Podcast: Short squeezes (long ones too)

Simon BrownJSE Direct, Latest

Simon Shares

  • SAA retrenchments, a test for the bigger Eskom process?
  • Telkom (JSE code; TKG) to buy CellC? R1 would seem a fair price and would benefit both Blue Label (JSE code: BLU) and Telkom. Rumours that MTN (JSE code: MTN) is also in the running to buy CellC, but I can’t see the competition commission allowing that. Of note is that Blue Label have not issued a SENS (Telkom has, but not naming CellC). The reason is that with CellC being written down to zero the deal is not material.
  • Aspen (JSE code: APN) sells Asian operations for Euro400million. This should take the groups debt down to just a little over R30billion and will within debt covenants and manageable.
  • Rebosis (JSE code: REB) failed to declare a dividend in the latest results yet as a REIT it is required to do so by law otherwise they have to pay tax n the profits.
  • The protests in Hong Kong continue on and are getting more violent as the authorities dig in their heels. This is hurting the economy in Hong Kong but I don’t see the authorities giving in any time soon. Also remember that after the 1997 handover Hong Kong operates as a “One country, two systems” with China. This expires in 2047 and truthfully nobody knows exactly what that means. But likely China will want Hong Kong to move closer to it and so is not going to back down on the current protests.
  • Good results from Spar (JSE code: SPP) continuing the results trend from Pick n Pay (JSE code: PIK) and Shoprite* (JSE code: SHP) trading update.
  • An update from Steinhoff (JSE code: SNH) saying they’re still considering listing Pep Europe. But the biggie is they may also do a rights issue to help pay legal fees? Really? Not sure many shareholders would be happy to partake in that waste of money. An yes I still think Steinhoff is heading for zero.
  • Brexit, election on 12 December. Likely Conservatives win, but not guaranteed and will they have a majority or not?
  • Upcoming events;

* I hold ungeared positions.

Short squeeze (or a long squeeze)

A short squeeze is when a stock surges, usually on some good news – but the surge seems disproportionate to the news.

The theory is that a lot of people were short (had sold the stock to profit from the downside), then the good news sends them all heading for the exits. In order to exit they have to by so you have the positive buyers sending prices higher but you also have the short sellers who’re sending the price higher.

This is potentially what we saw on Blue Label on Tuesday when rumours started circulating that they had two potential buyers for CellC.

This is one of the real risks of shorting stocks, you’re downside in a short position is unlimited as a stock can go forever.

With options your risk is always only 100% as it is the right wheres other derivatives are the obligation.

One could also see a long squeeze, but this is a phrase I have never heard mentioned before.

This would be when bad news sends a stock crashing as holders of the stock all head for the exits at once, think Steinhoff.

The difference is that short sellers are also short-term in nature. Sure that may be months or even years, but it’s never forever whereas as holders could be looking to hold forever.

Also short sellers profit or loss is paid daily whereas long holders losses are only on paper. Real but always a hope of recovery.

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