Sunday, September 4, 2016

"High Noon at the NYSE: Stutz vs. the Shorts"

I've referenced the Stutz story a couple times*, here's a longer version.
From Global Financial Data:
Until 1934 when the Securities and Exchange Commission outlawed rigging the market, Wall Street was occasionally treated to a battle between shorts and long that ended in a corner on the market.  A stock is cornered when shorts have sold more shares in a company than are in the outstanding float, and one shareholder owns the floating stock.  Since the shorts must cover their positions by buying back the shares they have borrowed, if one person owns all the shares, he can set the price and the shorts have no choice but to pay the price the owner demands.  

There were only four stock market corners in the United States in the twentieth century: Northern Pacific in 1901, Stutz Motor Co. in 1920, Piggly Wiggly in 1923 and RCA in 1928.  Although the Northern Pacific short was settled amicably because the short squeeze was a by-product of the attempt to take over Northern Pacific, the Stutz corner turned into a war between the shorts and Allan A. Ryan, who owned Stutz Motor Co. and who cornered the shorts.  Unfortunately, as detailed in John Brooks’ article in The New Yorker, “A Corner in Stutz,” the corner ended in a disaster for both sides.
                In today’s electronic stock market, the battle between bulls and bears is usually impersonal, one computer algorithm trading against another computer algorithm, but in 1920, it was man vs. man, bull vs. bear, and as in the Stutz corner, the conflict got personal.  The New York Stock Exchange was still overseen primarily by “old school” financiers who ran the NYSE more as their personal fief than as a corporation that served its customers.

Ryan Races to Produce Roadsters
                Thomas Fortune Ryan, Allan A. Ryan’s father, helped his son to get his start on Wall Street. Thomas Ryan opened a brokerage firm in 1873 and bought a seat on the NYSE in 1874. Ryan made his fortune by consolidating public transportation in New York City, amassing personal wealth estimated at $50 million in the process. Ryan built the Metropolitan Traction Company out of street railroads that ran through New York City.  Ryan also formed the Union Tobacco Co. in 1898 which consolidated with James Duke to form the American Tobacco Co. Together, Ryan and Duke developed the British-American Tobacco Co. to protect their American tobacco interests.  Ryan also owned Royal Typewriter and backed the maker of the Thompson submachine gun. At the time of his death in 1928, Ryan’s fortune was estimated at over $150 million, making him the tenth wealthiest man in the United States.

                Thomas Ryan tutored his son, Allan Aloysious in the intricacies of finance and in 1905, when he was 25, he turned over his seat on the NYSE to his son.  Three years later, Charles M. Schwab, first chairman of U.S. Steel, befriended Allan Ryan after Ryan’s father introduced him to Schwab.  His son formed a brokerage firm, Allan A. Ryan & Co. The stock market boomed after America’s entry into World War I in 1917, with the DJIA almost doubling in price by October 1919.  Ryan was one of the primary bulls on the exchange and enjoyed profiting from squeezing the shorts.

                Ryan also invested in the Stutz Motor Car Co. of America, Inc. which he gained a controlling interest in and became president of in 1916. The company was incorporated in New York and took control of the Stutz Motor Car Co. of Indiana.  Stutz Motor Car Co. was most famous for making the Bearcat at its factory in Indianapolis, an expensive and high-performing roadster which became synonymous with the roaring twenties. While a Model T cost $500 in the 1920s, a Stutz Bearcat cost $2000.

                Stutz stock participated in the bull market rally, moving up from 40 at the end of 1918 to 144.875 in October 1919.  The DJIA peaked at 118.63 on November 1, 1919, as inflation cut into post-war demand, but Stutz stock remained strong in the face of the post-war bear market.  On February 28, 1919, the DJIA hit 91.31, a 23% decline from the top and by definition, a bear market.  Nevertheless, the bear market still had strength left in it.
The Dow Jones Industrial Average, 1917-1921 (click to enlarge)
The Bear Raid Begins
                Ryan interpreted the decline in his stock as a bear raid designed to push the price of Stutz down so the shorts could profit from the decline in the stock.  In March 1919 Stutz stock diverged from the rest of the market, making a spectacular rise. The stock had closed February at 110, but by March 23, the stock was at 245, on the March 24 it was at 282 and by the end of March, the stock stood at 391.
                Other Stutz shareholders took their profits, but Ryan continued to buy Stutz stock while the shorts, even more certain that the price of the stock would ultimately collapse, shorted even more shares. Ryan borrowed millions of dollars to support the price of his stock, and by the end of the month, Ryan was almost the sole owner of shares in the Stutz Motor Co.
Confident that he could break the back of the bear raid, and owning virtually all the outstanding stock, Ryan continued to loan shares to the shorts so he could squeeze them until they faced either financial ruin, or if they were unable to buy the shares back, potentially face prison for breach of contract. As Daniel Drew said during Jay Gould’s attempt to corner gold in 1869:
“He who sells what isn’t his’n, must buy it back or go to prison.”

The Shorts Are Cornered
Since Ryan was the sole lender, he knew who the borrowers were, and he knew they were primarily fellow members of the NYSE, including members of the Exchange’s Board of Governors. The men he worked with on the floor on a daily basis were shorting his company’s stock, trying to ruin him financially. During the week ending March 27, Stutz stock moved up from 220 to 318 on 73,900 shares. Stutz stock closed at 329 on March 29, at 370 on March 30 and at 391 on March 31 when only 930 shares were traded because no stock was available. The shorts had clearly underestimated Ryan’s resolve....MORE
Stutz Motor Co. of America, Inc. Stock Price, 1918-1925

S&P Downgrades Rare Earth Miner Molycorp to "Are You Feeling Lucky?" (MCP)
This brings back memories, Stutz Bearcats, raccoon coats and Molycorp.
I may be confusing my geologic eras here but Molycorp was a wonderful trader back in the day. There were three separate times we had triples in the little bugger, long and short, from the very first tick, July 29, 2010:...

...Here's a Stutz Bearcat (1914):
In the early '20's the company was majority owned by "a young Wall Street sharpie" who decided to run what appeared to be a successful corner in the stock that gunned it from around $100 to $700. He went bust in 1922:
ALLAN A. RYAN FAILS; DEBTS $32,435,477, $27,806,984 SECURED; Stutz Corner Started War Which Made Thomas Fortune Ryan's Son a Bankrupt. 
And the company followed in the middle of the Depression.