Apr 20, 2017. Reduce demand for equipment and prices that we can charge; (3) our significant indebtedness, which requires us to use a substantial portion of our cash flow for debt. Note: In September 2011, the American Rental Association (ARA) released a Rental Market Metrics whitepaper which provided.

A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The reserve currency is commonly used in international transactions and often considered a hard currency or safe-haven currency.

People who live in a country that issues a reserve currency can purchase imports and borrow across borders more cheaply than people in other nations because they don't need to exchange their currency to do so. By the end of the 20th century, the United States dollar was considered the world's most dominant reserve currency,[1] and the world's need for dollars has allowed the United States government as well as Americans to borrow at lower costs, granting them an advantage in excess of $100 billion per year.[2] However, the U.S. Dollar's status as a reserve currency, by increasing in value, hurts U.S. Exporters.[3] The Dutch guilder emerged as a de facto world currency in the 18th century due to unprecedented domination of trade by the Dutch East India Company.[4] However, the development of the modern concept of a reserve currency took place in the mid nineteenth century, with the introduction of national central banks and treasuries and an increasingly integrated global economy. By the 1860s, most industrialised countries had followed the lead of the United Kingdom and put their currency on to the gold standard.

At that point the UK was the primary exporter of manufactured goods and services and over 60% of world trade was invoiced in pound sterling. British banks were also expanding overseas, London was the world centre for insurance and commodity markets and British capital was the leading source of foreign investment around the world; sterling soon became the standard currency used for international commercial transactions.[5] For example, suppose an American company sells electrical equipment to a buyer in France for one million euros. The equipment is to be delivered 90 days before the payment is made. At the time the sale agreement was made the exchange rate was $1.25 euros per dollar. This meant that the company was counting on receiving something in the neighborhood of $1.25 million in the transaction. Suppose the American company's cost for producing and delivering the equipment was $1.15 million and it was counting on making a $100,000 profit on the transaction. However if the value of the euro fell to $1.10 by the time the American company received payment then it would find that it had a $50,000 loss instead of a $100,000 profit.

Suppose the American company required the French company to make the payment in dollars instead of euros. Then the French company would be bearing the risk.

If the exchange rate fell from $1.25 per euro to $1.10 then what it had been expecting to pay one million euros for would cost it about 1.136 million euros. One Exchange Transaction When converting all of a USD advance into one foreign currency, there will be just one transaction to document, one exchange rate to calculate and one exchange rate to be used throughout the reconciliation. Multiple Exchange Transactions – First In First Out The Concept: First In First Out.

Spend down the first block of funds that was purchased at that specific exchange rate. Then, spend down the next block of funds that was purchased at that specific exchange rate. If it is expected that the funds will be spent at multiple exchange rates, make sure to save all of the exchange transaction receipts. There will be the same number of exchange rates to calculate as there were exchange transactions. If money is changed five times, there will be five resulting exchange rates to be used in the advance reconciliation. The vast majority of the value of U.S. Dollar payments, or transfers, in the United States is ultimately processed through wholesale payment systems, which generally handle large-value transactions between banks.

Banks conduct these transfers on their own behalf as well as for the benefit of other financial service providers and bank customers, both corporate and consumer. Related retail transfer systems facilitate transactions such as automated clearing houses (ACH); automated teller machines (ATM); point-of-sale (POS); telephone bill paying; home banking systems; and credit, debit, and prepaid cards.

Most of these retail transactions are initiated by customers rather than by banks or corporate users. These individual transactions may then be batched in order to form larger wholesale transfers, which are the focus of this section. The following are examples of potentially suspicious activities, or 'red flags' for both money laundering and terrorist financing.

Although these lists are not all-inclusive, they may help banks and examiners recognize possible money laundering and terrorist financing schemes. FinCEN issues advisories containing examples of 'red flags' to inform and assist banks in reporting instances of suspected money laundering, terrorist financing, and fraud. In order to assist law enforcement in its efforts to target these activities, FinCEN requests that banks check the appropriate box(es) in the Suspicious Activity Information section and include certain key terms in the narrative section of the SAR. The advisories and guidance can be found on FinCEN's website.302 Management’s primary focus should be on reporting suspicious activities, rather than on determining whether the transactions are in fact linked to money laundering, terrorist financing, or a particular crime.

XE Currency Converter - Live Rates www.xe.com/currencyconverter Calculate live currency and foreign exchange rates with this free currency converter. You can convert currencies and precious metals with this currency calculator. Eur/Usd USD - Us Dollar GBP - British Pound Cad/Usd Currency Charts Funding Currency Definition Investopedia www.investopedia.com/terms/f/funding-currency.asp The currency being exchanged in a currency carry trade. A funding currency typically has a low interest rate.

Investors borrow the funding currency and take short.

Summary: • In over 20 years SSTI has never generated profits or meaningful cash. Recent IPO simply allows VCs to finally exit positions. Dec 4th lockup expiration on 8 million shares • Reams of independent data and test use confirm that SSTI ‘s technology simply doesn’t work. Customers repeatedly describe overwhelming failure rate. • Aggressive tactics by SSTI thwart release of FOIA docs to journalists and researchers. Employee testimony states SSTI provides fabricated data to law enforcement.

• Multiple recent undisclosed contract losses (just ahead of lockup expiration) and inflated 3Q revenue. • Contracts such as Miami and Baltimore (and others) have been repeatedly announced, then quietly cancelled, re-announced, but then quietly cancelled again.

Note: This article is the opinion of the author. The author is short SSTI. I suspect that much of the information in this article may actually come as a surprise even to certain board members.

ShotSpotter has historically provided very optimistic reports to its board members, touting the unmitigated success and “proof” of its products, without including information like I have included below. A copy of one of these reports is included below. *** SHOTSPOTTER INC. () – KEY STATS / COMPANY DESCRIPTION Ticker SSTI LTM Rev $21.8m FD Shares O/S 11.69m LTM Net Loss -($8.3m) Mcap ≈$200m Cash per share $1.65 Share price ≈$16 52w Lo/Hi $9.33 / $20.15 Price/Sales 9.1 x Note: of 11.69 million shares includes 2.05 million shares underlying deep in the money warrants and options with an average strike price of $4.55.

Sell side analysts continue to ignore these 2.05 million shares. () offers software and hardware systems which provide locational information on gunshot activity within covered areas. When someone fires a gun, ShotSpotter’s microphones detect the gunshot and send the data to a ShotSpotter center in California.

It is then determined if it is indeed a gunshot. Finally, the location of the gunshot is relayed to law enforcement personnel. *** SHOT SPOTTER INVESTMENT THESIS – SUMMARY Below I will make clear the following points to show why ShotSpotter will quickly fall by around 80% to $2-4, once the lockup expires on December 4th. • Uninterrupted history of failure. After a 23 year history of uninterrupted commercial and financial failure, ShotSpotter was suddenly publicly hyped in 2017 as an innovative high tech solution to gun violence, so that it could come public in an IPO by Roth Capital. For two decades ShotSpotter has had repeated brushes with outright insolvency. • The IPO was arranged as the only exit for insiders from a business that has been unable to succeed for more than 20 years. The purpose of this IPO was simply to allow insiders and PE investors to exit an otherwise unsellable, money losing investment. On December 4th, 8 million shares will be released from lockup, allowing these investors to finally sell.

Ahead of that lockup expiration, ShotSpotter juiced its revenues by pulling forward nearly from a cancelled Puerto Rico contract and then failing to disclose other contract cancellations. • ShotSpotter.

Reams of hard data prove quite conclusively that ShotSpotter simply does not work. This is why ShotSpotter has repeatedly been unable to maintain customers or generate any profits despite 20 years of trying. Actual documented success rates of less than 2%, with 70-80% of all alerts being unfounded or false alarms. • Customers explicitly state that ShotSpotter does not work and fully confirm the hard data. New customers keep canceling.

Following their cancellations, former customers confirm categorically that ShotSpotter simply does not work. Including major “trophy” contracts such as Baltimore, Miami, San Antonio and Oakland. • ShotSpotter employee testimony (under oath) states that data presented to law enforcement is outright fabricated. • Aggressive tactics to conceal, distort or prevent outright the release of the “damning” data. Internal memos reveal aggressive tactics by ShotSpotter to thwart FOIA requests by journalists and universities seeking transparency into government spending on ShotSpotter.

Deliberate steps to legally gag police forces from disclosing the negative data. The data being withheld is the same data that categorically proves that ShotSpotter simply does not work. • ShotSpotter fails to disclose major contract losses ahead of lockup expiration. In its November earnings call, ShotSpotter indicated clearly that only one contract had been lost.

Below I show the proof that 3 more contracts have been lost but not disclosed by ShotSpotter ahead of the lockup expiration. • ShotSpotter makes diametrically opposing statements to law enforcement, journalists and university researchers, depending on its financial interest in each situation. ShotSpotter presents one set of facts to law enforcement when selling its product to government payers. It then presents the opposite “facts” to parties trying to investigate spending on ShotSpotter and its effectiveness. ShotSpotter also presents additional “facts” which contradict its own data when marketing the product.

The government payers who buy ShotSpotter are relying on the wrong data. *** SECTION 1 – OVER 20 YEARS OF UNINTERRUPTED FAILURE AND LOSSES ShotSpotter’s technology is not new. Neither is gun violence. ShotSpotter’s founder, came up with this idea all the way back in 1994 when he kept hearing the sounds of gunfire in neighboring East Palo Alto. Over the years, there have been a few minor improvements to the technology to try to weed out more false positives (from other loud noises).

But overall, the technology is still largely the same as it was 23 years ago. Recent media headlines have been dominated by gun violence. But in fact, the US has had an epidemic problem of gun violence for decades. Despite this decades of ongoing violence, ShotSpotter has not been able to achieve any real traction, and certainly. Here is a list of gun violence incidents that made major US headlines, all in 2015 or earlier.

The point is that high profile gun violence has been a problem in the US for decades, yet it has not allowed ShotSpotter to ever generate a profit. • In May, RH quietly awarded its CEO a massive nine figure incentive package to achieve a $150 share price by any means.

Two days later RH announced a $700m buyback. • In 2017, RH already bought back half of all outstanding shares at prices below $50.

Stock then doubled. Further financial engineering can easily attain $150 quickly. • In October, tiny debt repayment sent stock up 20 points. Now $650m of converts nearing conversion price. But RH previously bought “bond hedges” which neutralize any convert dilution. • Despite much higher share price, short interest now falling as some shorts realize the financial engineering trap.

But short interest still near 50% of float. • RH suddenly announced its first “investor day” after more than two years. Past events saw announcements move the stock big. Only eight trading days away. Note: This article is the opinion of the author.

The author is long RH and HTZ. Key statistics Name: RH (formerly “Restoration Hardware”) Ticker: () Market cap: $1.8 billion Current price: $89.24 52w Lo/Hi: $24.41 / $91.81 Shares out: 21.2 million (float of 18.6 million) Shares short: 8.8 million (48% of float, 9 days trading volume) Avg.

Volume: 1.1 million shares *** Section 1: Summary investment thesis Shares of RH are being driven sharply higher as a result of financial engineering being conducted by RH’s CEO Gary Friedman. Throughout this article, please understand that the described reductions in share count have nothing to do with any type of meaningless “reverse split”. Instead, with RH these are actual and permanent reductions in share count which are having a very predictable effect on the price of each remaining individual share.

Right now some shorts appear to be taking the view that “if RH was a good short at $30, then it must be an even better short at $90”. But in fact, the share count has been reduced so aggressively (via share buy backs) that the market cap of RH is only up by 30-40% since April. Moreover, this moderate rise in valuation is arguably not far out of line with the recent improvements in financial results (and outlook) as announced in September. The September announcement alone saw the share price spike 45% in single day.

The shares repurchased by RH were bought at far lower levels and much of these purchases were conducted with cash (not just debt), such that even the comparable rise in enterprise value is also far much lower that this sharp rise in the share price. In other words, comparing the price of a single share between one period and the next is no longer a consistent picture of the valuation of RH as a whole. So here is what is happening: In May of 2017, RH’s CEO Gary Friedman was quietly awarded a staggering nine figure incentive package if he can somehow engineer the share price to $150 or higher. Precisely how he achieves this goal is entirely irrelevant.

If Friedman is successful, the value of the total awards to him will exceed $500 million. At least $25 million of this will come to him within just the next few months. All that is necessary for Friedman to receive this payout is the financial engineering and ongoing reduction of share count coupled with even just very slight improvements in RHs business (in fact, whether real or perceived). Friedman did not waste any time in putting his plan into action. Within just two days of that award (on May 4 th, 2017) RH quickly announced a $700 million share buyback to sharply reduce the share float. Some were surprised at the buyback because RH’s stock price had already been rising towards the highest prices of the year (then closing in on $50).

Even more surprising (to some) was that within just 50 trading days, RH had announced that it had already completed the entire $700 million share repurchase, accounting for a significant portion of the daily volume during that time. What I will describe below is how Friedman is now using a combination of positive cash flow and new debt to further reduce the share count. Friedman is effectively conducting a “stealth/quasi/creeping” going private in order to drastically reduce share count. Ultimately, for Friedman to take home his nine figure package, the equity float must go lower. And this is what is happening. The impact on the share price is entirely predictable.

Throughout 2017, RH has already repurchased half of its outstanding float at an average price of $49.45. The share price has already nearly doubled since those purchases. But what about the all of that debt? Because of its increased leverage, the market has been very focused on RHs “capital structure”.

But changes in leverage can now cut both ways. As a result, when RH suddenly announced three weeks ago that it was already paying down its $100 million second lien term loan (within just 3 months of it being issued), the stock quickly shot up 20 points from the $70s to the $90s, quickly hitting new 52 week highs. And yet clearly that was a just relatively small deleveraging. Of RHs remaining debt, the majority ($650 million) is in the form of convertible debt with strike prices of $116 and $118. And now suddenly these conversion prices are quite squarely within range.

But.did you also know that in 2014 and 2015, RH had already purchased complete “bond hedges” from underwriter BofA-ML to fully neutralize dilutiononce those convertibles convert at prices over $116 and $118. There is therefore no dilution until the share price exceeds well over $170. In 2014 and 2015, RH paid BofA-ML over $130 million for the long legs of these bond hedges to neutralize dilution. ( Terms, details and dilution tables for the bond hedges are included below). Yet the market has missed the details of these convertibles and bond hedges because just a few months ago, the share price was still below $50, making conversion seem highly unlikely. (And quite frankly, I am very skeptical that many investors ever even knew about these massive bond hedges in the first place.) Even aside from earnings announcements, Friedman has made use of other ongoing announcements to propel the share price higher over the past 5 months. There was the announcement of the share repurchase, the announcement of Friedman’s own open market purchases of $2 million in RH stock in the $70s and then the announcement of the early repayment of RH’s second lien notes in October.

Each time, these separate announcements have driven the share price sharply higher. This is how we have gotten from the $40s to the $90s in just 8 weeks. The next catalyst for a sharp spike higher And now in just 8 trading days from today, RH has suddenly decided to conduct its first “ investor day” after more than two years.

In the past, RH has made very visible use of such events to make announcements which then sent the stock sharply higher. There are a variety of announcements that Friedman could be expected to make at (or in advance of) this “ investor day”. The most obvious announcement would be that RH would announce the simple approval of the next leg of its ongoing share buyback. Or RH could announce a subsequent reduction of leverage. Friedman could simply reiterate his recent very bullish views on RH’s near term prospects, both in the US and in Europe.

Given the 48% short interest in RH and the moderate trading volume, any of these announcements could easily fuel an immediate and very sharp spike in the share price. In the event that RH announces yet another shift in the capital structure (i.e.

The next leg of the stock buyback or the next debt pay down), such a spike would most likely be permanent rather than temporary. In the near term, if the share price stays above $100 (up just 11% from current levels) in the next few months, Mr. Friedman will receive an extra $4 million under the recently awarded incentive package. But if the share price goes North of $150 then just that first near term incentive award swells to $25 million to be doled out to Mr. Friedman in just the next few months.

So ask yourself this: in its first investor day in more than two years, and with $25 million looming in near term incentives, do you think Mr. Friedman will say something positive or something negative Link: *** Section 2: Financial engineering works again and again. Back in August, I my long thesis on Hertz Inc.

() when the stock was at just under $14. Many people thought (and said) that I must have lost my mind. The share price (they said) was clearly wildly higher than what Hertz’s troubled fundamentals could justify. And Hertz’s “ capital structure” (they said) would only serve to turbo charge a decline in the share price. Just before I published my article, a SELL recommendation from Barclay’s raised the specter of bankruptcy, sending Hertz’s stock plunging by 40% in 2 days. Against that, all it took was for the slightest of ongoing results to be “less awful than expected” and Hertz was set to skyrocket. And this is exactly what happened.

With short interest at greater than 50% of the float, a modest rise in the share price turned into a sharp spike and Hertz’s share price jumped 40% within days. The share price then quickly went on to double to around $28. Hertz is now up by around 75% since where I wrote about it. I am currently long a moderate amount of Hertz. As I was with Hertz, I am totally aware of the short thesis on RH.

In fact, just as with Hertz, I even agree with many of the FUNDAMENTAL observations of the short thesis on RH. But I will show what the market has missed and why shares of RH are set to very quickly spike sharply higher from here (and then stay much higher going forward).

And just as with Hertz, it is the “capital structure” (and changes to the capital structure) which will now turbo charge the share price much HIGHER rather than lower. Important: Once we saw what Carl Icahn was doing with Herbalife (), it then became very easy to see what Icahn was doing with Hertz.

It became very obvious that the price for any single share for each of those companies would have to rise, even despite very visible challenges with their underlying fundamentals. Changes in the share price between one period and the next were no longer comparable for valuing the company as a whole. With HLF, I tend to agree strongly with Ackman (bearish) about the business, but even more strongly with Icahn (bullish) on the expected direction of the share price. We can now see similar tactics being used by RH CEO Gary Friedman to “engineer” the RH share price to much higher levels. It has worked with HLF. It worked with HTZ and now it will quickly work with RH.

*** Section 3: Looking at the RH short thesis By now, the short thesis on RH is quite well known and has been widely disseminated for over two years in a variety of media outlets including Grants, The Wall Street Journal and Baron’s. In fact, on a strictly fundamental basis, I actually agree with many of these obvious concerns raised by the financial media. But it just doesn’t matter. The share price is headed sharply higher.

These media outlets had all raised similar concerns about names like Hertz and Herbalife as well, even as those stocks went on to soar dramatically in price. Notice the prices of RH at the time of these articles (as well as their titles). Date Source RH Price Title Aug 2017 WSJ $53 March 2017 WSJ $33 Dec 2016 Barrons $34 Jun 2016 Barrons $31 So here is the (widely known) RH short thesis in a nutshell: RH sells very high end (i.e. “over-priced”) furniture to a small demographic of upper income customers. The overall size of that demographic is already quite small and their continued purchasing power is heavily dependent upon ongoing appreciation in real estate and stock market assets.

Revenues at RH have steadily increased, and have been driven by a significant expansion effort into a) more stores and b) larger and larger store formats. Once the economy slows (and with it the real estate and stock market values), purchases from these customers will slow sharply. That store expansion (which has so far helped RH) will then become a weight on the business. Many shorts also assume that any decline in RH will then be turbo charged by recent changes in its “ capital structure”. This is because RH has been aggressively been buying back its own shares and financing those purchases by issuing debt. Leverage has therefore increased sharply. But against this short thesis, there is a very visible wild card which has been a significant head scratcher for anyone who has been short the stock.

RH CEO Gary Friedman has also been using his personal funds to aggressively acquire millions of dollars worth of RH shares in the open market. His earlier purchase of nearly $1 million in July of 2016 could arguably be justified by the low price of $27.50 at the time. But then in September of 2017 (just 6 weeks ago) Friedman again used his personal funds to purchase an additional $2 million of stock at an average price of $70.28. Friedman’s latest purchases occurred at the highest share prices for RH since late 2015.

Friedman’s most recent purchases at $70.28 in September marked the beginning of the subsequent rise in the stock from the $70s to the $90s, a further 30% rise in just those 6 weeks. So let’s look at what the larger market is missing here. *** Section 4: Smarter shorts have been very QUIETLY reversing their views on RH (Hint: No short seller is going to tell you that they are desperately looking to get out of their position in RH. Given the information below, I would be rightfully be quite skeptical if anyone who was short RH started aggressively trying to convince me to sell my shares of RH.) A few months back, short interest in RH had exceeded 60% of float. This is what we call a “suicide short”.

With the stock having doubled since this time, it has certainly lived up to the name “suicide short”. Since that time, the short interest has fallen to 48% of float. It is still basically a “suicide short”, but clearly some of the smarter shorts have started to comprehend the implications of the ongoing financial engineering by RH’s CEO, which will continue to send the share price ever higher. And note that even this small level of short covering over the past two months has contributed to the sharp rise in RH’s share price. From September through October, short interest fell only modestly from 58% of float to 48% of float but the share price rose by more than 20 points during that time (and this continued rise was already AFTER earnings had been released).

So if there is a larger unwinding of short positions, then we should expect a much larger upward move in the stock from here. Also remember that on September 7 th RH shot up by 45% in just a single day, from $49 to $71, following the release of better than expected.

So that is the level of short term price volatility we have come to expect from RH when it puts forth a meaningful new announcement. At nearly 50% of float, the remaining short interest is still absolutely massive. Even attempting to slowly get out of small positions is noticeably pushing up the price of RH. The current short position amounts to fully nine days of trading volume.

This is why existing shorts are trying to be very QUIET about getting out of their positions in order to minimize a potentially significant short squeeze from here. But as we have often seen in the past, there will inevitably be some “dumb money” that gets badly burned. The dumb money is staying short on the simple view that “if RH was a good short at $30, then it must be a great short at $90”. *** Section 5: The Bull Thesis for RH (on the share price, not the business) Share price vs. Valuation Yes, during 2017 shares have more than tripled off of their sub $30 lows. And yes, anyone who has been long or short during this time has participated 1:1 in this 60 point move. But it is very important to understand that this categorically DOES NOT mean that the VALUATION of RH has tripled.

In other words, despite the share price move, RH has not necessarily become equally expensive as a company. The all time high for RH was just over $100 in 2015. So as we now approach that level again, some people are tempted to try to call the top in the stock. But because of the changes to the capital structure since 2015, the market cap of RH is less than half of what it was back then, while the enterprise value (“EV”) is actually half a billion dollars LOWER – EVEN at the same share price of around $100. Conclusion: Because of continuing changes in the capital structure, comparing the share price from period to period is no longer an accurate reflection of changes in the value of RH as a company. Just during 2017, RH has been making use of very aggressive share repurchases to cause a PERMANENT reduction in the outstanding share count. As a result, despite the “triple” in the share price, the market cap has only risen by less than 50% since the end of Q1.

In addition, aside from the debt funding much of the share repurchase were conducted with cash and the average purchase price was at just $49.45. As a result, the rise in EV has also been far less than what would be surmised by looking at the share price. Think of it this way: RH borrowed around $600 million to buy back $1 billion of stock at the time. The balance was paid for with cash. The value of that debt stayed constant at around $600 but the value of those shares repurchased has since nearly doubled to nearly $2 billion. And remember that the 50% rise in market cap that we have seen this year was actually coming off of a very low base. The share price had been sitting at deep multi year lows.

In addition, some amount of bounce from those levels is arguably quite justifiable given that in: • GAAP revenues increased by 13% (relative to single digit growth at competitors). • Earnings came in at 65 cents per share vs. 44 cents in the year prior (an increase of 48%) • RH boosted guidance on 2017 revenues to $2.42-2.46 billion • RH boosted 2017 net income guidance to $70-77 million Analysts have also upped their outlook for RH substantially. Consensus wall street expectations for earnings this year has increased by 43% over the last 6 months to $2.60 currently from a low of $1.82.

The recently improved outlook is actually quite significant. In fact, we can see that RH currently trades at around 26 times consensus earnings estimates. This is actually slightly LOWER than where RH has traded vs.

Estimates in the past. It is also steeply lower than the 30-40x multiple where RH traded two years ago (when the stock was also near $100). So the stock price comparison of today is truly no longer comparable. It is apples to oranges. RH share price multiple vs. Consensus earnings estimates My only point is that some level of valuation increase is certainly merited vs. 6-9 months ago.

And once we factor in changes to the capital structure, the moderate rise in RH’s overall valuation is not excessive. SO HERE IS THE BIG QUESTION: Question So are these share repurchases just “ financial engineering” to artificially make the price of each share higher?

Answer YES, YES, YES. These repurchases are absolutely financial engineering.

It simply doesn’t matter. The share price will continue to go much higher as the actual share count continues to decrease. In addition, even very small improvements in earnings (or even just in guidance, Mr. ) will start to have a disproportionately larger impact on the price per individual share. Anyone who has been long or short the stock during 2017 has participated 1:1 in the share price rise. And they will continue to participate 1:1 as the share price moves up towards its next level of $150. Because that is the level to which CEO Gary Friedman needs to “engineer” the stock price.

*** Section 6: In 2017, Friedman was given a NINE FIGURE incentive to engineer a $150 share price for RH On exactly May 2 nd of 2017, RH quietly awarded CEO Gary Friedman a massive nine figure contingent equity compensation package which aggressively incentivizes him to increase RH’s share price. The precise method of HOW he achieves this price is entirely irrelevant. The incentives to Friedman have an “exercise price” of $50 per share but are “restricted” until the share price reaches prices of $100, $125 and $150. If he does not meet these share price targets, then the options are restricted for a period of 20 years.

Friedman is currently 60 years old. From the dated May 2, 2017. As noted, the options contain time restrictions and are awarded over a four year period. But under certain conditions, the options all get awarded immediately AND they then vest immediately too.

We will see this below. On the date of that award in May 2017, RH closed at $48.62 such that the large award size seemed not-so-relevant vs. Their restriction prices of $100-150. (Obviously they are suddenly looking much more relevant now that RH has doubled in just 6 months.) And here is where it gets interesting.

On May 4 th 2017 ( just two days after Friedman received his incentive) RH suddenly that that it had authorized a $700 million share repurchase program. With his massive incentive package in place, Friedman didn’t waste any time in aggressively reducing the outstanding share count. Within just 50 trading days ( on July 14 th) RH that it had already completed the entire $700 million repurchase. Wow, that was fast. In fact, this $700 million buyback followed on the heels of a in Q1 (just a few weeks earlier) which had been effected in the run up to Friedman’s incentive package being awarded to him.

Together this means that in just a six month period, RH bought back 20.22 million shares, cutting the outstanding share count by half (49.6%) from where it stood in early 2017. Against the total outlay of $1 billion, we can see that RH bought those shares for $49.45 (and they are now trading at around $90). So yes, the share price has tripled since Q1 from below $30 to over $90. But because the share count has been cut in half, the market cap has only increased by 50% from those deep multi year lows.

And again, since that time we have seen sharp improvements in revenues, earnings and cash flow, such that a higher valuation is certainly justifiable. As a result, against all expectations, the first of Friedman’s trigger levels (the $100 mark) is suddenly squarely in sight.

As we will see below, from here it will be very easy to for Friedman to get the price per share to $150 using the exact same technique. And the massive short interest is only going to help Friedman make this happen even sooner. From the RH (dated later in May 2017) we can see the breakdown of how these options are awarded. The takeaway from the table above is that if Friedman can keep the stock above $100 (just 11% above current levels) by the 1 st anniversary of his award (i.e. In May 2018) he will be awarded an extra 83,333 shares which would be worth an additional $4.2 million.

(Remember, the strike price is $50 such that the intrinsic value of the awards would be $100 minus $50=$50.) But. If Friedman can get the stock a bit higher, to above $150, by May 2018 then two things will happen. First, the intrinsic value goes up by 100% (not by a mere 33.3%). At a share price of $150, intrinsic value goes from $50 to $100 per option (i.e. $150 stock price minus $50 strike price = $100 intrinsic value). More importantly, under the schedule above, Friedman would also get three times as many underlying shares.

In other words, if CEO Gary Friedman can get the share price over $150 by May 2018, just his FIRST brand new additional award will suddenly be worth a cool $25 million just a few months from now. It’s a pretty nice incentive package. So ask yourself this: what do you think Mr. Friedman has in mind to announce at his first “ investor day” after more than two years?! We will find out in just 8 trading days.

Identical awards are to be given to Friedman over each of the four upcoming years, such that in addition to his paid salary and bonus, and in addition to the shares that he already owns, this single incremental incentive piece then pays Friedman an additional $100 million over four years Looking back to that $2 million purchase of RH stock that Friedman made in September. Friedman bought those shares at $71. So if the stock price does rise to $150, he would make a profit just over $4 million.

But his incentive awards would end up being worth over $100 million. It is very clear to me that these ongoing purchase of stock by Friedman have more to do with “signaling” so as to help him get the stock price to $150. They have less to do with the actual economics of those newly purchased shares. Signaling or not, these purchases will most likely have the desired effect and will continue to boost the share price higher. As a result, I fully expect to see Mr.

Friedman continue to make more open market purchases even at prices well over $100. It only makes sense. And when the CEO starts announcing his open market purchases at all time high prices of over $100 per share, I fully expect that this will have the exact effect that Mr. Friedman desires (in other words, more buys by Friedman will again drive the even stock higher). Either way, after 40 years in the retail business and at the age of 60, Mr. Friedman is getting within pistol shot of locking in a near term nine figure payout.

*** Section 7: OKbut what about all of that debt? One thing keeping many shorts in place on RH is the fact that these massive share repurchases have been largely financed with debt. Because of the share repurchases in 2017, RH’s total went from $532 million in July of 2016 to by the end of the July 2017 quarter (announced in September 2017). So basically an extra $600 million in debt to take out $1 billion in stock.

(The $1.15 billion debt figure is the number disclosed in July by RH. RH also has $233 million in “capital leases” associated with its properties which some analysts treat as debt). Beyond that debt, the balance of the funds used to buy back stock were obtained from operating cash flow as well as from cash on hand. The cash on hand was largely the result of previous bond offerings. We can see quite clearly that RH’s share price is indeed very, very sensitive to any changes in its capital structure.

But this knife cuts both ways. Any REDUCTION in leverage can also send the share price spiking sharply higher. On October 10 th RH the early repayment of its $100 million 9.5% second lien term loan. At the time, RH was still trading at just $72. In the three weeks that followed, RH then quickly soared by more than 20 points as investors started to recalibrate their assessment of RH’s “Capital Structure”. Much of that $100 million repayment was actually more of a refi, with RH using a 2.75% asset backed facility to make the payment. Even though only a portion of that term loan was actually repaid with cash, the share price still spiked sharply higher.

My point is that when we (very soon) see even larger reductions in leverage, we should expect to see much greater upward spikes in the share price. In fact, that tiny refi / pay down was very small potatoes compared to what is coming next. Just a few months ago, when RH’s share price was below $50, no one seemed to focus on the fact that $650 million of RH’s debt is actually convertible into stock. The conversion feature may have seemed largely irrelevant at the time because the conversion prices on those convertible bonds are set at $116.09 and $118.13 which was more than 100% above the prevailing share price just few months ago. It seemed safe to assume that if there was to be any eventual conversion than it would be far into the future.

But as recently as September (after the share price had spiked above $70), RH was already telegraphing it investors how it viewed this “debt”. For some reason, RH began “carving out” the calculating of those convertibles. In the September, RH suddenly described its as follows. (Note the carve out of the converts, as well as the advance disclosureof the bridge loan repayment which then happened 4 weeks later). Outside of the convertible notes that are due in June 2019 and June 2020, we had aggregate debt of approximately $504 million at the end of the second quarter, including a $100 million second lien bridge loan that we expect to repay in full by year end.

Here are the terms of those two convertibles. But now with the stock closing in on $100, those conversion prices become much more relevant because that “debt” can be extinguished if the share price stays above the $116-118 levels. It is now becoming clear why RH was alerting us to this back in September. And then it gets even better. The “bond hedges”. Even fewer people are aware that back in 2014 and 2015 when RH issued those convertibles, the company simultaneously entered into “call spread” transactions (AKA “bond hedges”) with BofA-ML (the convert underwriter). The purpose of these call spread transactions was to neutralize any eventual dilution which would occur when these bonds eventually converted into stock.

Maestro Peter Goldsworthy Ebookers on this page. Under the terms of those call spreads, RH completely neutralizes any dilutionthat would occur when the stock prices exceeds $116 and $118. This was a separate contract with BofA-ML such that even many of the convertible investors are likely unaware of it. So instead of having dilution at $116 and $118, there is no dilution under the convertibles until the share price exceeds well over $170, even when they are converted.

This type of an option package is certainly not free. RH paid a huge sum of money to BofA-ML for the massive benefit of incurring no dilution under the convertibles until North of $170. But those large payments were made by RH back in 2014 and 2015, such that all of the cost is in the past, while all of the benefit is in the present. The full details of these option purchases by RH can be found in the. For example, on the “long” leg of the call spread (“bond hedge”) purchases, the terms are disclosed as follows: The documents below were from 2014 and 2015.

As such I currently believe that most current investors are fully unaware of them. WHAT TO LOOK FOR: In the tables below, look to the column on the far right to see the net impact of the convertible vs. The call spread which was purchased by RH. In each case you will see that “total expected dilution” is zero until share prices well in excess of $170. BOND HEDGE #1 – NO CONVERT DILUTION UNTIL SHARE PRICE OF OVER $171.98 BOND HEDGE #2 – NO CONVERT DILUTION UNTIL SHARE PRICE OF OVER $189.00 Re-evaluating RH’s total debt picture In a Form 8K released in July 2017, RH included a table showing its total indebtedness following the $700 million repurchase. Total debt was listed as $1.15 billion, including the $100 million term loan and $650 million of converts.

Some portion of that $100 million term loan has already been paid down. And if Friedman can engineer even a slightly further rise in the share price from here, then the converts will get extinguished (with no dilution until North of $170). From the in July of 2017.

Note: From the multiple disclosures above, we should assume that the information on total indebtedness in this table above will be subject to significant change in the very near future. A sale to Williams Sonoma A potential sale of RH to Williams Sonoma is potentially easier and more interesting, yet many investors are likely tempted to dismiss the idea unfairly. Williams Sonoma already has an enterprise value of nearly $5 billion, but it has almost zero debt. As a result, levering up to acquire RH would certainly be quite achievable. Williams Sonoma owns competitors to RH including Pottery Barn and West Elm. But sales growth has been consistently stagnant. While Williams Sonoma has been growing only in the low single digits, RH has been killing it in the low to mid teens in terms of revenue growth (including in the most recent quarter).

The reason why is that RH has built a sustainable brand and a loyal customer base. As a result, Williams Sonoma would not need to penny pinch and try to lock in a low end valuation in acquiring RH. It could justify paying a premium price simply due to the very obvious synergies that the acquisition would bring. Both of the companies are headquartered in Northern California, making integration very easy. Both companies distribute fairly similar product lines, which would then allow for the consolidation of third party manufactures, shipping and distribution. There would be instant cost savings from day one.

As we know, RH CEO Gary Friedman used to be president and COO of Williams Sonoma. When he was passed up for the CEO spot 16 years ago, he then came on as CEO of RH. And RH has since done quite well in creating a brand and capturing market share. The one argument I have heard against such an acquisition is that Friedman may now insist on getting that CEO spot for the combined entity post acquisition. But Friedman is now 60 years old. After 40 years in the business, I think he would be willing to let that honor pass by if it involved him getting immediate vesting on over $100 million in payouts.

Again, I understand that many people are still stuck thinking that RH was “expensive” when it was at $30. As a result, trying to get comfortable with the notion of a buy out at $150 is going to be tough. But when we factor in the changes to the capital structure, the improvements in the business and then look at the overall valuation, the specific share price becomes irrelevant. Either Amazon or Williams Sonoma could easily justify the purchase of RH at current or higher levels. And (as we have already seen) further financial engineering by Friedman could easily get the share price to over $150 without a commensurate rise in the valuation (“EV”) of the company.

*** Section 9: Conclusion. RH is going much, much higher.

Very, very soon. (Note: The short interest of nearly 50% of float is not really part of my bull thesis on RH. But the unwinding of short positions will certainly cause the stock to rise much sooner (and much higher) than it would do otherwise based on just the financial engineering.) RH’s CEO Gary Friedman began his career in the stock room of The Gap () in 1977 following a short stint in community college where he received fairly low grades. Against those humble beginnings, Friedman has been singularly ambitious. From increasingly senior roles leading Gap, then Williams Sonoma () and now RH, Friedman keeps climbing the retail ladder.

And when one ladder has no more rungs, he simply switches ladders. Friedman is now 60 years old and just 6 months ago was given a nine figure incentive package which can be entirely obtained if Friedman can simply financially engineer RH’s share price to over $150. Within just 2 days of Friedman receiving that award, RH suddenly announced a $700 million share repurchase, which was then fully executed in just a few weeks.

The financial engineering (along with some positive announcement from Friedman) have seen the stock triple in 2017. But the deeply reduced share count means that the valuation is not all that much higher than where it was in April. At the same time, RHs financial performance has undeniably shown visible improvements which do merit a higher valuation. There are a variety of levers that Friedman can pull in order to get the share price to $150.

As we saw following a small (and only partial) pay down of the $100 million term loan, RH’s share price is now extremely sensitive to and changes in leverage. The stock quickly jumped 20 points.

As the share price now nears the $116 and $118 conversion prices of RHs two convertible bond issues (totaling $650 million), investors will rightfully begin to recalibrate their view on RH’s share price vs. Perceived leverage. I very strongly suspect that most investors have been totally unaware of the massive “bond hedges” that RH purchased back in 2014 and 2015, which fully neutralize any dilution from the conversion of those bonds into shares until the share price reaches over $170. As we saw, in the most recent earnings announcement, RH is already “carving out” the calculation of that convertible debt when it describes its total indebtedness. That was the same earnings announcement that disclosed the intention of paying down the $100 term loan fully 4 weeks before it actually happened.

• New data points: Fraud penalties expected to reach $100 million or more. Other insurers required to cease doing business with HIIQ as part of their fraud settlements. • June 2017: HIIQ rejected for key insurance license in home state of Florida as regulator uncovers undisclosed legal actions against HIIQ insiders. • HIIQ privately warns of disastrous “domino effect” spreading to other states, causing additional loss of licenses. HIIQ makes no disclosure to investors. • Regulatory catalysts now approaching in October 2017.

Insiders have been publicly hyping the stock while simultaneously dumping $50 million in shares. • HIIQ is nearly identical to five of my past trades where Craig Hallum was on the other side. They each plunged by 80-100%. SEC investigations, fraud suits and delistings.

Disclosure: This article represents the opinion of the author. The author is short HIIQ. *** 1 – KEY STATISTICS Name: Health Insurance Innovations “HII” or “HPIH” Ticker: () Location: Hollywood, Florida MCap: $500 million Current Price: $29.90 52w Low: $4.00 Avg.

Daily Vol: 650k shares ($20 million) LTM Rev: $215 million LTM Net Inc: $12 milion Cash balance: $27.5 million ( ≈$2.00 cash per share) **** 2 – BUSINESS DESCRIPTION Health Insurance Innovations () develops, distributes and administers individual health and family insurance plans (“IFP”), including short-term medical (“STM”) insurance plans and guaranteed-issue and underwritten Health Benefit Insurance Plans (also known as “hospital indemnity” plans). HIIQ designs these plans on behalf of insurance carriers and discount benefit providers and then markets them primarily through its internal distribution network and an external distribution network of independently owned call centers. *** 3 – INVESTMENT THESIS The theme I will show repeatedly below is one of “delay, downplay, dismiss, deny” which then allows insiders to aggressively dump their shares. Over the past 7 months, shares of HIIQ rose from below $5.00 to over $35.00 – a seven bagger – despite only marginal apparent improvements in its business. During this time, revenue has increased slightly, and HIIQ has successfully managed to lower its heavy dependence upon STM plans.

But this does nothing to absolve HIIQ of its massive undetermined liabilities stemming from fraud investigations which now span. And the problems then get worse from there. HIIQ is now set to quickly plunge by at least 80% to $6.00 or below. Such a decline would really just put HIIQ back to where it was right at the time of the 2016 US election. ( see chart above) In reality, I strongly expect that there is a high likelihood that HIIQ ultimately plunges to below $1.00 and faces delisting. No, this is not an exaggeration.

Keep reading. Consider the following: HIIQ is now facing fraud investigations or cease and desist orders from 42 different states. Recently emerged data points now indicate that legal liability will be in the range of $100 million or more (as opposed to the mere $1 million number which has been published by certain authors who recently spoke to HIIQ management). On the heels of these mounting state fraud investigations, in June of 2017 HIIQ was just in its home state of Florida. In its (also from June of 2017), HIIQ then PRIVATELY cited to the regulator the specter of a from this rejection by which licensing denials will then spread to the other states in which HIIQ does business.

These were the to the regulator in June of 2017, yet this impact was not disclosed to investors in the or anywhere else for that matter. The scathing letter from the regulator cited multiple reasons for the denial of the license, in direct contradiction with disclosure to investors by HIIQ. For example, as part of its independent background check, the regulator uncovered multiple undisclosed legal actions against multiple HIIQ insiders. When confronted with this by the regulator, HIIQ refused to respond. Again, HIIQ disclosed something very different to investors. Delay, downplay, dismiss, deny HIIQ has retained an expensive law firm and has now submitted, re-submitted and appealed for this license at least 4 times over the course of 2016 and 2017.

Now that the final rejection is imminent, HIIQ has somehow tried to that it doesn’t even need such a license in the first place. As of the most recent disclosure, the Florida regulator is set to publish its final determination in (a few weeks from now). For the sake of completeness, I have already sent a copy of this entire article to the Florida regulator. The slew of massive legal and regulatory problems facing HIIQ is set to unravel in the very near term. There are multiple near term catalysts. The most visible catalyst is coming in just a few weeks in October 2017.

HIIQ has repeatedly attempted to suggest that it is actually some other party (such as HCC) that is being investigated or is at fault. Yet anyone who reads the actual legal filings can immediately see otherwise. In the fraud complaints from 42 state governments, the repeated theme is that HIIQ has engaged in fraudulent sales practices while operating without a license.

And now HIIQ has brazenly attempted to suggest to investors that maybe it just such licenses at all. And here is where it gets really interesting: Even as HIIQ passionately encourages investors to buy, the insiders have been aggressively dumping their own shares.

So far in 2017, HIIQ insiders have dumped millions of shares taking in over $50 million. Keep in mind that just a few months ago, the market cap of the entire company was less than $200 million. In November off 2016, the market cap was just $70 million. Notice that insiders were aggressively dumping a huge volume of shares even when the price was more than 50% lower than the current level, at just $14. Selling has come from all corners, including the founder, the CFO, CTO and the CEO of its Healthpocket division. History of insider sales: Delay, downplay, dismiss, deny In fact, now that the legal consequences are rapidly closing in, management’s actions are becoming downright blatant. Last week ( on Tuesday September 5 th), after the stock had suddenly dropped from $37 to below $30, Craig Hallum put together a hastily arranged conference call for management to reassure investors.

As expected, the stock briefly rebounded. Just hours after this impromptu call encouraging investors to buy, multiple members of management began disclosing additional large share sales by insiders, quickly amounting to $1.5 million over just two days. New SEC filings were then released in the after hours beginning on September 5 th, which continued to the end of the week: (Sheldon Wang is HIIQ’s CTO. The by HIIQ insiders can be found on Edgar) As you read the magnitude of the problems below, keep in mind that HIIQ has a cash balance of just with which to run its entire business and then deal with all of these impending liabilities. The recently revealed data points indicate liability of $100 million or more. So you do the math!!

It will quickly become clear why I am saying that HIIQ has the potential to drop to below $1.00 and face ultimate delisting. Either way, given the unfolding of the events above, a $6.00 share price will likely prove generous by the time Florida makes public its decision in just a few weeks. This dire prediction for HIIQ is pretty much in line with what I had predicted on five prior Craig Hallum trades. For reference, the five companies were Unipixel (), Neonode (), Erickson Air Crane (), TearLab () and Plug Power (). Just like HIIQ, each of these past stocks had quickly spiked by 200-800% following gushing support from Craig Hallum. As the share prices spiked, large share sales or equity offerings then followed.

As soon as I exposed their terminal underlying business problems, each of these stocks immediately plunged by 30% or more. Each of the stocks then went on to by implode 80-100%, just as I predicted. Among these five companies, we then saw various combinations of SEC investigations, fraud lawsuits, bankruptcy and/or delisting. I am specifically including below my five past articles which were specifically focused on past Craig Hallum trades on similar toxic companies. I would strongly encourage readers to have a look. The similarities to what we see with HIIQ should become 100% obvious. *** 4 – LOOKING AT FRAUD INVESTIGATIONS FROM 42 DIFFERENT STATES Delay, downplay, dismiss, deny.

HIIQ is currently facing a tidal wave of fraud investigations, lawsuits and cease and and desist orders which now already extend to at least 42 states (that we know about so far). In March of 2016, here was the initial action taken by the state of following a sting operation which revealed unlicensed insurance sales in Arkansas.

During additional calls, “ several” company representatives misrepresented the insurance products in an attempt to sell insurance plans, not realizing that the person calling was actually The Arkansas Insurance Department. Read this screenshot closely. Within 60 days, in May of 2016, HIIQ had already received another cease and desist, requiring the company to immediately cease and desist from selling insurance in the State of Montana. Delay, downplay, dismiss, deny.

In July of 2016, announcing the appointment of Gavin Southwell as President and Josef Denother to serve as COO. Within the 8K, HIIQ spent 4 pages elaborating in deep detail the most minute details of the terms of employment for these two. And then, 4 pages in, HIIQ included a single small paragraph disclosing the commencement of a multi-state investigation being headed by the State of Indiana. And now finally the company disclosed the Arkansas and Montana legal actions from months earlier.

But by this time, anyone who actually made it through to page 4 of this 8K could see that the investigations had expanded to include Arkansas, Florida, Kansas, Montana, Ohio, South Dakota, and Massachusetts. When HIIQ ultimately chose to provide more detail on these investigations in, it attempted to portray its own role as being just one target among many players. Here is how HIIQ described the Montana fraud complaint. Keep reading and decide for yourself if this is an accurate representation or if it is wildly misleading. HIIQ specifically emphasized that it was “ among more than two dozen separate parties named”.

But the reality is that the other parties being named in this were largely being named as a result of the fact that they were doing business with HIIQ. According to: These policies are routinely sold though misinformation and deception at the point of sale by individuals not properly licensed or appointed in Montana to conduct this insurance business.

“The HII scheme” In fact, throughout this Montana action, the Montana State Auditor refers to the fraud directly as “”. The Montana fraud complaint includes throughout its 25 pages. Both of these graphics specifically map out HIIQ’s role in the scheme, without any mention whatsoever of the “two dozen” other players emphasized by HIIQ. Here are the ONLY TWO GRAPHICS from the Montana fraud complaint, both of which focus ONLY on HIIQ.

Delay, downplay, dismiss, deny. *** 5 – NEWLY EMERGING DATA POINTS: LIABILITY OF $100+ MILLION As various settlements from involved parties start to dribble out, we can begin to find data points to help us either confirm or contradict the disclosures from HIIQ. For example, from recent for other insurers named in the investigations, it was specific term of the Consent Order was that it was “ Unified ceasing to sell through HII”. From the Kansas with Unified Life Insurance: In a recent article on Value Investors Club, the author had stated that HIIQ has also ceased doing business with HCC Life Insurance.

He seemed to think that this was a good thing. But it now strikes me that this termination was more likely result of the being headed by the State of Indiana naming HCC for its involvement with HIIQ. This is really, really bad. And then it gets even worse. Multiple new data points relating to multiple states have recently emerged (including using HIIQ’s own disclosure). These now indicate that legal liability could be in excess of $100 million (and potentially much more).

In the, HIIQ noted that a penalty of $100,000 to $315,000 was “ probable” in the state of Montana. Such a low penalty caused the VIC author above to be optimistic that total penalties would only be around $1 million. Here is the from HIIQ: But in the filed by the Commissioner of Securities and Insurance (“CSI”), we can see that during the investigation period, HII is only said to have brought in. In other words, in its own estimation, it is “probable” that HIIQ will be forced to pay in the area of 20-60% of its revenues that were generated in Montana. Based on the past disclosure patterns from HIIQ, I believe I have a right to be suspicious that the estimate provided by HIIQ is still too low. This suspicion is entirely borne out by looking at the next settlement (which HIIQ is obviously well aware of). In the, HIIQ made reference to a recent settlement by a carrier for “ the same set of allegations” by the Massachusetts Attorney General (“MAG”).

HIIQ did not name the party by name and it stated that it was too early to predict any loss as it might apply to HIIQ. In fact, HIIQ suggested that there may not be any loss at all!! Delay, downplay, dismiss, deny. Actually, a quick legal search reveals that the party who settled was, which has been named alongside HIIQ in fraud complaints in other states. In fact, as part of Unified’s (“KID”), an explicit term of the consent agreement was that it was “ contingent upon Unified ceasing to sell through HII”. Once we know this information, we can see from with the MAG that it actually paid more than 100% of all revenues it generated in the state of Massachusetts.

This settlement of nearly identical charges included Unified directly reimbursing residents for 70% of all premiums paid plus 5% interest per annum!! From with the Massachusetts AG: Over the various time periods in question, HIIQ has generated over $300 million in total revenues. Feel free to make your own calculation on how to apportion these revenues across the 42 states that are currently investigating HIIQ and according to what portion of the revenues are applicable to the various investigations. What you will find is that even by stretching one’s optimism and creativity, it is very difficult to come up with a liability that is less than $100 million, even using very conservative estimates. As of Q2, HIIQ had just. I expect that HIIQ will need to conduct a large equity offering in order to meet these liabilities.

Even with its lofty current market cap of $500 million, this would present a meaningful challenge. At much lower market caps (such as the $200 million where HIIQ was just a few months ago) an adequate equity offering becomes almost impossible. But clearly HIIQ has the full support of Craig Hallum who continues to enthusiastically recommend the stock despite the obvious problems. *** 6 – THE SCATHING REJECTION FROM FLORIDA’S INSURANCE REGULATOR Just recently, in June of 2017, HIIQ was rejected by the over its application for a license to conduct business as a 3 rd party administrator in Florida. HIIQ then, also in June of 2017. Below is a screenshot showing how HIIQ chose to disclose this event to investors in the. In short, we are supposed to believe from the disclosure that it is just “no big deal”.

Apparently, after the notification of fraud investigations by 42 states claiming unlicensed selling, HIIQ now tells us that it is taking a “ prudent” approach and seeking a license in Florida. HIIQ states that it was only rejected because “the company had not yet provided all information required”. HIIQ notes that the denial is under appeal, set to be finalized in October. In fact, maybe the Florida OIR won’t even require a license at all!! With such muted and understated disclosure, it is no surprise that seemingly no one has even noticed this event.

Delay, downplay, dismiss, deny. But actually, the from the Florida OIR paints a dramatically different picture. From the: The references above to “material errors and omissions” refers to something bad. In fact, it is really, REALLY bad. On its application to act as a 3 rd party administrator, Florida asks the applicants if they have been a party to any civil actions over the past 10 years involving dishonesty, breach of trust, etc. The HIIQ insiders repeatedly answered “ no” to those questions.

But then an independent background check by the Florida regulator uncovered multiple such undisclosed legal actions against multiple HIIQ insiders. This includes both the CFO of HIIQ ( Michael Hershberger) as well as its founder ( Michael Kosloske). Even when pushed by the regulator, HIIQ refused to supply information over these undisclosed legal actions. Note that together, Mr. Hershberger and Mr. Kosloske have sold over $40 million in HIIQ stock over the past few months. Again from the: As per the above rejection letter from the Florida regulator, even when confronted with the undisclosed legal actions against multiple insiders, HIIQ refused to respond or provide the information required.

*** 7 – IMPLICATIONS OF REJECTION IN FLORIDA (ACTUAL VS. DISCLOSED) As we can see in that above, HIIQ has applied, re-applied, and then filed extended appeals at least 4 times over the course of 2016 and 2017 in order to obtain this license. HIIQ has also hired an expensive law firm in order to try to boost its cause.

Yet as the rejection date is now just weeks away, HIIQ has attempted to change its story, suggesting that maybe it just doesn’t need this license at all. By reading the above rejection letter in full, you will almost certainly come to the conclusion that there is effectively a zero percent chance of HIIQ getting this license in Florida. ( Separately, for the sake of completeness, I have sent a copy of this article to the listed email address of the Florida regulator at ). As we saw above, of the Florida rejection was so muted and understated in the 10Q that most investors probably never even saw it. Those that did would have understandably come to the conclusion that it was just no big deal. Delay, downplay, dismiss, deny.

But the private communications between HIIQ and the Florida regulator were not disclosed to investors. Those statements, IN HIIQ’s OWN WORDS, paint a picture which is absolutely catastrophic. Below is a screenshot showing (filed by their law firm) describing the dire consequences that HIIQ faces if it is rejected by Florida. As shown, following its rejection for licensure as a 3 rd party administrator in Florida, HIIQ / HPIH wrote a dated June 16, 2017. In that letter, HIIQ warned that a rejection in Florida would comprise a “ reporting event”, obligating HIIQ to inform the other states in which it does business. In HIIQ’s own words, this would then trigger a “ domino effect” which could result in its losing licenses in the other states where it does business. In other words, according to HIIQ itself, the consequences of a regulatory rejection in Florida will be catastrophic.

(Note that in HIIQ’s SEC filings, the name of HIIQ and its VIE “HPIH” (“ ”) are used interchangeably.) In HIIQ’s own words: To say that the interests of HPIH as an entity would be substantially affected is a radical understatement. Clearly all of this is extremely material information that investors should have been made aware of. But rather than disclose this information to investors, management has dumped over $50 million in stock this year, including just last week. *** 8 – RESASSUING INVESTORS WHILE AGGRESSIVELY DUMPING SHARES By now you should start to see what I mean by delay, downplay, dismiss, deny.

Just last week, HIIQ conducted an impromptu conference call to investors, arranged by Craig Hallum. Over the prior two trading days, the stock had dropped from $37 to below $30. But because of this investor call, the stock price quickly rebounded.

As shown earlier in this article, almost immediately after the investor call boosted the stock last week, insiders began quickly disclosing more sales, amounting to $1.5 million across just two days. Sellers included the CFO, the CTO and the CEO of HIIQs Healthpocket subsidiary. Below is a table showing the insider sales that have occurred just during 2017. A full list of can be found on Edgar. During 2017 alone, insiders have raked in $50 million from selling stock.

Earlier this year, the entire company a valued at just $200 million. In November of 2016, the entire company was worth just $70 million. *** 9 – THOUSANDS OF PREVIOUS WARNINGS ABOUT FRAUD AT HIIQ Realistically, no one needed any legal databases or Bloomberg to figure out what was going on with HIIQ. Here is a great hint for those of you looking for compelling short ideas. Google the name of a company along with the word “fraud”. Any time you get more than 40,000 immediate hits, you likely have a very safe short.

Feel free to try this test with HIIQ before proceeding. Keep in mind that when parties are accused fraud, they very seldom raise their hand and admit it. The most common response is to put forth repeated denials for as long as possible. Even before we look at the explicit fraud investigations by 42 different state governments, we can see by individual consumers from all across the country. Regardless of location, consumers across the US repeatedly use words like “”, “” and “”. Based on this overwhelming consensus from consumers, HIIQ has actually managed to obtain the ultra-rare “ F rating” from the better business bureau. On the recent investor call, Craig Hallum posed a layup question to HIIQ management, effectively stating, “tell us how bogus and erroneous the BBB complaints are”.

HIIQ responded by attempted to convince investors that the BBB is a corrupt entity which has falsely listed more than 80% of the complaints on its site. HIIQ also tried to state that the huge volume of online fraud complaints are simply the result of the fact that HIIQ does a high volume of business, such that a large number of complaints should also be expected. Here are the links so that you can check their claims for yourself.

From the on HIIQ: At just this one site alone, HIIQ has received 651 complaints. Out of the 93 total customer reviews, 90 are negative. This is quite obviously not simply a question of “high volume”. Yet even aside from the “corrupt” BBB site, every other site I could find also contains very similar fraud complaints from different consumers in different states across the country. The reviews are again overwhelmingly negative, regardless of which site is reporting. This includes: Here is a recent screenshot of multiple consecutive reviews from qn entirely different site called.

Next, here is the rating page and customer review profile for, which is also separate from the BBB. Again HIIQ receives the ultra-rare “F rating” along with across-the-board ratings of 1 star out of 5 (the lowest rating possible). Before proceeding further, take a few moments to click on the links above and judge for yourself. When it comes to HIIQ, the caustic consensus among consumers from all across the country appears to be entirely similar regardless of their location. *** 10 – MY PAST ARTICLES ON “CRAIG HALLUM SPECIALS” We are currently living through one of the biggest bull markets in history. Stocks of all shapes and sizes continue to surge higher, even on bad news.

Yet somehow I have been able to dozens of stocks which then quickly imploded by 80-100%. SEC investigations, fraud suits and de-listings followed soon after. One of my better sources of compelling short ideas (impending implosions) has been stocks which are being aggressively recommended by Craig Hallum despite the presence of very obvious problems. Each of the stocks below soared by 200-800% following aggressive and repeated recommendations by Craig Hallum. In each case, the underlying business problems were not only terminal, but they should have been entirely transparent.

Not surprisingly, these companies often needed money and Hallum ended up making millions of dollars in investment banking fees across these companies. For precisely all five of the Hallum trades below, they quickly imploded by at least 30% as soon as I exposed them.

They then went on to implode by 80-100%, just as I had predicted. The repeated theme was that even as the share prices soared ever higher, Hallum would just ratchet up the share price target again and again. After insiders or the companies sold shares, the share price then began its inevitable implosion. For example, Hallum’s escalating series of buy recommendations helped to take fraudulent Unipixel () from $5.00 to over $40. Hallum’s final target before the implosion had been raised to $58.00.

After I the fraudulentcompany, the stock ended up getting de-listed and now trades for just pennies. But not before Hallum made millions by helping Unipixel sell shares to investors. At the time when I (), Hallum’s repeated target hikes had seen the stock go from $2.00 to over $8.00. Hallum’s final target was $10.00 before Neonode imploded to $1.00 when Hallum’s predicted business developments failed to materialize. I wrote Neonode when the stock was at $7.00. As I highlighted in my article, prior to the implosion Neonode conducted a huge secondary offering in which nearly all proceeds went to selling insiders. When I Erickson Air Crane (formerly EAC), Hallum’s support had seen the stock quadruple to as high as $28.00.

EAC was visibly defunct and was being stripped by insiders. On the day of my article, the stock plunged by more than 30%. It quickly went on to implode to zero once it filed for bankruptcy. But not before various insiders unloaded at very beneficial prices. Plug Power was a very obvious promotion at $8.00.

Craig Hallum was again a strong supporter. The company was also in dire need of cash.

Following my article, the stock plunged to $1.00, but not before it had already raised $22.4 million from investors. TearLab () was another defunct business in dire need of cash which was being aggressively and repeatedly recommended by Craig Hallum. With the benefit of Hallum’s support, TearLab’s share price eventually reached $18.00. When I last TearLab, the stock was still at a pre-split price of $13.00. Since that time, the stock has fallen by 99.9% as its nonsensical business predictably failed to materialize.

Even after a large reverse split, the stock sits at just $1.00. But as always, TearLab was able to raise large sums of cash from equity sales before imploding. Please note: There is a very good reason why I have taken the trouble to include these links to my precedent experiences with “Craig Hallum specials”. Please take just a few minutes to read my analysis of these situations, which predicted their obvious impending implosions.

*** 11 – CONCLUSION I will sum up my thesis on HIIQ as follows: Delay, downplay, dismiss, deny, then dump millions of stock. As soon as this latest fluff trade falls into the single digits, you should expect to hear me publicly say “I told you so”.

• Quite suddenly industry insiders, analysts and media are recasting beleaguered “car rental” plays into lucrative “fleet management” plays, CRUCIAL to the futures of Uber/Lyft. • Icahn owns 35% of HTZ and is major Lyft investor. Icahn paying huge premiums to acquire additional targets across rental, ride share, service and parts. “Vehicles As A Service”.

• Short interest at HTZ just hit 61.9% of float. Short interest now EXCEEDS effective float by millions of shares. Not enough shares for shorts to readily cover. • As we saw with RH and WTW, shares of highly levered and heavily shorted stocks can quickly triple when even a very mediocre improvement changes the bear thesis. • With Herbalife, Icahn has shown that he iswilling and able to play and benefit from a short squeeze.

Icahn is now showing a paper profit onHerbalife of $500 million. Note: This article is the opinion of the author. The author is long HTZ. Recent developments On Tuesday, Hertz Inc () released Q2 results. As expected, the numbers were grim as ride hailing services continue to steal customers and revenues from traditional car rental companies. On the conference call, newly installed CEO Kathryn Marinello was making an obvious effort to “under promise, then over deliver”, in sharp contrast to multiple years of unfulfilled hype from her predecessors.

Here is what I suggest. First, read my analysis below.

Then go back and re-listen to the Q2 conference call, keeping an ear open for a number of very subtle (and under hyped) clues. Most of these were not even mentioned until the Q&A at the very end: • fleet management, fleet management, fleet management • huge surge in rentals to ride hailing drivers • autonomous vehicles • artificial intelligence • “telematics and car sharing technology” • large increases in ownership by 5% holders Also on Tuesday, that it would be terminating its car leasing program which was providing cars to Uber drivers with poor credit. The announcement highlights the need for “transport tech” leaders (including ride hailing and autonomous tech) to focus on what they are good at (i.e. The technology, not the vehicle management).

It’s not just that Uber was losing tons of money on this program. The real crisis was the Uber actually had no idea how much money they were actually losing. Uber was originally estimating that losses were running about $500 per car. Instead, the real number was roughly $9,000 per car! This is why Uber, Lyft, and Apple are already scaling up their programs to use Hertz vehicles and let Hertz handle the fleet management. Investment summary Apple, Google, Uber and Lyft have been pouring billions into their quest for ride hailing and autonomous vehicles.

Uber alone is on track to just in 2017 alone. Multi billion dollar losses are just the price of admission into this burgeoning market. Yet none of these players has any appetite to undertake the ownership, management, repair and logistics of fleet management. As these giants jockey for position in this transportation gold rush, Carl Icahn is aggressively pursuing the strategy of “selling shovels to the gold miners”. In various public statements, Icahn has made it very clear that there is a new paradigm shift in how people are getting from one place to another. Icahn is clearly NOT betting that the current car rental model is going to rebound in its current form. Instead, Icahn is building a nationwide “Vehicles as a Service” (“VaaS”) platform with Hertz () at its core.

The purpose is to provide fleets and fleet management to the new transportation providers in ride hailing and autonomous vehicles. Even as Hertz’s share price was plunging to new lows, Icahn more than buying 16 million more shares at an average of $23.78 in November. Icahn now owns 35% of Hertz. Over the past 3 years, Icahn has been spending billions, paying huge premiums to snap up numerous other companies from all parts of the fleet management spectrum, including: car rental (fleet management), ride hailing, auto parts and auto servicing. The headlines over the past 3 years illustrate Icahn’s “Vehicles as a Service” strategy centered around Hertz.

Date Sector Title Aug 20, 2014 Fleet mgmt Feb 10, 2015 Auto parts May 15, 2015 Ride share May 18, 2015 Multiple Oct 8, 2015 Ride share Dec 30, 2015 Auto parts Jan 25, 2016 Autonomous Sep 12, 2016 Various Nov 8, 2016 Fleet mgmt. Jan 23, 2017 Auto parts June 2, 2017 Service Jun 4, 2017 Service Jun 27, 2017 Autonomous Ultimately, Icahn’s VaaS strategy means that whichever emerging technology wins out in the next few years, Ichan (and Hertz) will be poised to be the most comprehensive and integrated provider of fleets and fleet management. So rather than being defeated by ride hailing apps such as Uber and Lyft, Icahn is positioning Hertz to be the key service provider to BENEFIT from the rise of Uber and Lyft.

In just the past two weeks we have started seeing industry journals, sell side reports and mainstream media articles which are doing a 180 degree pivot on the outlook for car rental (now known as “fleet management”) providers. Details of these reports and articles are included below.

This new (and more forward looking) thesis is a radical reversal from the draconian extinction thesis which has led Wall Street to place massive short bets against Hertz. But the extended negative sentiment has already pushed Hertz’s share price down by 90% in 3 years. The most recent “Sell” rating (from Barclays) sent Hertz tumbling by 30% in two days on massive volume. Short interest currently sits at 61.9%. But in fact it is actually much worse than this. Beyond the stated short interest on Bloomberg, the true effective float has shrunk to just 22.3 million shares vs. A current 33.4 million shares short.

There are simply not enough shares to allow shorts to readily cover. This math and its components are illustrated below. So how is the bear thesis suddenly changing? The severe bear thesis has two components, both of which are quite obvious. First, it is assumed that ride hailing companies (Uber/Lyft) will simply put the rental companies out of business by stealing passengers and revenues. Second, it is assumed that rental companies will be severely impacted by a glutted used car market when they attempt to sell their car inventory.

This has been a very visible phenomenon over each of the past few quarters (including the just announced Q2). But now Hertz is gradually being transformed. Rather than being a competitor to Uber and Lyft, Hertz will be a SUPPLIER to Uber and Lyft and will benefit along with their rising dominance. (If you re-listen to the Q2 conference call, this should become apparent.) Passengers will still be using Uber and Lyft to book rides which are fast, flexible and convenient. But they will be increasingly riding in a Hertz car.

Following his initial investment in Hertz, Icahn invested $100 million in Lyft. Shortly thereafter, Lyft began a program where Lyft now pays up to 90% of the cost for its drivers to rent cars from Hertz, rather than driving their own cars.

This allows drivers flexible use of a vehicle whenever they want at almost no cost and with zero responsibility for depreciation or maintenance as long as their rider targets are met. Shortly thereafter, Hertz began a different program to rent cars to Uber drivers as well. Now that Uber has terminated its own leasing program, it will need to figure out a quick and easy substitute (such as Hertz). When you re-listen to the Q2 conference call, you will hear that there has been a very steep increase in ride hailing rentals, up from nearly nothing a year ago.

Virtually no attention was given to this development on the call. Furthermore, as Apple, Google, Uber and Lyft seek to eventually eliminate drivers completely by using autonomous vehicles, their need for fleet management becomes even more critical (because there will be no more drivers to supply their own cars). Autonomous vehicles are still a few years away. But even as these programs develop in the test phase, they will need fleets of thousands of vehicles across the country. For Hertz, this new “fleet management” paradigm destroys both legs of the current short thesis.

Here is why: By providing the cars to Uber and Lyft, Hertz will increasingly be able to claw back a substantial portion of the revenues which would otherwise be lostas passengers shift towards Uber/Lyft rather than renting their own cars. Yes, these revenues are lower margin that corporate customers. But they allow Hertz to get marginal revenue from cars which would otherwise be sitting idle. Second, it also means that Hertz can greatly extend the useable life of its car inventory rather than being forced to dump its inventory at distressed prices into a glutted used car market. “Car rental” customers typically expect a car that is brand new or perhaps one to two years old.

But both Uber and Lyft allow their drivers to use cars in good condition which are more than 10 years old. Hertz is already in the late stages of “right sizing” its fleet.

Once this is done, the pain from inventory sales should get significant relief going forward. And as we will see, the Hertz programs with Lyft and Uber are just one element of Icahn’s much wider assembly of fleet management via his VaaS acquisitions. With Hertz trading down by more than 90% in 3 years, Ichan is now conceivably in a position to acquire the remainder of Hertz outright. The remaining 65% of Hertz’s equity is now valued at just $700 million. Alternatively, each of Apple, Google, Uber and Lyft are now so enormous that they could easily take a $300+ million stake in Hertz just to secure their future access to the fleet management. Such an investment would be tiny for any of them. In the past, Icahn has repeatedly taken large stakes in out-of-favor companies which were highly levered and heavily shorted.

When his investment reduces the outstanding float of the heavily shorted stock, the supply and demand imbalance causes the shares to rise almost automatically. As Icahn repeatedly increased his stakes in embattled (and heavily shorted) Herbalife (), that stock rose by 70-100% from the time of his initial investment.

As with Herbalife, Icahn started small and then made a large increase in his stake. Also like Herbalife, Icahn obtained substantial influence over Hertz via multiple board seats. Hertz is highly levered. Even just a mediocre re-rate of its business prospects (just a slight boost to enterprise value) will result in a massive spike in the equity value. The high short interest will then further turbo charge that rise. But, in fact, judging by the significant shift among sell side and mainstream media sources, we could be due for a re-rate that is much larger than just “mediocre”.

During 1H 2017, shares of Restoration Hardware and Weight Watchers () each tripled and quadrupled despite very “mediocre” improvements in their business outlooks and results. The reason for the meteoric share price spikes was that both companies were highly levered and heavily shorted. Again, even just a very mediocre re-rate of their business prospects caused their share prices to triple and quadruple. Given the significant shift in the business prospects for Hertz, seeing the share price triple or quadruple should come as no surprise in the near future. This is why Icahn was more than happy to double down at $23.

THE BEAR THESIS ON HERTZ HAS REACHED ITS NADIR Shares of Hertz are now down by 90% in three years. The entire market cap of Hertz is now down to just $1.2 billion. Icahn already owns 35%. On July 31, Barclays put out an extremely bearish sell note on Hertz. But in reality, all the Barclays note did was simply amplify the bear thesis that had already been widely disseminated in the market for the past year. Barclays predicted that Hertz’s stock was due to fall by a further 50% from its then level of just under $18.

In just two days, Hertz stock fell by 30% on 40 million shares of volume. Short interest now stands at a staggering 62.0% of float.

Here are the short interest data: *** 2. BUT THE HERTZ INVESTMENT THESIS HAS NOW CHANGED But suddenly, in just the past week, other sell side analysts began waking up to a new paradigm for the former “car rental” companies. These “rental companies” are now being re-cast as “fleet management” plays which are actually CRUCIALto the future ambitions of ride hailing (Uber/Lyft) and autonomous vehicles (Apple/Google). Hertz share price has been battered due to poor financial performance and negative sentiment towards the future. But this share price outlook could change sharply. As we have already seen, private companies like Uber and Lyft are being awarded PREMIUM valuations despite continued large financial losses. The only thing that matters is securing market dominance in this transportation gold rush.

Once investors realize Hertz’s emerging positioning in this new market, its distressed valuation could easily flip to a premium valuation. The only thing that is really necessary is just a change of popular sentiment. Following the bullish report by JP Morgan last week, mainstream media outletsare now jumping on the bandwagon to hype the prospects of this new distributed transportation paradigm. A few weeks ago, this sort of positive attention on “car rental” companies was unthinkable. But now such attention is becoming popular. Aug 4 th – Motley Fool – Aug 6 th – – Aug 7 th – Seeking Alpha – Aug 9 th – InvestorPlace – As Hertz transforms itself into a “fleet management” company, it will let other players (such as Uber, Lyft, Apple, Google) interact with the end passenger. Regardless who is booking the ride for the passenger, the passenger will still end up in a car that is ultimately supplied by Hertz.

The transition into autonomous vehicles will only accelerate this trend. Not only will Hertz get to claw back revenues which would otherwise be lost, but it can also make drastically longer use of its car inventory. Since Uber and Lyft allow the use of much older cars, Hertz can greatly extend the life of its car inventory rather than repeatedly dumping 1-2 year old cars into a distressed used car market. Vary by state, but range from as old as 2002-2007.

On August 4 th, JP Morgan revealed the first hint of the new investment paradigm from a sell side analyst. Despite his neutral rating on Hertz, the stock jumped 10% that day. Analyst Samik Chatterjee pointed out that incumbent car rental players would have a distinct advantage over potential new entrants into the fleet management business and that the overlap between rental and ride shares is set to expand: But actually it was a few days earlier, on August 2 nd, that the lead story was titled: “ Own the Fleet, Own the Future”.

This article noted that: In these conversations surrounding new transportation paradigms, fleets have been off the public radar until recently. What those in fleet know, the rest of the world is finally understanding: If you own the fleet, you own the future. First, a future with fewer personally-owned vehicles means someone will have to own and manage this new ecosystem. Fleets are playing a part in shared-use scenarios, which were at one time only found in traditional consumer carsharing applications. Using telematics and carsharing technology, these new systems are forming to serve residential and business complexes, downtown offices, universities, municipalities, and whatever type of community needs personal mobility for their members and workers. JP Morgan notes that the gap between rental cars, ride share and autonomous vehicles is now shrinking, “making them one and the same”. Hertz already has in place programs to provide rental cars to both Uber and Lyft drivers.

In fact, Icahn’s Lyft is now paying Hertz up to 90% of the cost of a rental for Lyft drivers when they meet minimum ride requirements. What this means is that a Lyft driver can use a Hertz car (rather than his own) at almost no cost.

He gets unlimited miles, the insurance is included and he bears no cost of depreciation or maintenance. Here is the current offer being made to Lyft drivers. Keep in mind that Lyft is the one paying the fully agreed price to Hertz.

Again, remember, Hertz is receiving the fully agreed price for the rentals above. The subsidy is being provided to the driver from Lyft. HERTZ IS NOW THE CENTER HUB OF ICAHN’S “VEHICLES AS A SERVICE” PLATFORM Ride hailing platforms are undeniably faster, easier, cheaper, more convenient and more flexible than renting a car. So until now, Icahn’s decision to double down on an imploding car rental chain was puzzling. After all, the consensus view on heavily shorted Hertz was that “car rental” is quickly going the way of the Yellow Pages and the printed newspaper. Ultimate failure was certainly viewed as a question of “when” not a question “if”.

So why is Icahn so content with his current paper loss of $1 billion on Hertz? The answer is that $1 billion is actually a tiny price to pay for a controlling position in the new transportation paradigm.

In just 2017 alone, Uber is on track to lose a staggering $3 billion. Eventual profitability for Uber is nowhere in sight. There are now many players vying for the future of how to transport people around.

Giants like Apple, Google, Uber and Lyft have each been competing to throw BILLIONS of dollars into their transportation efforts with absolutely no need to make near term profits. Regardless of who eventually wins this transportation gold rush, Carl Icahn will be “selling shovels” to them all, winners and losers alike.

Once you review the timeline of Icahn’s involvement in this space, this strategy becomes entirely obvious. Icahn began investing in Hertz in 2014, when the share price was still over $100. In 3Q 2016, a steep earnings miss sent Hertz’s share price into a tailspin, plunging by 35% from its then level of $35.

Icahn immediately more shares at an average of $23.78, more than doubling his total stake to 29.3 million shares. Icahn is now the largest shareholder of Hertz with a 35% stake. Both of Hertz’s bonds and shares have been under tremendous pressure for the past 3 years. Yet Icahn chose to double his stake in the EQUITY, while NOTbuying the BONDS.

If Icahn had any concerns about bankruptcy he would quite obviously be moving up the cap structure away from the common stock and into the bonds. A search of bond holders on Bloomberg shows that Icahn is not a bond holder. In 2015 (after Icahn had already begun investing in Hertz), Icahn quickly invested $100 million into the ride hailing service Lyft. Icahn chose to take down fully 2/3 of that $150 million financing round in Lyft.

The fact that Icahn chose to invest in privately held Lyft was quite notable. The observed of Icahn’s investment in Lyft that: More surprising is Mr. Icahn’s involvementMr. Icahn rarely invests in closely held start-ups Icahn demonstrated that he understands the new ride share dynamic completely. In an interview with the, Icahn specifically said of his Lyft investment that: What I’m saying is there is a secular change going on with the way people are getting around, and with urbanization, it means more people living in urban areas.

So as Icahn continues to ramp up his stake in Hertz, he is certainly NOT doing so because he is oblivious to the emerging dominance of ride hailing platforms. In fact, Icahn is investing in Hertz as a way to benefit from the rise of ride hailing platforms such as Uber and Lyft! Shortly after Icahn invested in Lyft, Hertz and Lyft began teaming up, creating the above mentioned Express Drive program where Lyft pays to Hertz the cost for drivers to rent cars from Hertz rather than use their own cars. Hertz later began a program for renting to Uber drivers. Just two months ago ( June 2017), Icahn acquired car-service chain Precision Auto.

That deal added 250 locations to Icahn’s existing network of 1,000 car servicing shops. Noted that: Carl Icahn is raising his bet that Americans won’t fix their own cars, and that eventually many might not even own one. And then just after that, Icahn announced that he was acquiring of auto repair shops across the country.

Jun 4, 2017 – NY Post – In fact, over the past 3 years, Icahn has been paying top dollar across the board to assemble together an interlocking network of automotive companies which will provide rental, ride share, parts, servicing and fleet management. Pep Boys – Icahn acquired up 130% for over $1 billion In early 2015, auto parts chain Pep Boys was trading at $8.00. The company was highly leveraged, heavily shorted and. (It was quite similar in these respects to Hertz in 2017). In December 2015, Icahn that he had acquired a 12% stake in Pep Boys. Just days later he made a bid for the at $15.50 per share (up nearly 100%).

A bidding war ensued with Icahn bidding against Japan tire company Bridgestone. Icahn was more than willing to outbid Bridgestone at $18.50 per share, valuing the company at over $1 billion (up 130% from just a few months earlier). On a standalone basis, most outside observers agreed (at the time) that Icahn for Pep Boys. Here was the run-up in the stock leading into the eventual buyout by Icahn. It took a few months, but finally the media took a completely different view of Icahn’s purchase of Pep Boys. MASSIVE LEVERAGE AND COLOSSAL SHORT INTEREST WILL PROPEL HERTZ STOCK HIGHER AS THESIS SUDDENLY TURNS BULLISH In 1H 2017, we saw shares of Restoration Hardware and Weight Watchers triple and quadruple from their lows to their highs. Both stocks were highly levered, heavily shorted and faced very visible challenges in terms of business prospects and valuation.

In other words, in January 2017, each of Restoration Hardware and Weight Watchers was very similar to where Hertz is today. For each of Restoration Hardware and Weight Watchers, all it took was a very MEDIOCRE re-rating of their business prospects to see them triple and quadruple in just a few months. The meteoric rises of Restoration Hardware and Weight Watchers took everyone (especially short sellers) by complete surprise. The reason for these wildly disproportionate share price spikes lies in the leverage and the short interest.

High leverage cuts both ways. It amplifies share price moves on the upside as well as the downside. When a mediocre re-rating of the business causes the enterprise value to rise by even just a moderate amount, the high leverage means that the equity value vaults higher by multiples.

That is why we call it “leverage”. Based on the information above, Hertz is due for a truly transformational re-rating of its business prospects. While it was recently dismissed as a dinosaur business on its way to extinction, it is now being viewed as an absolutely critical component of the future of transportation. This certainly merits a more-than-mediocre rise in enterprise value. Hertz has a total of $16.8 billion in debt.

But of this, $11.2 billion is debt secured by vehicles. The debt that really matters to us is the $5.6 billion of non-vehicle debt.

As of June 30 th, 2017 (): Against this, Hertz’s current market cap is just $1.2 billion, giving Hertz an enterprise value of $6.1 billion What this means is that as investors re-rate Hertz business prospects, a mere 25% rise in enterprise value translates to a 127% rise in the share price to around $32. If investors decide that the new paradigm makes the business (enterprise value) worth double what the dinosaur was worth, then the share price should go up by 510% to $87. Clearly this is why Icahn is completely unperturbed showing a tiny little paper loss of just $1 billion. Against these tremendous upside prospects, it is now the case that there are more shares short than there are available shares to cover in the effective float.

As the share price has fallen lower and lower, more and more bears have piled on at the bottom. The result is that short interest now stands at 33 million shares, which is 62.0% of the stated float (according to Bloomberg). But it actually gets worse than that. The already staggering 62.0% is the number reported by Bloomberg. But in reality, this number ignores the fact that several funds have initiated, maintained or increased their 5%+ positions and are unlikely to sell in the near term. As a result, these shares are unavailable when shorts are looking for shares to cover. Furthermore, index funds which own around 18% of Hertz are also unable to sell simply because the share price spikes.

They must continue to hold in proportion to their benchmark index weights, regardless of where the share price goes. As a result, the effective float at Hertz is around 22.3 million shares vs. The short interest which now sits at 33 million shares. There are simply not enough readily available shares for shorts to cover. Here is the math behind the effective float. (For a further discussion of the effective float, read my on infinity squeezes.) Icahn owns 35% of Hertz, which is already being factored in by Bloomberg. Key funds which each own 5% or more of Hertz include: • GAMCO.

Recently increased its stake by 765,100 shares to a total position of 6.6 million shares. • Par Capital. Just initiated a position of 5.9 million shares. Maintained a position of 4.4 million shares. In total, these 3 funds own 16.

8 million shares that are not being sold, reducing the effective float, making it more difficult for shorts to cover. Index funds include Vanguard, Blackrock Dimensional and multiple others.

In total, index funds own 14.7 million shares. Because they cannot readily sell, they further reduce the effective float, also making it more difficult to cover. Once we exclude the additional long term funds and index funds, there are only 22.3 million shares in the effective float which is well short of the 33.4 million shares which shorts need to cover. Here is the HDS screenshot from Bloomberg. ICAHN’S PLAY ON HERTZ VS. ICAHN’S PLAY ON HERBALIFE Icahn’s play on Hertz is nearly identical to the play that Icahn is making on Herbalife (), in which he is currently showing a profit of over half a billon dollars.

Following significant negative exposure, Herbalife’s short interest spiked, even as the share price briefly plunged below $30. After multiple purchases starting from around $40, Icahn then began seeking permission for larger and larger stakes. In July 2016, Herbalife agreed to allow Icahn to go up to 34.99%. And then in October 2016, Icahn received approval from the FTC to take his stake up to 50%. In February of 2017, as the float was getting tighter and the stock was rising higher, Herbalife announced that it had authorized a share buyback of up to $1.5 billion. As it applies to Hertz, it is very clear that Icahn is well aware of the short vs.

Effective float dynamic. And as we saw in Herbalife, he is more than happy to use it to his advantage. Hertz currently appears quite levered, which has been of concern to investors. But remember that most of that is “vehicle debt” which is secured by the vehicles.

Based on Icahn’s playbook with Herbalife, Icahn could conceivably buy more Hertz stock or use his meaningful presence on the board to encourage the company to authorize additional large share repurchase programs. Looking back to Hertz In June 2016, Hertz announced a new share buyback authorization of $395 million. And then in November 2016, Icahn acquired over 16 million shares of Hertz at an average price of $23.79 for a total cost of over $388 million.

This increased his total stake to over 29 million shares (i.e., 126% increase in his holdings). Summary • Dillard’s appears set up for “infinity squeeze” like VW in 2008, which sent stock up 5x. Einhorn was short VW in 2008, but is now largest outside holder of DDS. • Bloomberg shows short interest at 69.9% of float. But it’s worse. Index funds can’t sell.

Einhorn won’t. Short interest now over 100% of effective float. • Aggressive share buybacks (ever after Q1) further reducing float without being noticed. Extent of any further buybacks will be announced in 2 weeks. • Excluding Einhorn and index funds, as few as 4.38million shares in effective float vs. 9 million shares short. I expect further Q2 buybacks of 1-2 million shares.

• The math: shorts have now sold millions more shares than they can readily buy back from obvious sellers. Einhorn (or different 3rd party) could recall borrow and trigger massive squeeze immediately. This article is the opinion of the author. The author is long DDS. Note: In general I try to link to free data sources so that all readers can evaluate for themselves without data subscriptions.

But this article is very numbers-driven, so I have mostly used Bloomberg data. I have included screenshots to show the data where practicable.

Other links can be clicked on from various sources, including Edgar. In making my investment decision, I have done my own math and made my own decision. Do your own math and make your own decision. *** Key Statistics Company: Dillard’s Inc. () Market cap: $2 billion Debt: $820 million Cash flow: ≈ $400 million per year free cash flow Book value: $1.7 billion (at cost, decades old prices) Real estate: $3-4 billion (est. Current market value) Shares short: 9 million shares (69.9% of stated float) Free float: 12.88 million shares Effective float: ≈ 4 million shares (excl.

Key holders / index funds) Buyback: 3 million YTD. Plus 1-2 million more by Aug 10 th. This trade is about the potential for a massive short squeeze due to a mathematical imbalance. Shorts have sold millions more shares than are readily available for them to buy back. Someone (the last to cover) will be stuck paying an astronomical price. I am less focused on the fundamentals at Dillard’s.

But it is important to at least differentiate Dillard’s from the financially shaky players like Sears () or JC Penny (). The short thesis is simple. Online shopping from places like Amazon () is replacing “brick and mortar” shopping at places like Wal Mart ().

But unlike many of the other department stores, Dillard’s has strong free cash flow and little debt. Dillard’s is trading at just over book value. However, book value only values assets at historical cost, which is decades out of date. Market value of Dillard’s real estate has been estimated at $3-4 billion. Even with a generous haircut to those numbers, Dillard’s is still trading at a discount to its real estate value.

There is effectively zero visible bankruptcy risk for Dillard’s and significant incentive for the company to go private. Again, I am not really focused on the fundamentals at Dillard’s. This thesis is about the math that says there are millions more shares short than are in the effective float. In any event, the numbers above arguably make Dillard’s a better long pick than Macy’s (), Target () or Kohl’s (). But again, this is not a thesis about the fundamentals at Dillard’s. It is a mathematical trade based on the short interest exceeding the effective float. Below we will see how the short interest somehow became the highest in the retail space.

*** Investment thesis – set up for “Infinity Squeeze” For those in a rush, I briefly summarize my thesis here. In the section that follows, I include Bloomberg screenshots and additional links to SEC filings so that readers can do their own math. Dillard’s now appears perfectly set up for an “” which could be triggered at any time. The most famous example of an infinity squeeze was that of Volkswagen AG in 2008. When Porsche suddenly without prior notice, shares of VW quickly rose by a stunning 5x (more than 400%) within days, making it (briefly) the world’s most valuable company by market cap at €300 billion. Hedge funds suffered of as much as €30 billion that week, while Porsche reportedly made a.

Clearly size is not a limiting factor with infinity squeezes. (That’s why they are called infinity squeezes.) As we saw with the VW squeeze, the only thing that matters in an infinity squeeze is when shorts have sold more shares than they can readily buy back in the effective float. At Dillard’s, short interest stood at just 20% in January 2017. But then several things happened. During 1H 2017, shares sold short rose to 9 million shares. At the same time, accelerated share buybacks by Dillard’s simultaneously reduced the float to just 12.88 million shares.

As a result, Bloomberg now reports that short interest has suddenly risen to 69.9% of float. It seems that this “double whammy” of rising short against falling float had escaped the attention of short sellers who should have been paying attention. ( Note that many other financial sites have also missed the buybacks.

Their numbers for shares outstanding and float at Dillard’s are inaccurate and have not been updated since the 10K was filed. This is another reason why some investors are only now figuring out what has happened.) Oh but it gets much, MUCH worse than that. The third leg of this “triple whammy” is this: Of the 12.88 million share float, as much as 6 million shares are in the hands of (including Blackrock, Vanguard and others) who are typically unable to sell in meaningful size, even when the share price rises sharply. They must generally hold in proportion to their benchmark indices. As I will show below, the inability of index funds to sell their shares was a key contributor to that massive infinity squeeze of Volkswagen in 2008. A further 2.5 million shares are held by David Einhorn’s Greenlight Capital, amounting to 9.99% of the company.

As it so happens, Einhorn was on the painful side of that VW squeeze in 2008. So he can certainly appreciate the short vs.

Float dynamic that is suddenly unfolding at Dillard’s. (In other words, even if the stock spikes by more than 50-100%, don’t be surprised if Einhorn still isn’t selling.) With index funds largely unable to sell much of their up to 6 million shares and with Einhorn unlikely to sell his 2.5 million shares, the true “effective float” is really as low as 4.38 million shares of readily and likely available shares for shorts to cover their 9 million shares short.

That’s really, REALLY bad. But wait, there’s more.

In fact, to the extent that Einhorn has been lending out his shares, he could presumably recall those shares at will. This could force shorts to buy up to 2.5 million shares regardless of price – IMMEDIATELY. And just when shorts are forced to scramble to buy shares, there are simply not enough shares in the effective float to facilitate easy covering. Anyone who is long could simply hold out for astronomical prices and the shorts would be forced to pay. This is what happened with VW and was why Porsche made a €6 billion profit in a single week. Alternatively, the effective float at Dillard’s is now so tiny that any 3 rd party investor could swoop in, buy a block of stock and recall the underlying borrow.

Given how tiny the effective float has become, such a strategy would NOT require a huge outlay of capital. This is just what “Pharma Bro” Martin Shkreli did with KaloBios () in 2015, causing those shares to rise by 100x (yes, 10,000%) from their lows to a high of over $44. As a reminder, if a tiny 1% position rises by 100x then your entire fund goes to zero.

With both VW and KaloBios all it took was a single press release or Tweet from the 3 rd party investor to spark the infinity squeeze which soared by hundreds or thousands of percent within just days. As we will see below, prior to their gargantuan infinity squeezes, media sources reported that short interest was at less than 15% for both and.

By comparison, reported short interest at Dillard’s now stands at 69.9% according to Bloomberg. This shows how vulnerable Dillard’s share price is to such a massive squeeze. So it couldn’t possibly get any worse, right?! It is the ongoing share buybacks by Dillard’s that caused this precarious situation to develop without notice.

And with the stock hovering near 5 years lows during Q2, those buybacks have recently been accelerating. Dillard’s Q1 (ended April) results on May 11, 2017. In that press release, Dillard’s announced that it had repurchased 1.7 million shares. This would leave Dillard’s with 26.49 million Class A shares outstanding as of April 29 th.

But in the which was released 3 weeks later on June 6 th, the share count on the cover page was only 25.178 million dated as of May 27 th. This means that 1.3 million more shares were bought back in May (the first month of Q2, which will not be fully disclosed until August 10 th).

This 25.178 million share count number was updated on Bloomberg, but it seems that few people noticed the impact that this would have on the float, especially vs. The rising short interest. There was NOT a press release announcing the repurchase of the additional 1.3 million shares. So during just a 3 week period, investors who had been paying attention should have realized that the float had shrunk by 3 million shares. During this same few weeks, shares short rose by 3 million shares. This is how we quietly got to a staggering short interest of 69.9% apparently without many people noticing. In fact, Dillard’s has the cash and the approvals to have been conducting even more buybacks in June and July.

On August 10 th, (about 2 weeks from now) Dillard’s will release Q2 results and will reveal how many shares were bought back in June and July. As a reminder, Dillard’s generated over $400 million in free cash flow last year and has aggressively repurchased shares in each of the past 6 quarters. These buybacks have visibly become more aggressive as the share price has fallen. During Q2, the share price continued to hover near 5 year lows.

I expect that on or about August 10 th, we will see that Dillard’s repurchased 1-2 million additional shares in June and July. If this turns out to be this case, it would further reduce the effective float to as little as 2-3 million shares which would be likely and readily available for shorts to cover their 9 million share short position. Here’s the rub: The conceptual risk here is that Einhorn or any third party investor decides to recall stock borrow and force a squeeze when so few shares are readily available. Einhorn has been gradually acquiring over several years, but his stake is still just under 10%, meaning that he his not an affiliate. So simply deciding to stop lending shares should not be controversial in my view. Likewise, an outsider could end up triggering a squeeze even by acquiring less than 5% of outstanding shares. This would be far less aggressive that what Shkreli did with KaloBios in 2015.

Shkreli has come under tremendous scrutiny from regulators and the media for a variety of his past actions. But so far I have not found any mention of the KaloBios squeeze amongst his current regulatory problems. Either way, even in the absence of such a trigger, I expect shorts to rush to exit their positions in Dillard’s well before the new share count is revealed on or around August 10 th. At the same time, I cannot imagine why any longer term holders would be selling prior to August 10 th, when the extent of share repurchases is revealed.

*** The math – potential infinity squeeze at Dillard’s There are 9 million shares short at Dillard’s but there are only around 4 million shares which are likely and readily able to be bought back. Dillard’s Shares in the effective float Float: 12.88 million Stated float as per Bloomberg less: 6.0 million Shares held by index funds (cannot readily sell significantly) less: 2.5 million Shares held by Greenlight Capital (very unlikely to sell) Total: 4.38 million Effective float = shares readily and likely to be buyable (Potential for further float reduction of 1-2 million shares due to possible buy backs in June-July could leave as few as roughly 2-3 million shares in the “effective float”. Q2 results and buyback size to be released on or around August 10 th.) At Dillard’s there are 25 million shares outstanding. But 12.297 million shares are “stagnant” in the hands of various insiders (including Dillard family members) and Evercore (which manages the Dillard’s 401K plan). This leaves only 12.88 million in the public float, as per Bloomberg. Also as per Bloomberg, there are currently 9.0 million shares short in Dillard’s, which already amounts to 69.9% of this stated float.

Number of shares short is up from 3.6 million in January 2017. Below is the list of holders of Dillard’s stock from Bloomberg. As I see it, the obvious index funds include Blackrock and Vanguard. Dimensional also takes a hybrid index approach. Even funds such as BNY Mellon and State Street have funds that allocate via indexing. Collectively index funds own. A screenshot of the Bloomberg HDS table is also included below.

Note that as of the last reporting dates, 18 out of 20 of these holders INCREASED their positions in Dillard’s as shown on Bloomberg. But also note that because some of these holdings are reported as of March and some as of June, we there will be some overlap in the holdings across these periods. This will obviously change over time.

As you can see from the HDS table from Bloomberg, Einhorn’s Greenlight Capital increased its stake in Dillard’s by a net 623,675 shares in the past quarter. (Note that Greenlight did sell a mere 35,125 shares in June so as to keeps its stake at just under 10% of Dillard’s. When Dillard’s revealed in June that the share count had shrunk by 1.3 million shares in May, it resulted in Greenlight’s stake briefly exceeding 10%. Greenlight’s tiny sale occurred immediately after that disclosure and took their stake back down to 9.99%. Note that Einhorn’s stake did INCREASE by a net 623,675 shares in 1H 2017.) The reason I assume that index funds cannot for the most part sell meaningful amounts of stock at will is partly just common sense.

They are index funds. But also, we saw in the 2008 infinity squeeze of VW, it was the their shares that contributed to the height of that squeeze that saw the shares rise by 5x within just days. We know this because as the squeeze was in full effect, German officials quickly stepped in and conducted an of VW within the DAX index, allowing these index funds to sell.

From the on October 30 th, 2008: By Tuesday night, the establishment was fighting back. Germany’s premier stock index, the DAX, was changed to cut VW’s proportion in it. That allowed index funds to sell stock, adding to the supply of shares, and VW’s shares lost part of their gains. Greenlight’s average cost basis on Dillard’s is listed on Bloomberg at $78.47. And they have been increasing the position in recent periods. Knowing that, in combination with Einhorn’s experience in VW, I do not expect David Einhorn to be selling just to alleviate an obvious short squeeze (unless we see the share price at much, much higher levels). After allwhy would he?

So if we decide that index funds either can’t or won’t sell in meaningful size and that Einhorn is also unlikely to sell, there are really as few as 4.38 million shares readily available and likely to be sold for shorts to cover their 9 million shares short. Next let’s look at the share buybacks by Dillard’s which are rapidly shrinking the float. Dillard’s has been aggressively buying back stock for (at least) the past 6 quarters in a row. As shown, in the past 6 quarters, Dillard’s bought back shares as follows: Date (EoQ) Value repurchased Shares repurchased 1/30/2016 $117.5 million 1.6 million 4/30/2016 $58.4 million 0.7 million 7/30/2016 $54.1 million 0.9 million $53.1 million 0.9 million $80.6 million 1.3 million $91.1 million 1.7 million NOTICE how those buybacks have been getting more aggressive each quarter as the share price was falling. Also NOTICE that the share price during Q2 continued to hover near 5 year lows.

This is why I expect that another 1-2 million shares were repurchased in June-July. These ongoing buybacks (and the reductions in share count / float) were a major contributor to the short interest rising from 20% in January to 69.9% at present. Just from May through June, short interest rose from around 40% to 69.9%.

Just look at the steep trajectory of the short interest vs. Float in the chart below, which took off in January and then accelerated from May through June. When Dillard’s Q1 results (ended April), they also announced that the company had bought back 1. El Arte De Comunicarse Pdf Writer more. 7 million shares in that Q1. But many people failed to notice that by the time the was actually released in June (3 weeks later), that the share count had fallen by an ADDITIONAL 1.3 million shares, even AFTER Q1 had been fully reported. In other words, just in the month of May, Dillard’s accelerated its buyback, buying 1.3 million shares in a single month, reducing the Class A share count to just 25.178 million.

Realize that there was no paragraph in the 10Q explicitly spelling out further buybacks during May. It was just a change on the cover page to the number of shares outstanding. That change was quickly reflected on Bloomberg but it seems many people either missed the change or failed to appreciate its significance.

Here is a screenshot from the cover page of the released in June 2017. (Note: Dillard’s has 4.01 million shares of which gives Dillard family members voting control of the company. The Class B shares do not trade. The number of Class B shares outstanding and the ownership by the family members has remained constant going back to. The Class B shares have nothing to do with the tradeable float or short interest.) With the stock price hovering mostly near 5 year lows for much of June and July, I feel that it is safe to assume that across June and July, Dillard’s likely bought back an additional 1-2 million shares, further reducing the effective float. They certainly have the cash flow to do just that.

Further repurchases would also be consistent with their behavior over the past 6 consecutive quarters. Here is the annual free cash flow for Dillard’s over the past few years. Notice that for the year ended January 2017, Dillard’s generated over $400 million in free cash flow. Date (FY) Free Cash Flow 1/28/2012 $385.5 million $386.1 million $406.8 million $459.7 million $284.4 million $412.2 million And remember that Dillard’s ended the April Q1 with over. In fact, we can see that this pattern of aggressive share buybacks has been going on for years. Ten years ago, Dillard’s had roughly 60 million shares in the float.

That has since fallen by nearly 80% to 12.88 million. So given the chart above, choose which of the following scenarios would surprise you more: Scenario A.After more than 10 years of aggressively buying back billions of dollars worth of its own shares, Dillard’s finally acquired all shares and took the company private when the stock was near 5 year lows. Or Scenario B.

After more than 10 years of aggressively buying back billions of dollars worth of its own shares, Dillard’s suddenly stopped buying when the stock was near 5 year lows. You can decide for yourself. But while you’re thinking about it, also consider this. Whatever Dillard’s is theoretically “worth” as an entity, that value is increasing sharply on a per share basis as a result of those buy backs. Some investors may look at “free cash flow per share” others may want to look at “book value per share” to approximate the $3-4 billions of dollars in real estate that Dillard’s owns. Either way, on a per share basis, any per share number is increasing sharply due to the buybacks.

Obviously reported “book value” will be very out of date because it only reflects the cost at the time the real estate was acquired in past decades. The market value of the real estate should certainly be much higher than book value. But just to get an idea of the impact of the buybacks on book value per shares, here is the chart from Bloomberg. Anyone who is short Dillard’s need to factor this rising value per share into their target prices. Here is one that valued Dillard’s real estate at as much as $6 billion. I am not really trying to take a guess at that number. Instead, I am satisfied that even with a substantial haircut to that number, the current value of Dillard’s real estate ALONE is still well above Dillard’s market cap. (And that ignores the ≈$400 million in free cash flow.) *** What could actually spark an infinity squeeze at Dillard’s (like, as in RIGHT NOW)?

Just prior to the 2008 infinity squeeze on VW, at VW had been reported at just 12.9% of outstanding, which did not seem alarming. For Dillard’s, the reported short interest on Bloomberg was only 20% in January, but it has already risen to 69.9% as of now. That is absolutely alarming.

In the of 2008, the trigger was when Porsche AG suddenly without notice. Remember that of the 2008 infinity squeeze on Volkswagen. Shortly after the VW squeeze, Einhorn’s subsequent investor letter revealed some for those caught in such a squeeze on how they can live to fight another day rather than going down with the ship. Here is a which discusses how Greenlight handled the infinity squeeze on Volkswagen (“VOW”). I strongly suggest that anyone who is currently short Dillard’s read that quote from above. And then go back and read it again.

Focus on this part: The worst trade is the one you don’t want to make, but the one you have to make.we are unwilling to risk the entire portfolio on a single investment.Though VOW was not a large position on Friday, it became one by Tuesday. The now-tiny effective float means that even aside from Einhorn there is now a very real possibility that a different 3 rd party could swoop in and ignite a similar squeeze by simply buying a small chunk (less than 5%) of the stock and then recalling the borrow underneath it. Such a strategy would NOT require a huge outlay of capital. This is exactly what Martin Shkreli did in 2015 when he bought shares of KaloBios and recalled the borrow. Shares of KBIO quickly skyrocketed by 100x (yes, nearly 10,000%) from their lows. The table below shows the 100x rise in KaloBios’ share price following the of Shkreli’s purchase on November 18 th. Note carefully that the share price had been rising sharply in the days leading up to that announcement.

And that KaloBios’ share price quickly soared by 10,000% to a high of more than $44. LOOK at the dates. And then LOOK at what the prices did in percentage terms. When these squeezes happen, they are sparked immediately overnight and then continue squeezing for many days. This is what Einhorn meant about “unwilling to risk the entire portfolio on a single investment” and “not a large position on Friday, it became one by Tuesday”. As you can see above, the squeeze unfolded over multiple days as certain investors tried to “wait it out”, thinking that the stock would have to come back down once the “weak shorts” were flushed out. It turns out that the ones who covered early were actually the ones who made it out with the least damage from this 10,000% rise in just 7 days.

The infinity squeeze on KaloBios was made more memorable by retail trader Joe Campbell who started a GoFundMe account to seeking contributions after his $37,000 account lost nearly 400% of its value overnight, leaving him over $100,000 in debt to Etrade. Campbell had been short the stock at around $2.00 at the close on November 18 th, prior to the announcement on Shkreli’s purchase.

But Shkreli wasn’t content with the rise from $2.00 to the $20s. He wanted more. And any time we see a mathematical imbalance of shares short vs. Effective float, this goal becomes very easy to obtain.

On Thanksgiving day, Shkreli put out the following tweets, sending the stock as high as $45 (up another 73% in a day) when markets reopened on Friday. KaloBios’ stock had been at just 44 cents 10 days earlier. Notably, short interest at KaloBios just prior to the squeeze had been at less than 10%. Obviously this is far lower than the 69.9% we see reported at Dillard’s. Regardless of what anyone thinks about Dillard’s current share price, it is hard to deny the fact that the stock is now extremely vulnerable to a potential squeeze play by an outside investor, similar to what Shkreli did with KaloBios. So again, here is the math as I see it with Dillard’s: There are as few as 4.38 million shares which are readily able and likely to be sold by existing holders. But there are 9 million shares short which need to be bought.

This situation is already very bad, but it could get dramatically worse in just an instant in a single day if anyone chooses to recall borrow or acquire any meaningful new stake. I expect this aleady-bad situation to get much worse on August 10 th when we learn just how many shares Dillard’s bought back in June and July.

Again, I am expecting to see additional repurchases of up to 1-2 million shares, which would reduce the effective float to as low as roughly 2-3 million shares even as the number of shares short sits at 9 million which must be covered. Given the cash flow, the real estate and the aggressive buybacks at Dillard’s, a short bet on the stock was already not a particularly bright one in the first place. But given the rate at which the float is disappearing and the potential for an ignited infinity squeeze, staying short Dillard’s now is just plain lunacy.

Do your own math. Conduct your own analysis. Make your own decision. *** The shorts aren’t dumb – so how did we get here? Here is the way I see it. A major contributor to this infinity squeeze setup is just the fact that Dillard’s does not appear to be a “conviction short” for anyone. As far as I see, no one is shorting Dillard’s simply because of a view on Dillard’s.

Instead, there are many funds taking small positions of 50-100 bps in each of multiple department stores as part of a vey generic sector short on retail. As recently as January, the short interest in Dillard’s still sat below 20%. It wasn’t really that bad. Yes, the number of shares short at Dillard’s steadily increased.

But so did the number of shares short for most department stores. Hedge funds were just spreading their bets around. With Dillard’s, there has been a “triple whammy” which caused a sharp change in the short interest relative to the effective float changed. The sharp change happened fairly quickly without anyone noticing until it was too late.

Here again is the triple whammy. The float was already quite low at Dillard’s. This meant that the stock buybacks by Dillard’s had a disproportionate impacton the remaining float. As the float continued to shrink, the significance of the position held by Einhorn and the index funds grew quickly and exponentially.

But because Dillard’s was just part of a larger generic sector short for hedge funds, this dynamic was missed by those who were going short. For most investors, their short positions were just too small to merit significant individual attention. Since January 2017, hedge funds steadily increased their short bets against a wide variety of department stores.

But with Dillard’s specifically, they were increasing a short bet against a disappearing float and against an effective float that was shrinking even faster (due to the impact of the buybacks). And now there there are millions more shares short than are in the effective float which can readily be bought back. Disclosure: I am/we are long DDS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: This article is the opinion of the author. The author is long DDS. The author may make subsequent trades in various securities mentioned in this article within the next 72 hours.