The following is courtesy of my friend Dr Jim DeCosta:
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THE CONCEPT OF “PROGRESSIVE” DIVIDEND DISTRIBUTIONS FOR HEAVILY NAKED SHORT SOLD CORPORATIONS
Let’s hypothecate that Medinah management declares its intent to distribute a series of cash dividends. Assume a shareholder owns 1 million shares of Medinah which is trading at, let’s say, 20-cents per share to make the math easier. Medinah issues a 2-cent cash dividend (a 10% dividend). The shareholder takes the $20,000 cash and buys 100,000 more shares at 20-cents while awaiting the next dividend. Medinah then issues a 3-cent dividend. His now 1.1 million shares would earn $33,000 (not $20,000 like the prior dividend) and he buys 165,000 more shares at 20-cents with the cash. He now owns 1.265 million shares.
Medinah then issues a 4-cent dividend. His 1.265 million shares earn $50,600. He then buys 253,000 more shares with the dividend proceeds. His total is now 1.508 million shares. Note the assumption that all of this rolling over of dividend cash by many thousands of shareholders did NOT move the share price upwards from the 20-cent level which would obviously be a stretch. Note this is the worst case scenario. The total value of the shareholder’s investment went up 50.8% even if the PPS did not go up. If the share price were to have moved up from all of this opportunistic buying then the shareholder would have accumulated less than 1.508 million shares but the value of his investment in the aggregate would have probably increased by more than the 50.8%. The key to GAINING ACCESS TO CASH is the ability to distribute a series of progressive cash dividends. While in the midst of this series you actually would prefer that the shorts NOT cover quite yet.
From the naked short seller’s point of view their aggregate naked short position went up quite a bit under this scenario if they chose to NSS into the wave of opportunistic buying done BOTH by people wanting more generous cash dividends buying in the pre-dividend record date period as well as after while rolling the dividend proceeds into not only more dividends but more generous dividends on a per share basis. If the dividends were spaced quarterly or so the pre-record date time period of the next dividend in sequence would overlap with the post-record date rolling-in period from the previous dividend. Note also that in order to earn preferential tax treatment of qualifying cash dividends an investor must hold the shares for 60 days in the 121 day period in between 60 days prior to the dividend record date and 60 days after the dividend record date.
The pre-record date time period is the timeframe in which naked short sellers are FORCED by circumstances out of the status quo maintenance NSS-ing all day long. They need to make a lose-lose decision. Will they NSS into the wave of opportunistic buying before the dividend record date and be on the hook for matching all of those “extra” dividends in addition to those associated with their previous naked short position or do they cease their daily maintenance NSS-ing and cover in the midst of all of this opportunistic buying.
In dividend #2 and onwards the opportunistic buying before the dividend record date is augmented by the rolling over of previous dividend cash. The key is for shareholders to have more shares earning the more generous later dividends as time goes on. An analogy might be the incredible power of compounded interest on steroids. If one anticipates a “bunker buster” type of dividend associated with the sale of a large asset then all of these “extra” shares would earn that very large dividend and of course the shorts would have to match each and every one of those if they choose not to cover along the way. As is true of any effort to fight off these criminals, the key is the ability to gain ACCESS TO CASH and lots of it.
Management might try to design corporate strategies so that progressive dividends are possible in order to unlock these synergies. Conventional wisdom might suggest that the shorts are not going to put up with matching more and more amounts of more and more generous dividends without covering especially if the possibility of a “bunker buster” dividend or a tender offer exists. The net-net of this is who gives a hoot if the shorts cover or not during a progressive dividend distribution phase. The more they lean on the share price the more generous the dividends become on a PER SHARE basis which is what it’s all about. If the last dividend in the series is a “bunker buster” resulting from the sale of a large asset then loyal shareholders will have a lot of shares reaping the rewards of this ultra-generous dividend.
This methodology might be especially appropriate if the preferential tax treatment of dividends is in danger of being eliminated. Management’s mission statement should be to shower their shareholders with capital gains and dividend distributions IN AS TAX EFFICIENT OF A MANNER AS POSSIBLE. It’s the 30-day time period before a qualifying cash dividend that needs to be your focus. There will be a wave of opportunistic buying occurring and the shorts will be FORCED out of their comfort zone into making a lose-lose decision. If they NSS into this wave they’ll be on the hook to match that many more cash dividends. If they choose to cover they’ll first have to release the tension in the spring they’ve been compressing via daily maintenance NSS-ing. Then they’ll have to compete with the opportunists to buy shares at a time when nobody is going to be in a hurry to sell real or fake shares. When you are able to line up a “series” of these 30-day timeframes then I would think most shorts will cover and finally deliver the shares they have up until now sold but refused to deliver. Then an UNMANIPULATED “supply” variable can interact with an UNMANIPULATED “demand” variable to “discover” an UNMANIPULATED share price through the price discovery process.
