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Special situations, event-driven, debt, contrarian
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For most of my longs and shorts, I do daily checks on the cost of borrowing or shorting the stock. For most of my names the answer is that it is general collateral which mean there is very little carrying cost of shorting the stock. Today I called for J.C. Penney and for the first time ever I was told that there was not shares to be borrowed at any price but they had seen some available the other day in the 30% range.

For those who don't short a lot, 30% is an extraordinarily expensive rate to short a stock. Really anything that approaches 10% is in the danger zone. Given that there are over 300mm shares in the float, this is an extraordinarily unusual event. Given the heavy trading in the name, it does make sense that the borrowing rate could get tight. After all, a broker can only lend out what he has and if 20% of the float is changing hands each day, what he has today may be gone tomorrow. Usually, this movement all evens out but occasionally in very crowded shorts and JCP is the proverbial Tokyo subway car of shorts, brokers can't get enough shares to cover the amount short and have to start issuing recalls which forces the hedge funds to cover. No borrow means that even if I wanted to pay 100% per year to short JCP, no soup for you today.

None of this is truly fundamental to a Company's business but it can have enormous impacts of trading. Look at some of the great short squeezes of all time like VW/Porsche where hedge funds found out they were short more shares than even existed or Green Mountain where shorts saw KO take a massive position in the Company already trading near all time highs.

In the Case of JCP all this activity is exacerbated by the inter capital arbitragers who are short stock as a hedge for CDS or longs bonds. On techincals alone, once a borrow gets this tight, I typically stay away as the pricing can get very irrational very quickly. The shorts in the case of JCP need bad news to happen fast. The stock and bonds and CDS have all started to rally with earnings just around the corner and a new CEO in the wings, it wouldn't take much to move the stock. Let's not forget that Imperial just downgraded the stock again and their last downgrade is what caused a bottom in the name.

Source: J.C. Penney: No Borrow At Any Price. A Primer On Shorting

Additional disclosure: Positions can and do change without warning or notice.