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Saturday, 02/21/2004 11:41:59 PM

Saturday, February 21, 2004 11:41:59 PM

Post# of 193
Short list

Securities and investment firms get shorted

Investors appear to be betting, in the short run at least, against broker/dealers that have business models tied either to technology and the individual investor or market-making. They have shorted the stocks of 14 broker/dealers and one asset manager so much that it would take at least a week of trading at their individual average daily volumes to cover the short interest positions.

The heftiest days-to-cover ratios among the 83 publicly traded securities and investments firms SNL Financial follows was 112.2 days for Inc., a Baltimore-based broker/dealer with a market value of $19M, and 42.6 days for Southwest Securities Group. The Dallas-based broker/dealer and clearing firm seems to have been on the short list for shorting for months: In April, its days-to-cover ratio stood at 37.

The figures come from, which also showed the following days-to-cover ratios for September, the latest month for which short interest information is available:

Ameritrade Holding Corp.: 22.1
Friedman, Billings, Ramsey Group Inc.: 19.6
LaBranche & Co.: 18.1
Knight Trading Group Inc.: 11.4
E*TRADE Group Inc.: 10.4
Bear Stearns Cos.: 9.1
A.B. Watley Group Inc.: 8.2
Neuberger Berman Inc.: 7.7
TradeStation Group Inc.: 7.2
Legg Mason Inc.: 6.8
JB Oxford Holdings Inc.: 6.2
Jefferies Group Inc.: 6
TD Waterhouse Group Inc.: 5.7
For stocks in general during the second half of 2001, particular-ly in the last quarter, "We've been seeing record short interest on the New York Stock Exchange and on the NASDAQ," said Luciano Siracusano, research director of Individual Investor Group, the par- ent company of, of which he is editor. "That has been increasing throughout the year."

Investors' negative view on so many stocks reflects the economy as it heads into recession. They are particularly negative about telecommunications, judging from's list of com-panies with the largest short positions by number of shares.

Topping the list are Sprint Corp. (PCS GRP), Global Crossing Ltd., and Lucent Technologies, in that order. Immediately following are names most closely associated with technology: The NASDAQ 100 shares — QQQ — Cisco Systems Inc. and Intel Corp.

Six of the shorted securities firms stocks — A.B. Watley, Ameritrade, E*TRADE, JB Oxford, TD Waterhouse and TradeStation, — are online brokerages. is a subsidiary of Southwest Securities and eChapman offers Chapman Online.

The clientele on whom online brokerages count for their bread and butter — the retail investor — has been avoiding the market in droves. "People may be betting that the retail investor isn't likely to return to the market," said Putnam Lovell Securities Inc. analyst Rich Repetto, who covers Ameritrade and E*TRADE. He has a "hold" rating on Ameritrade and a "buy" rating on E*TRADE; he said he is not aware of any investment banking relationship between his firm and either company.

Investors may also be betting that "both the companies are around break-even and things can get worse, rather than better," he said. Technology alone does not explain the short interest positions. For instance, Charles Schwab Corp., the largest online broker by number of accounts, has a days-to-cover ratio of 3.5.

For eChapman, which had the highest days-to-cover ratio among the stocks followed by SNL, the significant short position was on a mere 84,012 shares. In addition to its online brokerage, the com-pany has other lines of business, such as insurance and capital man-agement. The company has an equity fund that focuses on what it calls domestic emerging markets, targeting companies owned or controlled by African Americans, Asian Americans, Hispanic Americans and women.

On Aug. 14, eChapman announced that it had bought NetNoir Inc., an African-American Internet company, for an undisclosed amount. On the same day, the company reported a second-quarter net loss of $544,000, or 4 cents per share, down from $913,000, or 7 cents per share, in the year-ago period. As of that earnings report, the company had yet to turn a profit, but Chairman Nathan A. Chapman Jr. received a 51% pay increase to $553,300 in annual salary and bonus for his performance in 2000. Efforts to contact Chapman were unsuccessful.

On Oct. 26, the company's shares closed at $1.51, down 49.1% for the year. On the same day, Southwest reported earnings that showed its fiscal first-quarter profits slipped quarter over quarter to $683,000, or 4 cents per share, from $5.3M, or 30 cents per share. The com-pany's clearing business was hit by the loss of four days of trading as a result of the events of Sept. 11; the firm processed 11.9 million shares during the quarter, vs. 13.5 million a year ago. On Oct. 26, Southwest shares closed at $18.30, down 22.2% in 2001.

"There's a committed group of investors who believe that, first, the conversion that the company is involved in from its old [clear-ing] system to the CSS system will result in the company failing, or at least losing most of its clearing business," said Raymond James Financial Inc. analyst Richard X. Bove. Although Bove has a "mar-ket perform" rating on the stock, he said he is not recommending it. Raymond James has done underwriting work for Southwest, but Bove said he does not own the stock.

"There's all sorts of wild statements out there," such as some that allege Southwest has inflated its book value, the value of one of its subsidiaries and the value of certain venture capital investments, as well as an allegation that it has understated loan losses at its thrift subsidiary. "Having tracked down, one by one, these stories, I think the SEC ought to look into the people making these stories up, because they're all untrue," Bove said. "If you ask yourself, ‘Why do they keep doing this? Why don't they just cover?' The answer may be that they can't," he said. With so much stock shorted, there may not be enough stock around to cover, he said. And if many did attempt to cover, it could double or triple Southwest's share price above current levels, he said. "They're in a box," he said.

Southwest's earnings may not be stellar at the moment, but the company is in no danger of failing, he said. Last year, Southwest hired Bear Stearns & Co. to explore strate-gic alternatives, including the possibility of selling part of the com- pany or seeking a merger partner. No deal was announced, and Southwest discontinued its relationship with Bear Stearns.

Bear Stearns, the only major Wall Street investment bank to make the short list, has itself been rumored periodically to be a ripe tar-get for takeover. Those who shorted Bear, however, might have got-ten squeezed: The company's stock closed Oct. 26 at $57.95, up 14.3% for the year.

The other discernable pattern among short positions on securities and investments firms involved stocks of companies whose business it is to make markets. Knight is the NASDAQ's largest market maker, while LaBranche is the NYSE's largest specialist by number of shares.

"For them," Putnam Lovell's Repetto said, "it's a bet [by investors] that the impact of decimalization will continue to nega-tively affect their business models." He covers both companies, and has "hold" ratings on their shares; he knows of no investment banking relationship between his firm and either company, he said. On Oct. 26, LaBranche's shares closed at $29.40, down 2.2% in 2001. Knight, meanwhile, closed at $10.95; its shares have fallen 21.4% during the year.

Generally speaking, asset managers have had a tough time of things during the second half of 2001, as they have witnessed the market's downturn reduce the values of the assets they manage, which in turn has reduced their income. Neuberger Berman is no exception. During the third quarter, the New York City-based firm that caters to wealthy clients saw its net income fall 5% from the year-ago period to $33.5M.

The company announced earnings on Oct. 23, the day after it said it would move into hedge funds by acquiring Oscar Capital Management LLC, which oversees approximately $800M, includ-ing $150M in hedge funds. Ironically, hedge fund managers can short stocks, something most mutual fund managers cannot do. At the Oct. 26 close, Neuberger Berman's shares were down 30.5% for the year at $37.58. But share prices have risen steadily since the Oct. 19 close at $34.60, which may indicate the market approved of the acquisition.

"Neuberger had a little bit of trouble on the mutual fund side that had relatively poor performance in the past, very little asset flow," said Friedman, Billings, Ramsey analyst Bijan Moazami. "But also because a lot of insiders a few months ago sold through a public offering. So maybe when people saw insiders selling, they just shorted the stock," he said. "I'm just totally speculating." He recently upgraded Neuberger Berman to a "buy"; his firm has no investment banking operation for asset managers.

He said he couldn't comment about Friedman, Billings, Ramsey's being shorted, other than to say, "I purchased a tremendous amount of shares, together with a lot of my other colleagues, a few months ago. … We're all big shareholders now."