Encore for Kodak shorts
18 August 2020
Short sellers are betting on iconic US camera maker’s decline (again). IHS Markit’s Sam Pierson surveys the situation
Image: Shutterstock
On 8 January, 2018 Eastman Kodak Co shares closed at $3.10, its value having declined by 80 percent over the preceding 12 months. Over the next two days the shares more than tripled in value, closing 10 January at $10.7; Insufficient to offset the losses over the prior year but a boon for long investors, nonetheless. The cause of the about-face was the announcement of KodakCoin (see Figure 1), a partnership the firm was forming to develop a blockchain cryptocurrency solution for payments to photograph rights holders.
A tripling will cause problems for short sellers. The pain of the unrealised loss is compounded by the loss making position having grown in nominal terms and as a percentage of the (now smaller) portfolio. For the prospective short seller, however, a tripling may be a most welcome entry point, as was the case in for KODK shorts in January 2018. The short interest reported by NYSE for 29 December 2017, the most recently reported as of 10 January, stood at 3.2 million shares. The 12 January short interest would later be reported as 12.2 million shares, a 276 percent increase.
On 10 January the number of borrowed shares reported to IHS Markit more than doubled to 5.2 million shares, while the fee for new borrows increased from < 50bps to more than 5,000bps. The increase in borrow fee was published intraday on 10 January and the net increase in shares on loan reported the next day on 11 January. The 12 January NYSE short interest number was not published until 25 January, by which time the share price, shares on loan and borrow fee were all in decline from the 22 January peak. By August of 2018 the KODK share price was back below where it was prior to the KodakCoin announcement.
The same-day spike in borrowing on the day of the KodakCoin announcement highlights a key subtlety in how the data is reported. The short interest data published by the exchanges is purely tied to settlement date, so the 12 January short interest number pertained to trading on 10 January.
The securities finance data will function similarly, in that changes in borrowing will usually reflect changes in the settlement needs for that night, i.e. trade date +2. However, Kodak provides an important caveat. While broker-dealers generally borrow shares for today’s settlement needs, they are also managing an internal long supply of shares which they may lend out to their own clients or other brokers. If a broker had rehypothecated KODK shares prior to the KodakCoin announcement the combination of soaring volume and volatility, increased locate requests and surging borrow cost may have compelled the broker to borrow in shares today to cover the existing short position, suspecting that the long position may be sold and marginal borrow may be even harder to come by tomorrow so getting ahead of today’s locate requests may be worth doing anyway.
Shifting forward by just over two years, amid the so-called 2020 COVID crash the KODK share price closed at $1.55 on 23 March, the lowest point since the firm went public via an initial public offering in 2013 (as a result of bankruptcy reorganisation). The KODK share price subsequently recovered along with the broader market, increasing by 35 percent from the low close in March to the close on Friday, 24 July.
The following Monday, 27 July, the share price increased by 25 percent with no obvious catalyst. On Tuesday, 28 July, Kodak announced via a press release that they would be receiving a loan from the US government to develop capabilities as a provider of discount generic drug materials. In reaction to the news the share price increased by just over 200 percent to close at $7.9 (the highest closing price since 31 January 2018) (see Figure 2).
Like the January 2018 episode, the rapid ascent in share price was painful to existing shorts; The 1.7 million in short positions (reported by NYSE as-of 15 July), increased in value by an estimated $3.5 million on 24 July to $56 million at the peak. Also echoing 2018, short sellers immediately added to outstanding short positions, both on the 28 July and over the next week as the share peaked on the 29 July and started to descend, reaching 8.9 million shares on 3 August. The 31 July NYSE short interest was published on 11 August at 8.6 million shares. The borrow fee peaked at 16,000bps (an annualised rate of 160 percent) on 30 August and subsequently declined with shares on loan; New borrows were back under 2,000bps on 13 August.
“You Press the Button, We Do the Rest”. So said an early slogan for Kodak, in 1888. That phrase would work as well for brokerage firms in 2020, given the surge equity trading activity. The outperformance of hard-to-borrow US equities starting in April exceeds even the rally from the depths of the GFC in early 2009, with filing for bankruptcy appeared temporarily to be a positive catalyst. The resurgence of Eastman Kodak Co fits perfectly into the broader narrative, however, specific risks exist for investors on the long and short side. Shares of KODK closed on 13 August at $9.2, down 72 percent from the peak close on 29 July, though still up 338 percent from the close on 24 July. Shares on loan have decreased by 1.9 million shares since 3 August, suggesting some short sellers are pocketing gains, while most short sellers who entered positions after the loan-announcement await further developments to cover their positions. In 2018 short sellers were rewarded for maintaining positions after the initial reversal, however, little about the short selling in 2020 has been grounded in precedent.
Figure 1
Figure 2
A tripling will cause problems for short sellers. The pain of the unrealised loss is compounded by the loss making position having grown in nominal terms and as a percentage of the (now smaller) portfolio. For the prospective short seller, however, a tripling may be a most welcome entry point, as was the case in for KODK shorts in January 2018. The short interest reported by NYSE for 29 December 2017, the most recently reported as of 10 January, stood at 3.2 million shares. The 12 January short interest would later be reported as 12.2 million shares, a 276 percent increase.
On 10 January the number of borrowed shares reported to IHS Markit more than doubled to 5.2 million shares, while the fee for new borrows increased from < 50bps to more than 5,000bps. The increase in borrow fee was published intraday on 10 January and the net increase in shares on loan reported the next day on 11 January. The 12 January NYSE short interest number was not published until 25 January, by which time the share price, shares on loan and borrow fee were all in decline from the 22 January peak. By August of 2018 the KODK share price was back below where it was prior to the KodakCoin announcement.
The same-day spike in borrowing on the day of the KodakCoin announcement highlights a key subtlety in how the data is reported. The short interest data published by the exchanges is purely tied to settlement date, so the 12 January short interest number pertained to trading on 10 January.
The securities finance data will function similarly, in that changes in borrowing will usually reflect changes in the settlement needs for that night, i.e. trade date +2. However, Kodak provides an important caveat. While broker-dealers generally borrow shares for today’s settlement needs, they are also managing an internal long supply of shares which they may lend out to their own clients or other brokers. If a broker had rehypothecated KODK shares prior to the KodakCoin announcement the combination of soaring volume and volatility, increased locate requests and surging borrow cost may have compelled the broker to borrow in shares today to cover the existing short position, suspecting that the long position may be sold and marginal borrow may be even harder to come by tomorrow so getting ahead of today’s locate requests may be worth doing anyway.
Shifting forward by just over two years, amid the so-called 2020 COVID crash the KODK share price closed at $1.55 on 23 March, the lowest point since the firm went public via an initial public offering in 2013 (as a result of bankruptcy reorganisation). The KODK share price subsequently recovered along with the broader market, increasing by 35 percent from the low close in March to the close on Friday, 24 July.
The following Monday, 27 July, the share price increased by 25 percent with no obvious catalyst. On Tuesday, 28 July, Kodak announced via a press release that they would be receiving a loan from the US government to develop capabilities as a provider of discount generic drug materials. In reaction to the news the share price increased by just over 200 percent to close at $7.9 (the highest closing price since 31 January 2018) (see Figure 2).
Like the January 2018 episode, the rapid ascent in share price was painful to existing shorts; The 1.7 million in short positions (reported by NYSE as-of 15 July), increased in value by an estimated $3.5 million on 24 July to $56 million at the peak. Also echoing 2018, short sellers immediately added to outstanding short positions, both on the 28 July and over the next week as the share peaked on the 29 July and started to descend, reaching 8.9 million shares on 3 August. The 31 July NYSE short interest was published on 11 August at 8.6 million shares. The borrow fee peaked at 16,000bps (an annualised rate of 160 percent) on 30 August and subsequently declined with shares on loan; New borrows were back under 2,000bps on 13 August.
“You Press the Button, We Do the Rest”. So said an early slogan for Kodak, in 1888. That phrase would work as well for brokerage firms in 2020, given the surge equity trading activity. The outperformance of hard-to-borrow US equities starting in April exceeds even the rally from the depths of the GFC in early 2009, with filing for bankruptcy appeared temporarily to be a positive catalyst. The resurgence of Eastman Kodak Co fits perfectly into the broader narrative, however, specific risks exist for investors on the long and short side. Shares of KODK closed on 13 August at $9.2, down 72 percent from the peak close on 29 July, though still up 338 percent from the close on 24 July. Shares on loan have decreased by 1.9 million shares since 3 August, suggesting some short sellers are pocketing gains, while most short sellers who entered positions after the loan-announcement await further developments to cover their positions. In 2018 short sellers were rewarded for maintaining positions after the initial reversal, however, little about the short selling in 2020 has been grounded in precedent.
Figure 1
Figure 2
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