isn’t his’n
Must buy it back or go to pris’n.”
Jesse describes in detail how Commodore Cornelius Vanderbilt trapped short-sellers of a stock called Harlem City Railway by accumulating all the floating stock and refusing to lend the stock to them. The short-sellers were unable to cover their positions and were financially ruined.
We have the unique opportunity of watching a similar scene play out in real life in KaloBios Pharmaceuticals (KBIO).
We saw earlier how, when KBIO announced that it was closing down, the short-sellers pounced on it and dragged it down to a low of 42 cents. Unknown to the short-sellers, Martin Shkreli was quietly accumulating the stock and when he had a majority stake, he announced that he would revive KBIO and merge it with Turing Pharma. The short-sellers rushed to cover their positions, sending the stock on a vertical climb to a high of $46, translating to a gain of 9,500% in just a couple of days.
At the high price, fresh short positions were created with the short-sellers speculating that the stock price would plunge again.
KBIO short interest 37%; Shrekli owns 70%. Do the math
— zerohedge (@zerohedge) November 23, 2015
Martin Shkreli waited patiently till the short positions reached a position (37%) in excess of the floating stock (30%) available and then announced that he would stop “lending” his stock.
I spoke with my counsel & advisers and decided to stop lending my $KBIO shares out until I better understand the advantages of doing so. 1/2
— Martin Shkreli (@MartinShkreli) November 26, 2015
I apologize for any inconvenience this may create in lending markets and I will probably resume lending at some point. Happy Thanksgiving!
— Martin Shkreli (@MartinShkreli) November 26, 2015
The consequence of this sorry state of affairs is that the short-sellers are badly trapped because they cannot meet their commitment to deliver the stock and the shares will have to be acquired by auction.
Knowing this, other speculators will jump into the fray to buy the stock, sending the price surging even higher.
All experts are excitedly referring to the fact that a similar short-squeeze had happened in the year 2008 in the case of Volkswagen. Porsche AG increased its stake in the Company to 70% and created the situation where the short-sellers were ruined because the stock price surged 5-fold within a matter of days from 200 euros to 1000 euros, leading to billions in losses for the short-sellers.
Will a similar thing happen when the market reopens on Monday or will the short-sellers find an escape route from the death grip of Martin Shkreli is the question on everyone’s mind!
