Ma Bell -- An $80 billion shorting opportunity

[DanS]

Cris-cross. Liberal cross-editing, etc.

You might as well start reading again from the beginning.

[KrazyHorse]

Originally posted by DanS
No, I meant what interest rate are you assuming that the brokerage would charge the investor for the short sell.

0. I was under the impression that the brokerage kept the proceeds until you closed your short. As long as you have sufficient collateral to cover your position. Nobody owes anybody any interest.

My account will be credited with the sales price of 100 shares of IBM less broker's commission. But the broker has actually lent me the stock to sell. No way is he going to pay interest on the funds from the short sale. This means that the funds will not be swept into the customary money-market account. Of course there's one exception here: Really big spenders sometimes negotiate a full or partial payment of interest on short sales funds provided sufficient collateral exists in the account and the broker doesn't want to lose the client. If you're not a really big spender, don't expect to receive any interest on the funds obtained from the short sale.

http://invest-faq.com/articles/trade-short.html

[Pyrodrew]

Originally posted by KrazyHorse
He's going to be paying a hell of a premium for that long an option.

And some might say the seller of the LEAP has a hell of a risk. What is a "hell of a premium" to one person, might be a "hell of deal" to another. There are 6month LEAPs too.

[KrazyHorse]

In other words, the brokerage pockets the interest on your money as the charge for shorting the stock. You can't actually withdraw that money or buy other stocks with it (since they're investing it at their own discretion in reality)

[KrazyHorse]

You are, of course, responsible for paying back dividends out-of-pocket...

[KrazyHorse]

The one key piece missing from this puzzle is how much in the way of real assets Bell has. If they have a war chest of 20 billion$ then you're going to require a drastically larger decline in order to make shorting attractive...

[KrazyHorse]

Sorry for post #395 in a row, but:

http://stocks.about.com/od/advancedtrading/a/shortsell110804.htm

Selling Short
You call your broker and say you want to “short” 300 shares of Amalgamated Kumquats. Your broker will require you to have a margin account meaning you must meet their credit and deposit requirements.

Your broker will then sell 300 shares of Amalgamated Kumquats out of their inventory or “borrow” the shares from another customer or another broker.

Your broker can only make the “short” sale on an “up tick,” meaning the stock must be going up.

This is to prevent a bunch of short sellers from jumping on a declining stock and driving down the price even further.

Your broker escrows the money from the sale in your account for the protection of the original owner of the shares. You normally won’t earn interest on this money and if the stock pays a dividend during this time, you’ll owe it to the owner

[DanS]

SBC/AT&T had about a $ billion in cash at the end of 2004. Total assets of $108 billion, much of which I assume will be written off as the business become impaired.

[KrazyHorse]

Not too much difference in the cash then. I have no idea what those wires will be worth if and when they decide to sell them (or if they can use them for another purpose)

Like I said: the mathematical rate necessary with a steady exponential decline in revenue is just about 7.3%

There are a bunch of other unknowns here which necessitate a significantly higher decay rate.

EDIT: 80 does not equal 90

[KrazyHorse]

Ah, crap. misread your original post. Saw 90 billion instead of 80 billion for market cap.

Revise my original 6.45% to 7.23% and all other figures accordingly.

[KrazyHorse]

The real problem with shorting Bell here is that they're only priced at 13.3 times earnings

You have to be pretty sure of some hefty declines to take that short position.

[DanS]

Well, they're actually making about $4 billion this year, so their PE isn't 13.3. I'm doing some SWAG normalization here.

[KrazyHorse]

Well, you have the answer to the math problem. The real question is the business problem. Are you normalising correctly? Will the decline in Bell's business begin immediately or will they hold off another 2 years? Will they find another business model which will make them more money? Will they pour their earnings down into the black hole of their old business model or will they send it back to their investors in the form of dividends?

Ideally you'd want them to start going downhill the day after you sold the stock and spend all their money upgrading lines that aren't going to be worth **** anyway. That way they could go bankrupt and the entirety of the proceeds from your short sell are yours.

Bad would be if they keep making money at a constant rate and ship all of it to their investors. That way you're out all the dividends they paid out.

[DanS]

The business problem is interesting. I don't think their entire land and wireless network is worth $10 billion if things proceed as I speculate. A proxy asset would be a gigantic LEO satellite constellation, which would cost something on that order to orbit. I bet SBC owns a whole lot of prime real estate, however.

The revenue line is also interesting. Perhaps a good proxy would be the decline of the old AT&T long distance business. There are some problems with that proxy, of course.

[Ted Striker]

SBC is not even close to the same business model as AT & T was.

They are extremley heavy on Internet services, and do them extremely well.

Voice over IP is not an issue. Because they will have their own VOIP service running, and even so, will be carrying alot of VOIP traffic on their backbones.

Shorting right now is not a good idea.