Yesterday the stock of Italian offshore oil services company Saipem SpA [10]imploded nearly 40% after the company said it expected 2013 net profits to be, oh, just around 50% below current consensus. In other words, merely another case of irrational investor exuberance where actual corporate cash flow is orders of magnitude below where the sellside expected it to be, and so indicative of what happens every time hopium collides with reality (and, tangentially, is the real valuation case for most public stocks were they to report real, not GAAP-massaged earnings).
Only in this case there was a lot of hopium, because none other than Bank of America placed some 10 million share of Saipem stock at €30/share just hours ahead of the news release that sent the stock crashing! Nothing like getting a 40% wipeout minutes after naively believing the lies from the most incompetent bank of all time. "This is a disaster for the buyer of the placed shares and it is a disaster for Bank of America Merrill Lynch," one trader said. As Dow Jones reports [11], "Several traders said Tuesday's buyers, who face huge losses, are likely to push to revoke the deal, and that Bank of America will ask the seller if they had insider knowledge of the imminent news."
[12]
But borderline criminal incompetence on the side of BofA is nothing new. Where this story gets really surreal is the response of the Italian regulato Consob, which this morning did the only thing it could do: it banned all shorting of the stock.
From Consob google translated [13]:
Resolution no. 18454
Temporary ban on short selling of shares issued by Saipem SpA, pursuant to Article 23 of the EU Regulation. 236/2012 of the European Parliament and of the Council of 14 March 2012
THE NATIONAL COMMISSION FOR THE COMPANY 'AND BAG
Seen the Law of 7 June 1974, n. 216, and subsequent amendments and additions;
HAVING REGARD to the EU Regulation. 236/2012 of the European Parliament and of the Council of 14 March 2012;
Having regard to Article 4-bis, paragraph 2, of Legislative Decree no. 58 of 24 February 1998, according to which Consob is responsible for implementing the measures and to exercise the functions and powers under the EU Regulation. 236/2012 of the European Parliament and of the Council of 14 March 2012 with reference to, among other things, to equities;
Having regard to Article 12 of the EU Regulation. 236/2012 of the European Parliament and of the Council of 14 March 2012, which imposes certain restrictions on short sales of equity securities in the absence of availability of the securities;
Having regard to Article 23 of the EU Regulation. 236/2012, which sets the power to take temporary restrictions on short sales of securities in the event of a significant fall in the price;
WHEREAS the relevant threshold in the case of the Saipem is equal to 10%;
WHEREAS, the change in price of Saipem compared to the end of the previous day was equal to -34.3%;
ACKNOWLEDGED that the information environment is not fully justify the above price change and, therefore, can not be excluded bearish speculation;
RESOLVES:
1. The ban on short selling of Saipem shares (ISIN code: IT0000068525) MTA on the regulated market organized and managed by Borsa Italian SpA, pursuant to article 23 of the said Regulation, as of 0.00 and up to 24:00 on 31 January 2013. You specify, in accordance with Article 23, paragraph 3, that the prohibition does not apply to the activity of market making , as defined in Article 2, paragraph 1, letter k, of the Regulations.
This resolution is transmitted to ESMA and published on the website internet Consob.
Rome, 30 January 2013
Because, you see, it is bearish speculation that drives a stock down from €30 to €20 when the company admits its profitability was exaggerated by some 100%. People's idiocy to push it up there in the first place, with the complicit help of the same banks that lied and caused massive losses to shareholders by selling them "40%-off" stock, had nothing to do with it.
It was "bearish speculation."
But at least we now know what will happen in markets around the world, and soon in the US, when one after another myth-based upside cases for public company after public company start crashing into the iceberg of cold, hard reality, where one can only expand multiples so much before the underlying cash flow reality shines through.
To that end, we can't wait for the daily list of stocks banned for shorting each morning, issued by the regulatory branch of Morgan Stanley, henceforth known as the SEC.