November 11, 2005
The stock of Calpine Corp. has attracted a lot of interest recently - short interest, that is. The result has been a tale of lost faith told by the erosion of the independent power producer's share price on the New York Stock Exchange over the past three months.
Short interest is the result of short sales. It is a bet that a stock's price will decline made by borrowing stock and selling it in the expectation that the borrowed shares can be replaced with stock purchased at a lower prices. The number of shares borrowed at any given moment to make these bets is a stock's short interest. It is reported once a month by the exchange where the stock is listed for trading.
Calpine is listed on the New York Stock Exchange, which reported in mid-September that short interest in the stock topped 226 million shares. That is about 47 percent of the power plant operator's outstanding shares and the most of any stock listed on the NYSE. By mid-October, the short interest had declined to 213 million shares - still more than 44 percent of those outstanding and still the largest total of all the stocks trading on the exchange.
Just the reporting of such totals adds to the pessimism that led to the bet in the first place. The associated cynicism can become self-fulfilling - aided by encouragement from "shorts," the label put on traders who placed the bets.
The encouragement often comes in the form of rumors, such as those that pushed Calpine shares down a third before trading was halted for a company statement on April 22.
In a news release responding to trading pressure that resulted from false market rumors, the company said: "While it is not Calpine's policy to respond to market rumors, we feel compelled to comment today to assure the marketplace that these rumors are false. Calpine remains in compliance with its corporate and project indentures. Further, the company assures the market that it has no plans to file for bankruptcy."
There was nothing in the statement about the rumors, although there was a hint in the word bankruptcy.
Before trading was halted on the third Friday in April, Calpine's common stock traded at $1.70/share - its lowest price in two and a half years. And the company's reaction was far from satisfying.
"Obviously the suggestion that all is well is not enough. They will have to be more forthcoming with new information," Maxcor Financial analyst Daniele Seitz told Reuters.
As it turned out, the stock price continued to decline, reaching a low of $1.32/share in early May before the company reported a first-quarter loss in line with expectations.
This was followed by another phenomenon of large short-interest positions?a short panic. This features heavy buying of the stock once the price starts to rise as those who have profited by the decline attempt to maximize their gains by purchasing replacement shares at the lowest price possible.
In one late-May session, nearly 70 million Calpine shares changed hands as the price surged to about $2.50/share from $2/share on one such panic. The stock then continued to climb, reaching nearly $4 in early August before more rumors of financial problems started to wear on the company?s credibility.
Again, as TheStreet.com put it, Calpine didn't make life easy for investors.
Instead of initiating reports of bondholder challenges to its use of cash from asset sales, the company waited until the news was spread by others and then verified the reports. By Wednesday, this had driven the stock price as low as $1.83/share before some shorts figured they had profited enough and closed their trades with purchases of more than five million shares in 45 minutes.
Once again, the end is in sight for Calpine's bad-news mongers.
Today, the company is appearing before a Delaware court, asking it to release funds blocked by bond trustees.
Last week the company's general counsel, Lisa Bodensteiner, told analysts, "We expect the trial to last one day and that the decision from the court will be made promptly thereafter."
She also said a hearing has been scheduled for December 19 and 20 to finalize an order issued in August on funds blocked by other trustees.
Jim Brumm