Friday, January 29, 2021

Beating the Shorts the Old School Way: Bring In Jesse Livermore

 A repost from 2017 with a replacement for the previously rotted link to GFD.

Investing History: "The Piggly Crisis" Or: Bring In Jesse Livermore and the Pigs Get Slaughtered
"Bulls make money, bears make money, pigs get slaughtered"
-old Wall Street saying adopted by Jim Cramer
From Global Financial Data:
The next time you go to the grocery store, pull out a shopping basket and walk down the aisles, you should think about the fact that the modern grocery store is a result of the innovations of one man: Clarence Saunders

Saunders’ Self-Shopping Innovation
Until the 1920s, customers did not pick up their own groceries. Instead, they went to clerks who stood behind a counter and put together their purchases for them. Think of the way an old country store was set up. 

Saunders was obsessed with the idea of efficiency, and thought that customers wasted a lot of time waiting on clerks. Saunders wanted to free customers from the tyranny of clerks by letting them do their own shopping. Saunders also developed a just-in-time delivery system to get food to his Piggly Wiggly stores. This system later inspired Toyota to apply the same concept to automobiles which helped Toyota to control costs and conquer the globe. 

Saunders opened up his first Piggly Wiggly store on September 6, 1916 at 79 Jefferson Ave. in downtown Memphis, Tennessee. Each store had a turnstile at the entrance. Every item in the store had a price on it, another innovation, and Saunders provided shopping baskets so customers could take their items to a check-out stand in front. Saunders patented the idea of self-service stores in 1917.  
Saunders incorporated the Piggly Wiggly Stores Corp. in 1918. The stores were an immediate success. By 1922, there were over 1,200 Piggly Wiggly Stores of which about 650 were owned by Saunders, and by 1932, there were 2,660 Piggly Wiggly stores with sales of $180 million.
Unfortunately, in 1923, Saunders had lost control over his Piggly Wiggly stores. 

Saunders vs. the Shorts
Clarence Saunders also became part of the last stock corner on the New York Stock Exchange in 1923. The corner became so prominent, that the whole affair became known as the Piggly Crisis. Clarence Saunders was generous, determined, stubborn, and well-known in Memphis. Saunders became known as the home boy who faced off the financiers of Wall Street who were using a bear raid to try and profit from a decline in Piggly Wiggly stock. 

The goal of shorting a stock is to borrow shares from someone who owns them and sell them. When the stock declines in price, the shorts buy the shares back at a lower price, make a profit, and then return the stock to the person they borrowed it from. In a bear raid, several shorts make a concerted effort to drive the price of a stock down so they can profit from the decline. 

The bulls, on the other hand, can try and beat the shorts by forcing the price of the stock up, squeezing the shorts and forcing them to sell at a loss. If the bulls can buy up the existing float, the stock is cornered. The shorts have no choice but to buy the stock from the bulls at whatever price they demand. Of course, creating a corner is risky for the bulls as well because it takes a lot of resources to buy up the float in the stock. Once the corner is completed and the shorts have covered their positions at the inflated price, little demand is left for the stock. The price of the stock can collapse, leaving the bulls with a burdensome load of debt. The whole process can end up bankrupting both the shorts and the bulls. 

Piggly Wiggly shares started trading over-the-counter in July 1920 and listed on the New York Stock Exchange (NYSE) in June 1922. In November, 1922, several of the independently-owned Piggly Wiggly stores in New York, New Jersey and Connecticut failed and went into receivership. Although Saunders’ corporation operated independently of these stores and was profitable, some Wall Street operators saw this as a reason to begin a bear raid on Piggly Wiggly stock. 

The bear raiders began selling PIggly Wiggly short and spread rumors that the company was in poor shape. Saunders took this challenge personally. He had created Piggly Wiggly stores, created the concept of self-shopping, was spreading his stores across the country, and some bears were trying to create profits by spreading lies about his stores. Saunders decided to “beat the Wall Street professionals at their own game.” 

Saunders not only used his own money to battle the shorts, but he borrowed ten million dollars from a group of bankers in Memphis, Nashville, New Orleans, Chattanooga and St. Louis to buy up the existing float. In the Wall Street of the 1920s, bear raids came and went. Companies didn’t go bankrupt because of bear raids, and if the fundamentals of the company were sound, the stock would bounce back after the bear raid was over. Nevertheless, Saunders refused to give in to the Wall Street city slickers. 

Saunders hired Jesse L. Livermore, the most famous bear on Wall Street, to help him break the back of the bear raiders. Within a week, Livermore had bought 105,000 shares of Piggly Wiggly, over half the float of 200,000 shares. The bears had shorted Piggly Wiggly stock in the 40 range, but by January, Saunders’ bull campaign had pushed the price of shares past 60. The shorts were losing money.  
The Shorts Are Cornered
Piggly shares were traded on both the Chicago and New York Stock Exchanges. In January, the Chicago Exchange announced that the stock had been cornered, though the NYSE denied that a corner existed. So Saunders decided to try a new tack. He announced that he would issue 50,000 shares of Piggly Wiggly shares at $55 each. Saunders regularly advertised his stores in the newspapers, and he used some of these ads to offer shares to small investors. Saunders pointed out that Piggly Wiggly stock paid a $1 per quarter dividend, yielding 7% to investors. Since this occurred before the S.E.C. came into existence, Saunders could promise that this was a “once in a lifetime opportunity,” and get away with it.
Since Piggly stock was then trading at $70, why would Saunders offer shares at $55, leaving $15 on the table for each of the 50,000 shares? The reason is that Saunders knew that once the shorts had been cornered, the demand for Piggly stock would dry up. Saunders’ stock distribution created a market where he could distribute his shares to new investors. Saunders even allowed investors to buy new shares on the payment plan, put $25 down and pay $10 a month for three months. Since the new shareholders couldn’t sell their shares until they were paid for, this would keep the shorts from obtaining these newly minted shares to cover their positions....