Chase Manhattan Corp. shares have been falling so relentlessly that an investor stopped by to ask why: "I bought this stock for its yield, but it keeps going down. The yield is up to 9 percent. What gives?" Without knowing it, the investor was the victim of a short squeeze that was still going on at press time. The short sellers may not be breaking any laws here, but in other cases they can.
If you own a stock that the short sellers are working, you may be disappointed in the results. Let's consider how and why they work.
In the classic case, the short seller borrows stock and sells it. His selling _ and that of confederates, if he has them _ will tend to send the price of the shares lower. When this happens, the short seller ordinarily buys the stock and returns the borrowed shares.
The difference between his net cost in buying the shares at the lower price and what he got for the borrowed shares is profit. The uptick rule is supposed to prevent a so-called "bear raid."
On both the New York and American Stock Exchanges, the seller may not go short unless the last previous trade at a different price was lower. This does put a damper on things.
But it doesn't solve the problem for Chase Manhattan Corp. and its shareholders. Chase has been undertaking a major refinancing to augment its capital. It sold 16.1-million new shares to the public last year, its first issue of common in a century. In the fourth quarter of 1989, Chase encouraged holders to buy even more shares through an unusual dividend reinvestment plan offering them a 5 percent discount from market price.
Apparently, arbitrageurs have discovered the plan. If they buy a small amount of stock through Chase, they qualify to buy stock valued at $250,000 at the 5 percent market discount.
Some arbs have reportedly opened a number of accounts under different names so that they can sell short in sizable amounts and cover their shorts with stock purchased at discount.
Thus, Chase shares have dropped from 35~ in January to 27 as this was written. Trading volume is unusually large. Chase spokesman Ken Mills says there is no present intention to drop the plan. But the bank reserves the right to alter terms at any time. In the meantime, investors are buying the beleagered stock at ever higher yields. That's good if you are a late comer.
But if you are of a mind to buy it, just remember that the stock may remain under pressure unless Chase drops the plan.
There is a far worse dilemma for investors in companies with huge short positions. Through a quirk in the tax law, the short seller need not report profits on a short position until closed out.
This has led to the "terminal short" variety of bear raid. Heaven help you if your company is the target of such a raid. Overzealous short sellers have been known to take steps to ruin the target company's business.
Assix International has been a target of a prolonged bear raid. For a time, it looked as though the shorts might ruin the business.
Assix International, which is based in Tampa, markets wheel balancing services. When the company was about to sign up Sears last spring, short sellers approached Assix customers and the company's 15 market makers whispering that the deal with Sears would fail.
Sears was to become the most important of Assix's five accounts. The others are Pep Boys, Western Auto, Winston Tire of California and Grand Auto. The Sears account was a plum. Sears sells more wheel balance services than any other firm in world.
Assix says short sellers tried repeatedly to disrupt negotiations, even going to Sears itself. Sears was critically important to Assix.
While the deal was in negotiation, Assix shares fell to 5 from 8 on exceptionally heavy trading activity. Executive vice president R. Park Newton says trading remains heavy because the short sellers haven't given up. In January, volume was 1.65-million shares and the short interest rose dramatically. There are only 1.1-million shares in the floating supply of stock. But Assix has since soared to 8]. Assix is now confident of defeating the shorts.
If you are about to invest in a small company, ask your broker to check the short interest position. If the number of shares short is a high enough to put the stock near the top of the list, check further to learn how determined the short sellers may be.