Why is Bear Stearns BSC trading higher?
In case you hadn't noticed, Bear Stearns (BSC) is trading much higher since opening on Monday around $3/share. The reports say that JP Morgan Chase (JPM) is buying BSC for the price of approximately $2/share... so what gives? Why is BSC trading so much higher?
I've read several explanations today on why we're seeing that behavior. Could be that:
1.) Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.) Short sellers are covering their shorts, which last week supposedly made up 54% of the float.
Dave was interested to find out more about reason (2), so here's what I told him.
First check out: http://finance.yahoo.com/q/ks?s=jpm
Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float. The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.
As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC
Contrast that 18.7% to JPM's 1.3% short % of float. Huge difference! Lots of people were betting that BSC stock was going to fall, so they sold shares short. The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!
Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small period of time. Short squeezes can cause crazy stock pops because they create an unexpected buying demand. During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).
Not sure exactly what the scoop is, but it sure is interesting to follow! (yep, I'm a geek like that)
[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.
I'll catch up with more PE discussions later!
Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
I've read several explanations today on why we're seeing that behavior. Could be that:
1.) Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.) Short sellers are covering their shorts, which last week supposedly made up 54% of the float.
Dave was interested to find out more about reason (2), so here's what I told him.
First check out: http://finance.yahoo.com/q/ks?s=jpm
Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float. The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.
As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC
Contrast that 18.7% to JPM's 1.3% short % of float. Huge difference! Lots of people were betting that BSC stock was going to fall, so they sold shares short. The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!
Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small period of time. Short squeezes can cause crazy stock pops because they create an unexpected buying demand. During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).
Not sure exactly what the scoop is, but it sure is interesting to follow! (yep, I'm a geek like that)
[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.
I'll catch up with more PE discussions later!
Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
I was already aware of a short squeeze due to unexpectedly good news, but I never really thought of one happening because of unexpectedly bad news. I think that's what confused me before. But it makes sense. A lot of people just decided all at once that their profit was "good enough." Not surprising when there's a HUGE drop and then the drop levels off. Even if it's not the actual bottom, it's a local bottom and a reasonably good time to cover your short.
And, of course, by the time I write this, JPM is now considering a whopping (!) $10/share purchase, so the people who were buying it up at $4/share don't look quite so silly, anymore! Who knows what the future holds, but it just goes to show that anything can happen. :-)