Having written a primer on short selling and stock manipulation, how likely is it actaually that Interoil is the victim of this? There can be little doubt as IOC is nakedly shorted on an ongoing basis. However, there are more interesting clues…
First, hedgefunds are known to short and then start manipulating the news, or short naked. For a primer on these matters, read our primer on this topic. The last two links are especially helpful.
Second, IOC does have a large short count. The last one was a little over 9M, that’s almost half the float. That really is large.
Third, and this is really a crucial element, IOC has been shorted for a very long time, from before the discovery of Elk1. It’s somewhat understandable, exotic country, unknown little company, etc. What we’ve come to understand is that the shorters were caught by surprise by Elk1, and that’s a little bit of an understatement. Faced with the choice between covering and sitting it out, they chose the latter. Drilling takes time and things can go wrong, and they have ammo to manipulate the share price. But the jury is still out whether this was a wise choice.
Fourth, IOC is not only shorted to the hilt, but it’s shorted nakedly. In fact, of all Amex listed companies, it has been on the naked short list the longest without interruption. Naked shorting in essence is selling shares that the seller doesn’t own and hasn’t borrowed (see our primer for more). To be on the list for such a long term really eliminates any other explanation (like some mishap in the settlement system). It’s the prime instrument of stock manipulation. So there really can be little doubt IOC is manipulated, it’s in the public domain.
Fifth, as you would appreciate from reading stuff in our primer on shorting stocks, shorters can and do plant stories in the press. A prime example here is an article by a free-lance journalist for the International Herald Tribune . Here you find a pretty solid analysis of that article which shows why this is likely to be a bashing job.
Sixth, shorts hire students to confuse and misinform message boards. We have an upcoming primer on paid bashers, but consider just this; the guy who publishes the link to that IHT article, well, he does it rather a lot, at least once a week (even after Yahoo removes all his posts, which they do at regular intervals).
Seventh. this is something we cannot really prove, because nobody has had access to it. But this is what we heard, so if you don’t think we’re credible, don’t read on. There exists an outfit called Ross Energy, it’s an engineering firm and consultancy, and they wrote a report just after Elk1 was discovered. They were paid by the shorts (two hedgefunds). Ross energy had to make an embarrassing backtrack on the flow rates of Elk1.
Eight, where are the geologist that question Elk (or at least the analysis of Wayne Andrews and IOC itself). They are not in the public domain. There are a couple of issues here:
- one has to ask the question, if the hedgefunds that shorted IOC did employ geologists, do they have access to the same information as Wayne Andrews and T Boone Pickens? Did they study the set of complete drilling logs? We have reason to doubt that.
- Wayne Andrews name is attached publicly to a $65 price target (which he actually described as more like a floor, certainly not a ceiling) and his reports can be bought (and parts appear at message boards), so they can be scrutinized, and he has his reputation at stake. He stands to lose when his analysis proves wrong. We don’t know what the geological analysis of the shorts is, in fact, we don’t know whether there is actually such an analysis. It would be most helpful if it would appear in public. But so far, they have not put their reputation at stake, and their motives are questionable (witness the amount of shares shorted and naked shorting going on)
- We have heard of a couple of instances where people from hedgefunds that apparently shorted IOC appeared at conferences where IOC presented, trying to sway people. This does not seem to have been a success. In fact, they were not taken terribly seriously. One such guy was a certain Corey Johnson. We would like open debate, scrutinize arguments. We are not aware of any reputable geologist of analyst questioning the viability of the Elk property or IOC’s or Wayne Andrew’s rendition. This is a pity.
- Even the cheerleader of the shorts, Andrew Left from citronresearch.com, has kept quiet for more than a year, and even he did not question Elk1, his arguments revolved around finance and the viability of the LNG facility (after making a meal out of a scuppered plan to build a pipeline to Australia that did not make any sense in the first place).
Nine, for anyone watching level II during a trading day (especially at the last half hour or so), it will be obvious that there is a good deal of share price manipulation going on, apart from the naked shorting. Every time buying starts with serious volume, sudden sellers wake up instantly. We have never seen anything like it.
So in the end, an absolutely crucial difference is this. Those longs who’ve put their analysis and money at stake (such as Wayne Andrews, T Boone Pickens, and Merrill Lynch) have done so in the public eye. Apart from their money, they have put their reputation at stake. The shorts keep lurking in the dark. We don’t even know who they are (and we are not aware of any who does know)…