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John Petersen
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John Petersen is the executive vice president and chief financial officer of ePower Engine Systems, Inc., a Kentucky-based enterprise that has developed, built and demonstrated an engine-dominant diesel-electric hybrid drivetrain for long-haul heavy trucks that promises fuel savings of 25 to 35... More
My company:
Fefer Petersen & Co.
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ipo-law.com
  • Anatomy Of A Supply And Demand Imbalance 17 comments
    Oct 6, 2012 12:06 PM | about stocks: AXPW

    Regular readers know that I spend a lot of time focusing on supply and demand issues when I discuss Axion Power International (OTCQB:AXPW) but most don't understand why because many of my theories are based on recollections of other clients who experienced similar problems during a time when I didn't pay as much attention. Since I predicted last summer that Axion would reach an inflection point by early fall, this seems like an opportune time to explain what I've been tracking and why I think it's relevant.

    Sometime last year HTL drew my attention with his discussions of the daily short reports published by FINRA. When I looked at the numbers, they seemed to mesh well with recurring SEC reports from Quercus and Special Situations. So I decided to start tracking the FINRA data more closely to see if it might be useful for my purposes. HTL was a priceless research tool in that regard because he was able to give me the daily data all the way back to April 1, 2010, which was about the time the heavy selling started. The following table summarizes the FINRA total volume and short data from April 1, 2010 through October 5, 2012.

    (click to enlarge)

    On the supply side, I've principally paid attention to seven blocks of shares. Two were legacy holders who owned stock before the December 2009 private placement and the other five were holders or classes of holders that bought in 2009. The following table identifies the blocks.

    (click to enlarge)

    The thing that makes each of the blocks different from other shares is that they were sold in private placements. Under SEC rules stock that's sold privately is classified as "restricted" until it is sold by the original purchaser. So even if a resale is registered, every resale requires an opinion of counsel that the resale is legal. Even under the best of conditions, that process can't be completed in T+3 so every sale of stock by a private placement purchaser must give rise to a reported short sale.

    My last table is part reported fact and part educated conjecture. It takes the annual FINRA short data and matches it up to the time periods when the seven blocks were selling, or at least presumed to be selling. Some holders like Quercus and Blackrock reported their transactions for a time and then fell off the radar when their holdings hit certain levels. Others like the Winner Estate and Mantuck Hill have been invisible all the way along, but the timing seems reasonable in light of the available facts. The little yellow arrows indicate that the timing of likely sales is fuzzier than it is for other holders.

    (click to enlarge)

    In my mind the most important data point is the yellow balancing entry, which represents reported FINRA shorts that can't be allocated to other holders. For 2010 and 2011, I believe that line represents sales by small 2009 investors and legacy pre-2009 investors. For 2012, it would also include buyers in the February placement that sold immediately after the offering closed who didn't get their stock into electronic form for a week or two after the closing date.

    If you assume that there were no sales by legacy pre-2009 investors over the last three years, total sales by 2009 Investors would have been 17.7% of their purchases in the first nine months after closing and 34% in the following year. Those percentages of tie pretty well to patterns I've seen in the past. Once the 2012 investors received their shares in electronic form, they wouldn't be expected to impact short reporting.

    When I pull all the numbers together, the only conclusion I can reach is that even under a worst case scenario we're within a million shares of the bottom of the willing sellers barrel. At this point I don't see any remaining 2009 buyers as likely sellers because they've already held on through two years and nine months of misery. I think the same logic holds for the February purchasers. It may have made sense to filp for a modest gain during the first month or two after the offering, but the decision dynamic changes once you've held a stock for nine months.

    The bottom line is that I can't see any other large blocks of shares that can flow into the market as the stock starts to perform. They've already been sold. And until the holders who bought those shares over the last two and a half years see an irresistible price, I think we're on the cusp of a major supply and demand inflection because the blocks that accounted for about 60% of sell-side activity are out of stock.

    Disclosure: I am long OTCQB:AXPW.

    Stocks: AXPW
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Comments (17)
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  • Jon Springer
    , contributor
    Comments (4161) | Send Message
     
    Vroom vroom vroom
    6 Oct 2012, 12:08 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » Don't get excited - be critical. If there are holes in my reasoning we have to identify them.
    6 Oct 2012, 12:16 PM Reply Like
  • Jon Springer
    , contributor
    Comments (4161) | Send Message
     
    Okay, there's still 50 to 70 million shares completely unaccounted for... and some of those could be shares you've used in your calculations. This is all hypothetical.

     

    There's no way to be sure of anything until the facts are a distant memory in the rear view memory. Its guesswork until proven, and its not proven until its history no longer worth debating.
    6 Oct 2012, 12:37 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » The unaccounted for shares fall into one of two classes (a) the core legacy holders who have been stockholders for ages, and (b) the February shares that were registered under the Securities Act and wouldn't normally impact the FINRA short numbers.

     

    The legacy core is in the same position as the 2009 purchasers. We all need legal opinions before we can sell and to the extent that any of us have sold over the last three years, those sales were included in the balancing entry line.

     

    The 2012 buyers were not around in 2010 and 2011, and except for the few who flipped immediately after the offering, they can put their shares into a brokerage account with no fuss, muss, bother or legal opinions.
    6 Oct 2012, 01:04 PM Reply Like
  • D-inv
    , contributor
    Comments (4205) | Send Message
     
    JP, ISTM the analysis implicitly assumes constant open market demand for AXPW shares with price changing solely in response to steadly increasing open market supply of shares. I think that assumption is perhaps mostly valid over the past few years. Going forward, IMO any increase in open market supply of AXPW shares without concomitant positive shock to demand is quite likely to shift the demand curve for shares toward the origin with share price settling lower than anything seen to date.

     

    Alternative investment opportunities are always just over, if not on, the horizon. Talking to large potential future buyers has played out its story line for AXPW. The company has crawled some distance (navigating several obstacles in the process), pulled itself to its feet, and stepped along the supporting wall of the talk. IMO, commercial sales with conspicuous prospects for follow-on orders are needed this quarter to sustain AXPW share demand. It is time to toddle towards walking the walk.
    6 Oct 2012, 03:23 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » I think you've missed the point of this analysis completely.

     

    For two and a half years fully 60% of all shares that were sold to open market buyers came from a small number of sellers who no longer have any shares they can sell to satisfy future demand.

     

    Unless open market demand shrivels and dies, it will be impossible for open market supply to exceed open market demand.

     

    There is no identifiable event on the horizon that will increase the open market supply of shares and management has clearly said they want to place the next round with strategic investors instead of financial investors. If the stock does end up in strategic hands, it won't impact the open market for years.

     

    For two and one half years only 40% of sell-side activity came from open market sellers while 60% came from a short list of large sellers.

     

    With the large sellers out of the picture, the price will have to rise to meet the expectations of the investors who've been doing all that buying over the last two and a half years.
    6 Oct 2012, 03:53 PM Reply Like
  • D-inv
    , contributor
    Comments (4205) | Send Message
     
    " I think you've missed the point of this analysis completely."

     

    Possible. But doubtful.

     

    "With the large sellers out of the picture, the price will have to rise to meet the expectations of the investors who've been doing all that buying over the last two and a half years. "

     

    I suggested that you assume "the expectations of the investors who've been doing all that buying" remain constant. Such could be the case, but I don't expect it without some positive verifiable sales developments within the next 8 - 10 weeks.
    6 Oct 2012, 04:36 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » I wouldn't have written this particular Instablog if I didn't think we were already seeing a clear shift in the supply and demand dynamic. The shift started last week and unless my work is way off base it will accelerate next week. Spirits are rising based on a 20% gain from last Friday to this Friday. If the price continues to rise, so will the spirits.

     

    Market conditions could certainly take an unfavorable turn if the third quarter report is negative and there's no discernible progress on any front over the next couple of months. I have to believe that most investors who harbor those particularly negative expectations have already sold.
    6 Oct 2012, 05:17 PM Reply Like
  • BugEYE
    , contributor
    Comments (195) | Send Message
     
    My theory or pure conjecture is last week one of the last two big sellers (except Q) willing to take any loss left the war room and that is why we observed a pattern change of trading lately.

     

    The sole seller now does not have to compete with others and feels quite content with 30 cents, therefore providing "unlimited" shares for the last few days.
    
    Pure, complete and ignorant conjecture, of course. All I want is to be the first commenter in the next concentrator. What? already lost out on that competition?
    6 Oct 2012, 08:34 PM Reply Like
  • Mayascribe
    , contributor
    Comments (9984) | Send Message
     
    JP: Chiming in to say great work!

     

    HTL has done a beyond excellent job with the charts and his analytics. I'm also seeing several indicators recently turning north.

     

    I'm thinking we're only one if not a couple of major announcements and a strategic partner away from share prices to really take off.

     

    Hoping this Trick or Treat season is more treat than trick.
    6 Oct 2012, 07:06 PM Reply Like
  • Stefan Moroney
    , contributor
    Comments (2656) | Send Message
     
    Interesting work John. The new shares that Special Situations purchased were likely purchased in the 2012 placement correct? So I will assume that they will not show up in any new FINRA data.

     

    Do you have any thoughts about this block of shares and if, how or when they may flow into the market?
    6 Oct 2012, 10:23 PM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » Special Sits is a mystery to me. It will be interesting to see their next holding report in a little over a month.
    7 Oct 2012, 01:07 AM Reply Like
  • H. T. Love
    , contributor
    Comments (18051) | Send Message
     
    I am very interested in SS too. I hope they report soon.

     

    HardToLove
    12 Nov 2012, 08:28 AM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » Since they made several Schedule 13 filings on Friday, I expect the 13-HR filing later today.

     

    http://1.usa.gov/WY6sc4

     

    Their last reported number was 2,608,000 on June 30, which was down 800,000 from the 3,408,000 they reported on March 31.
    12 Nov 2012, 08:34 AM Reply Like
  • H. T. Love
    , contributor
    Comments (18051) | Send Message
     
    So my suspicions about them may be at least partially on target. This would be one of the times I wouldn't mind being wrong at all.

     

    <*sigh*>

     

    HardToLove
    12 Nov 2012, 08:42 AM Reply Like
  • Stefan Moroney
    , contributor
    Comments (2656) | Send Message
     
    Were the shares that were given to the Bankruptcy Trustee in electronic or certificate form?
    7 Oct 2012, 10:56 AM Reply Like
  • John Petersen
    , contributor
    Comments (30232) | Send Message
     
    Author’s reply » They were in electronic form because a 2006 Bankruptcy Court order eliminated the restrictions. The same is true for the ±575,000 shares the Bankruptcy Trustee had in early 2010.
    7 Oct 2012, 11:09 AM Reply Like
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