New data: Both volume and cost to borrow HLF shares spiking: New short squeeze predicted
The battle over Herbalife (NYSE: HLF) has raged for months now, with hedge fund titans battling it out over the future of this stock.
Notably, Carl Icahn of Icahn Enterprises (NYSE: IEP) has bought over 16 percent of the stock while Bill Ackman of Pershing Square Capital has taken a large short position.
Stock Lending On the Rise
Speaking to Benzinga on a recent up-tick in securities lending in shares of the nutritional supplement company, Tim Smith , Executive Vice President of SunGard's Astec Analytics, noted that the number shares lent by major investment banks to be shorted by traders has ticked higher sharply in recent days. Further, he noted that this data tends to be extremely correlated to overall short interest, the difference being largely the positions made proprietarily by the investment banks themselves.
Smith noted that the number of shares lent has increased sharply from July 25 , from 17 million shares to 22.5 million shares Tuesday. Further, he noted that the interest rate that investors are paying to borrow these shares has been spiking, from between two and three percent on July 25 to 10 percent today, data which is reflected in the chart below.
Related: Herbalife Shares Rise Despite Reported Ackman SEC Complaint, Bob Chapman Is Astounded.
"What we've seen with Herbalife and all of the positioning with all of the players in the market place, the securities lending volume has changed and it has been very interesting to follow," said Smith. "If the short sellers are so confident that they are correct, then the price that they are willing to pay to maintain their positions would further increase. At a 10 percent rate, there is still quite a bit of possible growth in fees."
Hot But Not White Hot
Smith described the up-tick in lending rates and number of securities lent as "hot, but not white hot" as he noted that the volume of shares lent out is not yet near the May high, which was near 50 million shares lent. However, he noted that the number of shares to be lent may not got higher because "there is not an awful lot of supply there."
He attributes part of the limited supply of shares lent to the insiders who have been buying the stock. Investors such as Icahn but also Dan Loeb of Third Point Partners and Bob Chapman of Chapman Capital LLC have gone long Herbalife. "Institutions like Soros won't lend the stock," said Smith, "which could be a factor in there being limited supply."
History As A Guide?
Smith said that the number of shares lent out peaked around 50 million back on May 10 , before Herbalife's stock went on a massive run up, gaining nearly 53 percent since that time. The interest rate paid on the stock was also much higher at the last peak than it is now, as lending has become easier as shorts have been squeezed out due to the run up in the stock.
Nevertheless, the data could lead to a short squeeze, especially if it begins to turn around. As Smith said, if the interest rate keeps going up, it implies that shorts are willing to keep paying more money to stay in their positions. Therefore, if it starts to level out or fall and the number of shares available for lending continues to contract, it could mean that more shorts are being squeezed, which could be a signal of a new short squeeze.
Also, Smith mentioned that recalls could be a catalyst for further upside. Recalls occur normally as those who were long and had lent the stock sell positions to book gains. In this case, those short would have to cover positions to return the stock, potentially at a loss, which could thus be a catalyst for a short squeeze itself.
I'll add that the finding shares to borrow is easy right now because some of the big long players have yet to pull the borrow which will dramatically constrain available shares. The squeeze coming is more than just that though... unhedged shorts here are stupid and about to be steamrolled. Those shorts who think their borrow is secure may be in for a big surprise because the longs getting ready to stuff the shorts understand the hedge and are enjoying the decay which they will soon stomp on hard.
Ackman is dead on this and he knows it. LOL that Carl called him a whiner who would run off the playground to complain to the teacher that he was being bullied... hAckman's complaint filed with the SEC is akin to that, as if he is saying, "Those big bad guys are calling me a sissy and trying to take my lunch money and spitting at me." Hanging in the back of the playground laughing, all of the "bullies" are saying, "Uncle Carl, when do you plan to give him a full force wedgie, cuz we are gonnahang him up by his little panties in the girls' locker room." ROFLOL
For those who don't understand what "pulling the borrow" means or anything else in the above article for that matter, you really ought to cover your short before you lose your kid's college money... or maybe just the card money you have in those 20 shares short. And have fun studying the margin account charges -- likely most of the F heads short on this board don't even know waht a stock loan dept does. ROFLOL