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  • americanuspublius americanuspublius Sep 17, 2012 9:56 PM Flag

    Morgan Stanley Issues $16MM of Securities that Bet on Amazon Move

    Morgan Stanley issued a derivative (i.e. "Contingent Income Auto-Callable Securities") that helps the buyer/seller bet on the move of Amazon. HSBC did something similar recently, and I read this as a negative sentiment on Amazon. If Amazon moves up from or stays at 75% of its recent level of $255.63 (i.e. $191.73) the security pays basically 14% for a year (plus the original par amount). If Amazon goes down from $191.73, the security holder gets a negative return. See Edgar filing below.

    (edgar root) /Archives/edgar/data/895421/000095010312004790/dp32887_fwp-ps330.htm
    (edgar root) /Archives/edgar/data/895421/000095010312004204/dp31835_424b2-autocallable.htm

    Who knows who is buying this security, but when I see someone paying 14% return contingent on Amazon going up, but EARNING money on Amazon going down from $191.73, I think that there are some hedge funds out there ready to burst the Amazon bubble. Maybe my reading on this is totally wrong, but I don't see people paying 14% on anything unless they think it's not going to happen. Maybe this is just some crazy hedging instrument designed by a hedge fund to arbitrage the crazy option values and the actual volatility of the stock, who knows.

    FYI, I think Amazon has an awesome business model long run, and long-term I fancy it a great investment (as a former employee). But it's recent run-up is completely detached from the economic fundamentals. They are building some great scale-able business models and the Kindle platform (the sub-par Fire aside) is a fat-margin business with great potential, as is web-services.

    But there are too many opportunities to stumble in the next 3 years to justify a 100X forward P/E multiple. Talent is stretched at Amazon right now, the company is betting in areas that they are out-classed (like tablets), and frankly has too many bets placed. They're going to slip soon (probably when the Fire sells less than they expected) and when the insiders start chattering to the press and blogs like they always do, they stock will fall.

    Sentiment: Sell

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    • So, why would MS pay 14% per year if they are so sure AMZN would keep going up? Someone is betting AMZN will tank big time.

      I smell a Paulson / Goldman style setup. Paulson wanted to short housing, so Goldman create a vehicle for Paulson. Wasn't Goldman found to have bet against its own clients?

      Sentiment: Strong Sell

    • That's interesting news.

      What someone buy the securities from MS, and at same time short AMZN in another account.
      In case if AMZN stays above $191, he will get 14% return. If it goes down, his short position will make money for him.

    • AMZN gets cash by selling OTC out of the money puts to MS. The additional cash is accounted for as an increase in paid in capital in excess of par so most security analysts and the public don't even see how it got there. AMZN then uses the cash to buy back their stock.

      The derivative security issued by MS enables them to transfer away the risk of purchasing the otc puts from AMZN to purchasers of the security. The potential profits are retained by MS. Security purchasers pay MS a premium to risk taking a loss.

      Nice work if you can get it.

      • 2 Replies to friedlandjt
      • Just taking the transaction on AMZN books basically they are selling a put to get some cash. Then they are on the hook at some point if the stock tanks. I look at the SEC reports and don't recall that being disclosed anywhere. This would need to be disclosed somewhere. I looked at the balance sheet in that section "capital surplus" and it increased some 1B in the last year. Normally that section would not change. Could these transactions be increasing this section of balance sheet that much.

      • Sounds about right, fried... Sybs figurez FMR, world cap, trow, and other big bot haverz that control the underlying float are in the optionz writing bus definitively ... They have been for roughly 4 yearz, particularly FMR. They have done this with great success on many low float pigz that have run the bubble north of 6x off the piggy base line of march 2009. Weekly option writing haz been a boondoggle for theze idiots at the expense of the crackheads that buy them... Once the jig iz up they dump the underlying, possibly after buying arsloadz of naked puts under written by retailerz thinking they will 'join the game'... See gmcr and nflx crashez.

    • You're absolutely correct about bursting a bubble. If Apple releases iPad mini before Amazon starts selling the new Kindles, you can expect huge cancellations in pre-orders.

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