Mr. Saylor's Micro Strategy

To the ramparts, shareholders of MicroStrategy Inc! Your company needs you to defend your stock against the short sellers. (But don’t expect your CEO to join you – he’s been unloading his shares.)

Some CEOs try to boost the share prices of the companies they oversee by improving operating performance. Numerous are the timeworn means by which they seek to “enhance shareholder value.” But MicroStrategy CEO Michael J. Saylor has devised a novel approach: squeeze the shorts.

To judge from his latest shareholder missive, Mr. Saylor sees no connection between the company’s chronic losses and its falling share price. But he has identified something nefarious that is gnawing away at the stock price – short sellers. And he’s taking the highly unusual step of asking shareholders to defend the MicroStrategy crown by squeezing these shorts. We found it equally unusual, if not unseemly, that, at the same time, Mr. Saylor himself has been selling the stock at a 15,000- share-per-day clip.

Short sellers like MicroStrategy. As of the end of March, a whopping 5.78 million of the 17.08 million freely floating shares had been sold short – that’s 33.84%. So, writing in his April 19 letter to shareholders, CEO Saylor issued a call to arms: “There is something that you might be able to do to help us, and in the process, help yourself,” he writes. “[L]ike many stocks in the technology industry, MicroStrategy’s has been recently trading at a low share price level. Although general market sentiments about technology stocks and our company have undoubtedly played a major role in the recent price of our stock, management believes that the current stock price is also attributable in part to heavy selling pressure from ‘short selling’ in the marketplace.”

Mr. Saylor then graciously provides a brief short- selling primer: “In ‘short selling,’ traders sell stock they do not own by borrowing shares from a broker that need to be returned at a later date. If the stock price goes down, the short sellers buy stock in the market at a lower price, return the stock to the broker and make a profit. By selling first and buying later, short sellers benefit from stock prices going down instead of up. This makes their interest in our company directly opposite from what most of our stockholders want – i.e., for the price of our stock to increase. If there is a lot of short selling, supply of our shares may exceed demand for our shares, causing the stock price to go down. In other words, short sellers can make money by selling enough stock short to artificially increase the volume of selling and drive down the market price.”

But, soon enough, he’s back to the mission at hand:

“While many companies experience short selling in the marketplace, the amount of short selling compared to the trading volume in our stock has recently been unusually high. Our financial advisors believe this may be adding downward pressure on the price of our stock.

“How Stockholders Can Help To carry out short sales, traders need to borrow stock from brokers that is registered in ‘street name’ or held in a margin account. However, if enough stock is taken out of street name or margin accounts, short sellers will have difficulty maintaining the current volume of short sales. Therefore, we are asking all of our shareholders to promptly call your brokers and have your MicroStrategy stock taken out of street name or put into a cash account [so that] a short seller would not be able to borrow your stock for short sales without your permission. So long as the stock is registered in the broker’s name, the broker is the legal owner of record, and can lend your stock to a short seller without your permission. Similarly, so long as you have your stock in a margin account, it is available for loan by your broker. If you have the stock registered in your own name or placed in a cash account, brokers will not be able to do this.

“Would there be any downside for stockholders in having shares registered in their own names or held in cash accounts? From an economic point of view, the answer is no – nothing will have changed. The only difference would be administrative including some possible paperwork and expenses you may incur in re-registering or moving your shares…We think this is a small price to pay for relieving the heavy short selling pressure on our stock.”

The letter winds up with another plea for stockholders to move immediately if not sooner, with Mr. Saylor adding that MicroStrategy “intends to work with its transfer agent and participating brokers” to make the process of re-registering shares and moving them into cash accounts as quick and easy as possible.

Mr. Saylor’s missive is certainly trend-setting. But shareholders shouldn’t expect to find their CEO shoulder-to-shoulder with them atop the ramparts. For the last two months, Mr. Saylor himself has been on the same side of the MicroStrategy trade as those reviled short sellers, according to Bloomberg’s database of insider sales. He has been a relentless seller of MSTR, unloading 511,500 shares in 59 separate transactions from February 12 through the end of March.

And price is no object. Since logging his first sale at $10.40 per share, he’s been selling it all the way to the $3 level. In all, the sales netted the market-savvy CEO $3.7 million – good news for the Saylor household. Not such good news is that the CEO still holds 3.4 million shares of a stock that now trades in the low fours. Those shares once traded as high as $289, a price not likely to be repeated anytime soon.

But a modest short squeeze should provide a larger bid, at the very least, just in case anybody who owns the stock was, you know, thinking about maybe selling some.

Your guest correspondent,

Eric Fry
London, England
May 2, 2001

Mr. Fry is editor-in-chief at

*** London is quiet this morning. The plywood is coming down along Oxford Street. The mobs seem to have gone home. Capitalism is still in business.

*** It was a great day for the London police. They must have been training for this event for months – practicing their tactics and working on their baton swings. Normally, a cop’s life is pretty dull – endless waiting, filling out forms, and answering stupid questions from tourists. But yesterday, the average London cop went home tired and satisfied. At the least he got to shove the crowds back – or stand his ground with calm resolve, like Wellington’s troops at Waterloo…allowing the enemy to exhaust himself against his disciplined ranks. And the really lucky policemen must have felt especially content – regaling the missus with the stories of the day’s actions…while she massaged muscles made sore from bopping skulls and whacking bones.

*** The poor demonstrators never really got a chance to fully express themselves. Gathering at Oxford Circus to disrupt traffic, they found themselves trapped. Police sealed off the four streets with ranks of baton-wielding bobbies…backed by other cops mounted on horses. The would-be rioters were unable to break out.

*** Finally, in the evening I heard shouting outside my hotel window…just off Oxford Street. A group of ragged protesters had managed to collect outside police lines and was headed towards Tottenham Court road, breaking a few windows along the way. They were charged by a phalanx of police swinging their truncheons with great delight and enthusiasm. A few missiles were launched from the mob in the cops’ direction…but none did any damage that I could see. The police – backed by mounted officers – formed a line, waited, and then charged again, driving the demonstrators before them. And then, the street was quiet again.

*** The Dow soared 163 points to 10,898. The Nasdaq climbed to 2,168. Bonds advanced 12/32. And yes, even gold stocks managed a sparkling return on the day – up almost three percent. Every asset seems to have a bounce in its step these days, now that the Fed appears to be back in control.

*** Or maybe Greenspan can’t lay claim to all 163 of today’s Dow points. According to the financial news networks, the late afternoon rally on Wall Street stemmed from investor delight over news of a crucial deal in Congress to implement a $1.35 trillion tax- reduction plan over 11 years.

*** Didn’t the stock market already implement a tax reduction plan of its own? It erased $4 trillion in capital gains over the last 12 months.

*** Since Greenspan’s second surprise rate cut, the Dow has recovered much of its losses. It is even ahead – up 3% so far this year. But the Nasdaq has only managed to regain 12%.

*** “The worst is behind us,” chants the financial media. “We’ve seen the bottom,” say the Wall Street analysts. “Happy days are here again,” chorus the consumers. Maybe, dear reader. But, if I were Mr. Bear, I would be as happy as a glass company before riot…

*** “The employment index dumped again,” observes Weldon’s Money Monitor. “It’s down more than two full percentage points, to a lowly 38.1, the first sub-40 reading in years…the New York purchasing manager’s report states that only 13 percent of respondents expect to hire new employees in the next six months.”

*** Moody’s latest Credit Market Overview will provide little solace to job seekers. “Almost all of the labor market’s major indicators have deteriorated significantly,” writes Moody’s John Lonski. “April’s projected 5.4 percent monthly increase should leave first-time jobless claims higher by 36.1 percent year-over-year for the quarter ended April. Initial state unemployment claims have entered into their steepest yearly advance since surging by 35.1 percent annually during the recession-bound first quarter of 1991.

“Of great concern is the ultimate reaction of consumer spending and home sales to the forthcoming rise in unemployment…Both the jobless and those who fret over job security do not make for good customers.”

*** “Solid growth in U.S. incomes persisted in March,” reports the Financial Times, “but growth in spending was relatively subdued as consumers built up savings.” Oh la la…are consumers beginning to act…responsibly? Personal income rose 0.5% in March while spending rose only 0.3%. Thus did the savings rate manage a small, but potentially significant, increase. Remember, if consumers ever get serious about saving money – the whole borrow- borrow/spend-spend economy is in big trouble.

*** What happened to the recession? According to the government, the GDP grew at a 2% annual rate – about twice what most economists expected. But John Crudele of the N.Y. Post points out that the number is probably a statistical lie. It includes estimates of the trade deficit and inflation that are fictions, he says. “If the inflation number used in the GDP report was equal to other government figures on inflation,” he writes, “the GDP would have been minus 0.1%.” If Crudele is right, the U.S. economy didn’t grow at all in the first quarter. “We are in a recession,” he concludes.

*** “Small Online Brokers in Fight for Survival as Market Slides Bite,” reads the headline in the Financial Times. The story to follow states helpfully, “Online brokerage accounts are insured by the US Securities Investment Protection Corp. for up to $500,000.” Do any online brokerage accounts still hold $500,000?

*** Investment tastes/preferences are little different from any other fashion trend. Last year about this time, Abby Joseph Cohen was in, Warren Buffett was out. early retirement was in, working a lifetime in an honest profession like medicine or education was out. And, of course, tech stocks were in and everything else by comparison was out. What kinds of stocks are now de rigeur portfolio accessories? Drug stocks.

*** The Economist notes a “whiff of change” in the S&P 500 composition. “[T]he share of health-care stocks has increased from 9% to 13% [over the last year].” Much of the gain comes at the expense of the withering technology sector. Immediately after Cisco did its James-Cameron-I’m-king-of-the-world thing last year by surpassing – momentarily – GE’s market cap, its death spiral began. Meanwhile, Pfizer has ascended into the number four slot – jumping past Cisco Systems, IBM and Intel in the process. Is a new drug-induced mania now unfolding?

*** “The chain-smoking doctor. The heroin-addicted vegetarian. The boozing captain. All kinds of people do all kinds of dangerous and dumb things they know they shouldn’t do,” writes James Padinha of “Fed policy makers are no different.”

Padinha: “By wrongly leaving the funds rate too low during a crucial two-year period from 1997-1999, the Fed set in motion a vicious fed funds cycle that forced the central bank to tank the economy in 2000, KO-ing consumption, business investment and share prices. It’s true that the Fed potentates have recently done the right thing in bringing down the funds rate more aggressively than they raised it. But to give credit for that is to applaud Exxon for trying to clean up Prince William Sound. Heck, a few thousand sea birds later, the place doesn’t look too bad. The same is true for the economy, where the fallout from the Fed’s error will continue to play out to our collective detriment in the coming quarters.”

*** “Stimulating continued credit excess at this very late stage of the business cycle,” adds Doug Noland, “should be recognized for what it is: an obvious misadventure in monetary management… While Nasdaq stocks have declined sharply, excessive money and credit growth continues to fuel strong – unsustainable – consumer spending. Nasdaq was not THE bubble, but only one component of THE Credit Bubble.”

*** But wait, what’s this? A major telecom company with growing profits? Yes, it’s true. India’s international long distance company, VSNL, reported an 88 percent jump in net income over last year’s result. “The results are better than expected. Both topline and bottomline have beaten forecasts,” Sudhanshu Asthana, telecoms analyst with Birla Sunlife Securities in Bombay, told Reuters. Indeed, much of the Indian economy is running contrary to the sluggish global trend at the moment. GDP growth continues to hum along at rates approaching six percent. So while true that VSNL is no Ma Bell, maybe Maharashtra Bell is a better name to own these days.

*** “You have probably not read the book…” writes James Glassman in a familiar sounding e-mail to me. He was responding to Monday’s Daily Reckoning in which I mentioned his book “Dow 36,000.” “Bears, like stopped clocks, tend to be right a couple times every 24 hours. Now, they’re in their glory. But watch the hubris!” First Reuven, now Jim. I guess ought to mind my p’s and q’s…

*** Okay…I know you are on the edge of your chair…Here’s the latest from page 3 of the Daily Telegraph. The former aide to the Duchess of Windsor, aka the “stupid cow,” said in court yesterday that her boyfriend “tied me to the bed. I was face down…” Wait. I can’t report this. The details are too disgusting. The woman said she was sexually abused as a child and raped by her boyfriend just hours before she killed him. “The trial continues,” says the paper.

*** On the same page, we find the story of a bride “under stress,” who tried to exchange a pair of shoes and became enraged. “She picked up the scissors from the counter and lunged…at the cashier,” reports the Daily Telegraph. “I just hope I never get any customers like that again,” said the clerk.

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