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Charter Financial Corporation Message Board

  • joeevani joeevani Jan 28, 2005 10:42 AM Flag

    WSJ Article SEC on Short Selling 2

    "The new rules can involve some pain for hedge funds who specialize in trading the securities of smallcap companies," says David Katz, a lawyer with Sidley Austin Brown & Wood LLP. One hedge fund manager characterizes it more dramatically as the beginning of a "hunting season on hedge funds which short."

    The new rules stem from instances where short positions approach or even sometimes exceed the entire amount of known shares outstanding.

    The new rules may also change the economics of the securities lending business. With more information about what shares are hard to borrow, fees could rise.

    Cal-Maine, a Jackson, Miss.-based company which is the largest fresh-egg producer in the U.S., has recently seen demand for its eggs diminish. In its last fiscal quarter, the company posted a $5.3 million loss, compared with a profit of $17.6 million a year earlier.

    Meanwhile, Cal-Maine's share price has been as volatile as consumers' choice of the diet du jour. Eighteen months ago, high-protein diets were the rage and Cal-Maine did well. Today, the trend has reversed and the shares have plunged and short interest has exploded. In the past 52 weeks, the stock has traded between $9.80 and $22.80 and is currently changing hands at about $11.40 on the Nasdaq Stock Market.

    Six months ago, the short interest amounted to 66% of the total shares that trade freely, or the float. Today, the short interest has risen to more than 85% of shares available to the public, according to research from Merrill Lynch & Co. based on Nasdaq data. Fred Adams Jr., Cal-Maine's chief executive, attributes the short interest to a planned secondary offering that was later canceled and adds that "the intent of the regulation will cause fewer shorts in the future." Mr. Adams and his family control 70% of the voting rights of Cal-Maine.

    Short sellers, unsure how the public lists will affect trading, may already be trying to close out positions ahead of Friday's deadline. "If I had good profits on my short position, I'd make sure I was out by Friday. If you get caught in a buy-in, you will lose," says William Rhodes, principal of Rhodes Analytics, referring to the way in which brokers close out customers' positions. "Better not be caught with your shorts around your ankle."

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