WASHINGTON, March 7, 2017 – In our companion column today, we duly noted the brutal beating that those newly released IPO shares of Snapchat parent Snap, Inc. (symbol: SNAP), are going through a real market meat grinder this week.
ZeroHedge's "Tyler Durden" weighs in on the extent of the selling in this issue:
"As we warned earlier, the shorts have been unleashed in Snap (as T+3 settlement enables ‘borrow'). Snap is down 12% today and down 30% from Friday's highs as S3 Partners says short-interest in the ‘camera' company has reached $100 million…
"BROKERS LENDING SNAP SHARES TO SHORT SELLERS AT RATES BETWEEN 20 AND 40 PCT – S3 PARTNERS
"SNAP SHORT INTEREST APPROACHING $100 MLN – S3 PARTNERS"
(Bold and caps as in the original article.)
Need a picture? ZH helpfully provides a chart illustrating this horror story:
Queried one puckish GH commenter: "Can they change the ticker [symbol] to CRAP?"
Via our brokerage's Reuters newswire, we get this confirmation of the ZH point of view along with additional information:
"Early short selling in Snap on Tuesday was approaching $100 million, according data from S3 Partners. After Snap's red-hot public listing last Thursday and then a sell-off this week, brokers on Tuesday were charging short sellers annualized rates of between 20 percent and 40 percent to borrow the shares, according to S3 Partners." (No direct link)
What's happening here is that Wall Street, in general, hated this IPO from the get-go. First of all, there's that obnoxious fact that essentially all the shares in this issue are non-voting. In a nutshell, this means that whether you're a little guy, a big institution or a hedge fund that bought shares in the SNAP IPO, if Snap, Inc. management eventually screws up the company, your investment goes down the crapper (as that ZH commenter hinted earlier). Worse, you have zero recourse since you can't influence management or the board of directors with your vote.
Building on that large perceived negative was the simple fact that even at its IPO price-$17 per share-Snap, Inc. was regarded by the majority of analysts as being considerably overvalued to begin with. That's even when the new stock is compared to its more or less competitors in the Internet and app space like Facebook (FB) and the currently embattled Twitter (TWTR).
BTW, the latter onetime high-flyer, we suspect, wouldn't even be around today without the Twitter-barrages and counter-barrages being emitted on a regular basis from the White House. So what about SNAP? What if the millennials who currently adore this app suddenly find something else to love? This is a fickle market.
As our readers already know, we, ourselves, did get in on the SNAP IPO just for the heck of it. Like that long-ago (2010-2011) deceased battery maker A123 that President Obama wasted taxpayers' money on, we figured that the SNAP IPO would skyrocket for a time before crashing to earth after its first red-ink bleeding quarterly numbers were reported.
Unfortunately for us, the bloodletting started a bit earlier than we expected, which could cause us some portfolio damage as our discount brokerage house essentially coerces us into holding any new IPO for at least 30 days. But in IPO Land, you win some and you lose some. Besides, this game isn't over, for us anyway, until around April 3 or so. That said, despite our brave words, SNAP, which was flirting with $30 per share just a couple of days ago, is now flirting with $20 per share, just $3 above its IPO price of $17.
Our first sign that something was very om-inous was going on with this stock occurred when we spotted a couple of cutesy online reports about thrilled-to-the-tips-of-their-toes millennial Snapchat fanatics who couldn't wait to own some shares. We're talking 3-5 shares apiece, bought after the IPO shares soared on Thursday and Friday of last week.
Say these newbie investors picked up 5 SNAP shares at $29 per share last Friday, and say those shares will only be worth $20 per share this afternoon or tomorrow morning. That's a $45 loss (roughly 30 percent) in just two trading days. (That figure does not include the selling commission, BTW.) Not much encouragement here for a new investor.
In other words, as of today, anyone who chased SNAP is seriously regretting it, including these clueless millennials-the ones the short-sellers were lying in wait for as they drove up SNAP's price, making short bets Monday and today even more potentially lucrative.
Although I've never seen any surveys on the topic, it's my guess that millennials know less about how money works than almost any American generation in history, given that their education has increasingly focused on gender identification, safe spaces and trigger words rather than math, business and career.
But don't get me wrong. This ignorance isn't entirely their fault, although their lack of awareness is a problem. It remains a sad fact that most of what the rising generation knows about business is that it's evil, evil, evil, because their teachers and professors have programmed them to think-or rather feel-just that.
What's happening to these naïve investors right now is that Mr. Market (and all those short-sellers) are fulfilling in an ironic way precisely what the millennials' left wing English profs have taught them about business: evil, evil, evil. So it goes. You can't make this stuff up. Like W.C. Fields said, "Never give a sucker an even break." Wall Street never does.
Even though we got in SNAP at the IPO price of $17, we ourselves are potentially going to be left holding the bag just like those millennials. But we knew what we were doing and decided to roll the dice. And we did get in at the lowest price, though it could get lower than that before we're done.
On the other hand, we're used to the IPO game. We pick them carefully-or cannily-and win more IPOs than we lose. Plus, there's no saying where this currently sad IPO puppy will end up when we hit our "sell by" date, so we haven't actually lost any money yet. (Neither have our anonymous millennials unless they've already panicked out.) But here's the lesson in hot IPOs, folks: If you can't get shares in the actual IPO, don't chase them if they take off to the upside when the stock opens for trading.
Additional bad news for our largest portfolio today: Sellers are pounding our position in Allergan's convertible preferred "A" shares (AGN/PRA, your broker's symbol may vary), very likely because this issue has just paid out its latest huge dividend and won't pay another for about 90 days hence.
Unfortunately, in addition to this, along with other pharma giants, Allergan itself (via its common shares, [AGN]) has been getting hit this week by nervous investors now that the Republican Obamacare/ACA alternative has emerged from the "darkness."
This will keep the pharmaceutical and medical sectors roiled, likely for many months, making this a treacherous sector to invest in right now. We are holding our AGN/PRA anyway, and may even pick up a bit more if it sinks down to the 700s again. That's because too many people keep forgetting that these high yielding preferred shares, now around $845 per share, will be redeemed at par value ($1,000 per share) next March when Allergan retires the issue. What's not to like about that?
Nothing is guaranteed, of course. But Allergan is big enough to survive most downdrafts in the market. And in any event, the preferred stock is senior to the common in case things really go awry.
Gold and silver continue to get hit, courtesy of next week's likely interest rate increase, smacking our current small investments in mining companies Newmont (NMT) and Silver Wheaton (SLW). We're hovering around our stop-loss limits right now and aren't quite sure what to do at this point, since precious metals and the companies that mine them are tricky and often don't follow normal rules. Which means that panicking out of these stocks can be precisely what the bears and short-sellers want you to do so they can profit at your expense.
But too much more on the downside for this pair of miners, and we'll have to sell, even though we know that this market is being manipulated by some big players who have yet to pay a penalty to any government. Which also tells you something you don't want to know.
On a happier IPO note, although we're down a few pennies on an earlier IPO today on home-renting REIT Invitation Homes, Inc. (INVH), we're up almost 9 percent on this one as of Tuesday's market close. Here's an example, for now at least, of an IPO win even after our broker's 30-day soft limit on selling IPO shares expired last Friday, March 3. Typically, we'll dump IPOs one way or another after their sell-by date. This one, we'll probably hold for a longer period and see what happens.
Stay cool. We expected a bad patch in this market, and it looks like it's here, at least until it isn't.