This is a little long but worth the read of you follow any of Sterling's predictions and theories. I respect Sterling but I have to admit, some of his posts are OUT THERE baby. The post below was from PennyWrangler in reponse to Sterling's post titled CMKX-Operation Dividends... __________________________________________
Ok. lets take this one step at a time here, like I do in my PR reviews...
1) The idea that dividends can force naked shorts to cover is correct IMO. I think we are all quite familiar with this idea. Basically, when you hold a short position, you must pay any dividends on that short position, whether it’s naked or not. This is because shorting always creates the illusion that more shares exist than really do.
For anyone unfamiliar with how this works, I’ll give a brief example. Joe owns 1 share of XYZ corp. Shortie thinks XYZ corp is over-valued and that the pps will go down. So, Shortie borrows 1 share of XYZ corp from Joe. Joe does NOT know that this has happened. He still sees 1 share of XYZ in his brokerage account. Ok, Shortie takes that share he borrowed and sells it. Lets say Sam bought it. Now both Joe and Sam think that they own 1 share of XYZ. So this 1 share looks like 2 shares now.
Ok, now XYZ offers a dividend. Lets say they offer 1 share of ABC stock for every share of XYZ stock someone holds. Both Joe and Sam are delighted that they will get 1 share of ABC. When the dividend is paid, XYZ corp pays Sam 1 share of ABC. Joe also gets 1 share of ABC, which was bought by Shortie and delivered by Shortie into Joe’s account.
Shortie could have avoided having to do this if he had bought 1 share of XYZ and given it back to Joe, eliminating his short position. This is called “covering”. Shortie would have to do this before the “ex-div” date, which is usually 3 days before the “record” date. For purposes of the UCAD dividend, the “record” date is 8/20.
The only difference between this and naked shorting is that, if Shortie had opened a “naked" short position, he would have sold 1 share of XYZ to Sam, and kinda promised that some day he would borrow that share from somewhere and actually deliver it to Sam. Since Sam never REALLY takes posession of that share of XYZ (although it shows up in his account as if it really existed), it is up to Shortie to pay him any dividends that he has coming to him.
If Shortie has sold a LOT of shares naked short like this, he’s going to have to cough up a LOT of shares of ABC. Those cost money, and the fact that dividends are coming out really make Shortie question whether shorting XYZ was really a good idea anyway. So Shortie will often choose to cover rather than pay the dividend.
Also, if XYZ offers a dividend in the form of stock in a company that is not publicly traded (like CIM for example), then Shortie is really in a bind. He CAN’T buy shares of CIM to deliver to all the Sams he sold shares to. It is impossible; he just can’t do it. So he has to cover. If he doesn’t then he’s in trouble, cuz demz da rules.
Sorry for the digression, but folks new to this really have to understand this process for any discussion of a naked short sqeeze to make any sense at all.
2) Ok, so this “operation dividends” thing suggests that offering dividends will help eliminate the naked short position. I agree, especially with the CIM dividend. The UCAD dividend should work nicely too, because the UCAD float is very small. There are very few shares available for Shorties to buy to pay to all the Sams out there. So far so good.
3) Early on Sterling suggests a cash dividend. I’ll say right now that everyone would love to get a cash dividend, but I see no reason to expect one any time soon. Just does not make any sense that the company would send cash our way when they could use it for drilling operations, equipment, and company/mining-rights acquisitions. Sterling offers nothing of substance to change my mind about this. It might happen, and if it does I’ll be a happy camper just like every other shareholder, but I’m not holding my breath because it really doesn’t make business sense to me.
4) A cash dividend is not more likely to cause short covering than a share dividend. It’s actually a lot harder to come up with shares to distribute than cash. So IMO a share dividend is a MUCH more effective way to force short covering than a cash dividend.
5) Sterling suggests that UCAD and GEMM are going to a major exchange. Possible, but I see no indications of this at this time. This looks like pure speculation.
6) Sterling keeps talking about the “date of execution”. I have figured out from context that what he means is “date of record”. When talking about dividends, there are only 3 dates of significance:
a) ex-div date -- First day to buy shares and NOT be eligible for the dividend. Usually 3 days before the "record" date because it generaly takes 3 days for trades to "settle".
b) record date -- Date on which you MUST be a shareholder of record in order to be eligible for the dividend. If you buy before the ex-div date and hold the shares through the record date, you will get the dividend. Technically you don’t really have to hold the shares even this long, but I don’t like to push my luck with such things...
c) distribution date -- Date that the dividend is actually paid. It is not uncommon for the payment (stocks or money) to not actually show up in your account until the day AFTER the distribution date in my experience.
So, there’s no such thing as an “execution” date, unless you are found guilty of murder in Texas... Sterling means the “record” date.
7) Fruitages? LOL!
8) The explanation for the large o/s is, to be polite, ludicrous. Sterling suggests that Urban created a gargantuan o/s because he wanted to help as many people as possible. He also suggests that a smaller o/s would not help as many people because a small number of people would accumulate most of the o/s.
Utter nonesense. No businessman would think like this for one thing. It’s one thing to respect your shareholders and want to reward them. It’s quite another to believe that Urban’s primary goal is to provide welfare. Sterling suggests that 1M shares would not be enough to ensure good liquidity. Yeah, that’s true, but 10B would be PLENTY. With a smaller o/s, the pps would be proportionately higher, and people would buy less because it would cost more. The same number of people would end up with about the same percentage ownership of CMKX with an o/s of 10B as would for an o/s of 500B.
We have a large o/s because CMKX is a junior mining company that needs money for exploration and has no source of revenue yet. It may also be true that the a/s was jacked up to enable Urban to grab enough shares to protect CMKX from takeover by De Beers. Also always remember that “counterfeit” shares created by naked shorts are NOT part of the “official” o/s, which is what is being discussed here.
9) Sterling suggests that we will get 49% of any transaction, whether this be cash or shares. This is pure guess work and I think this is very unlikely. For one thing, we haven’t seen this happen with ANY of the transactions to which we are privy. Consider the transactions and dividends we’ve seen so far:
a) UCAD is giving CMKX 7.5M shares. CMKX is giving 100% (note, NOT 49%) of these shares to shareholders via a dividend.
b) UCAD gave CMKX $3M to exercise their option. We have not gotten a PR saying that we get ANY of this money, so right now we’re looking at getting 0% of this transaction.
c) GEMM is giving CMKX 49% of it’s o/s (assuming CMKX exersises their option on the remaining 25% of GEMM, which I think they will do). However, if you run the numbers (see my review of this PR) you will see that shareholders are NOT getting all of this. CMKX is retaining 7% and giving us 42% of the GEMM o/s. So again, NOT 49%.
d) CIM is giving CMKX 40B shares. The PR from 7/19/04 implies that 100% of this will go to shareholders in a dividend.
So, I really don’t see where Sterling is getting this “shareholders get 49% of everything” stuff from.
Plus, as I and others have said before, it makes a lot more sense for CMKX to keep it’s cash right now to fund exploration efforts.
10) Sterling says that he assumes that the CMKX float is 40B because of the wording of the CIM dividend PR. I must assume that he is referring to this PR saying that the CIM shares will be distributed “pro rata”. Well, I hate to tell ya that “pro rata” just means “in proportion too, as determined by a specific factor” (http://www.investorwords.com/5735/pro_rata.html). Well, the factor can be anything, so assuming that this means 1:1 is just wishful thinking. Now, the float may very well be on the order of 40B, but I think it’s closer to 100B personally. Certainly the language of the CIM dividend PR does not provide any clues; it just happens to say “pro rata”, when in fact ALL dividends are given pro rata, whether they bother to say so or not!
11) Sterling suggests that Urban will specify that only non-restricted shares will get these dividends. By this he means that Urban, his family, private investors, and companies getting CMKX shares (like Nevada Minerals) will not be eligible for these dividends. Essentially this means that only the “float” would get the dividends; no one else. Obviously if the public float is some figure between 40B and 100B, this would put a lot more shares in our accounts than if these dividends are paid on the entire 483 o/s.
Well, this is a lovely thought, but yet another case of extremely optimistic thinking that, IMO, has no basis in reality. If this in fact happens, I’ll be thrilled, but I see no reason to believe this is the case. Sterling doesn’t offer any reason for why he thinks this will happen either, other than Urban is a really nice guy. We’ll see.
12) Sterling assumes (there’s that word again) that the 75B shares given to Nevada Minerals is 49% of the o/s, and Urban and insiders hold 51% of the o/s. Well, this fits nicely with Sterling’s zero float theory, but otherwise again has no basis in reality. There’s just no reason to believe this. About all you can surmise is that 75B is less than half the o/s, because I’m pretty sure Urban would not give controlling interest in his company to Nevada Minerals. So, as I have discussed elsewhere, the o/s simply MUST be larger than 150B. But there is no reason to assume that it is exacty 150B + 1 shares. This is just a minimum figure based on the NM PR.
13) The calculation of the 153,061,224,489 shares is again nonesense. Look, the only point here is that Nevada Minerals simply must not get controlling interest in CMKX. It is not necessary for the number of shares given to them to be 49%. It is necessary that the number of shares given to them be less than 50%. The smallest number of shares required to be in the o/s for this to be true, given that NM was given 75B shares, is 150,000,000,001. Simple as that. Sterling’s math error is based on the notion that these percentages have to be whole numbers. Nope... they can be fractional.
14) The $15 dollar figure for UCAD’s pps is, you guessed it, optimistic. Yeah, it will go up if good things happen for UCAD, but you can’t count on it. We know for a fact that we are getting restricted shares of UCAD; we won’t be able to sell them for a year after we get them. There is no way to predict what UCAD’s pps will be in the fall of 2005. Might be better, might be worse. Best you can do is just use the $6 figure that it’s trading at now when thinking about the value of the UCAD dividend. The same goes for any share dividend.
15) Sterling plays around with some Excell spreadsheet “what if” kinds of calculations to show what your shares are worth given different o/s figures. Cute, but nothing new. Basically if the o/s is anywhere near where I think it is, no one is getting much out of any of these dividends. But hey, it’s more than we had before and they didn’t have to give us anything, so I’m not complaining. I’m just saying these dividends are not going to enable us to quit our day jobs, and the ones that are restricted are totally worthless for 1 year.
16) Sterling assumes (*sigh*) that the “plus sign” in front of the UCAD dividend ratio (+.0000155) means that this ratio could be bigger. He also suggests that this ratio is a “temporary” figure that has been reported.
Uhhhh... no, sorry. The “+” means that these shares will be added to our accounts. And companies don’t submit a “worst case guess” for a dividend ratio, then change it later. What utter nonesense! No, what you do is figure out what the ratio will be and submit it. One time. Period.
Sterling is having the same denial problems that a lot of people are having. Look, the ratio for the UCAD dividend has been reported, PERIOD. DONE DEAL. COPE.
BTW, there is such a thing as a negative dividend. This is how a reverse split would appear. For example, a 2:1 reverse split would show up as a “-0.5” dividend, meaning that for every share of a stock that you hold, 1/2 of a share is taken away from you.
This is why they put the “+/-” in front of the ratio; to indicate whether the dividend is being paid TO you or being paid BY you.
17) Sterling thinks we’ll get 15 or more dividends. Who knows. We have 3 right now. Over the next 10 years, if the company is around that long, we probably will get over 15 dividends. Pure guess work again.
18) Sterling thinks CMKX is headed for the NYSE. Who knows. Urban and Roger and no one else, that’s who.
19) The notion that a cash dividend will drive the share price up to 10X or 20X of the cash dividend value is absolutely nuts. Koo Koo, Krazy for KoKoPuffs nuts. When a cash dividend is announced for a stock, especially a stock that does not regularly pay cash dividends, the value of the stock typically goes up by the amount of the announced dividend. So if a 0.10 dividend were announced, CMKX would go up to approximately 0.1004. Once the dividend is paid, the value of the stock will go down to 0.0004 again. That’s how cash dividends work. Go look at other stocks that occasionally pay dividends that are a large percentage of the stock’s pps. They pop up when the dividend is announced, and they pop back down just as fast on ex-div day.
So lets look at Sterlings thinking here. For example, lets look at the 0.20 figure. He says that the price could go up to 0.20 because, after all, you will get half your money back, and be left with this great stock with huge potential! Well, that’s not how normal investors will look at this. Most see this as a super-risky play that they would not normally touch with a 10 mile long stick. If the pps were at 0.20, what they would see is the opportunity to spend 0.20 for 1 share of a company that would pay them 0.10, then plunge instantly back to 0.0004. Oops, I just lost nearly 0.10 per share!
This is why the pps will only go up to the value of the dividend plus the market’s valuation of the stock at the time the dividend was announced, AT MOST. This is because it is common for a stock to go LOWER after the dividend is paid than it was before, because investors now know that the company is POORER than it was before, by the amount of the dividend. In other words, they know that the book value of the company is lower than it was before they gave out the dividend, by the total amount of the dividend.
20) How about this comparison with a savings account? Sterling suggests that the pps could go as high as $2 because you will make 5% on your money with a 0.10 dividend, and that’s better than what you will get from a savings account. Perhaps, but the amount of money in your savings account won’t go down after the interest is paid. The pps of such a stock most definitely will go down on ex-div day. A “normal” $2 stock will go down to $1.90 after paying a 0.10 dividend typically, unless it is very strong (meaning “in demand”, usually because it’s in a good sector and it is growing its earnings consistently).
If CMKX somehow managed to surge to $2 from 0.0004 based on a 0.10 dividend (impossible, but for sake of argument...), then after the dividend was paid, it would plunge right back into 0.0004 land. Ok, now you paid $2/share to make $0.10/share, and now your original $2/share is only worth $0.0004/share. Hmmmm... seems to me you didn’t make out too well there bub.
21) Again with the tender offer. Well, I hope we get a nice juicy TO as much as anyone else. Sterling is right that we need time to get as much out of a TO as possible. CMKX will get more money from a potential buyer if at least some of the mineral reserves are “proven” prior to negotiations. It would make sense to at least wait for core sample testing results to come back for the big “oreo” that we are currently drilling before making any final TO arrangements. Also, CMKX might be testing some of the other Carolyn samples now, and if this is the case, and they come back with great results, this would also be a big help during negotions. If a TO is going to happen, we all want to get TOP DOLLAR for our shares.
Now, as to whether a TO will happen... again, I say “Who knows?”. Urban and Roger and nobody else. Rumors about a TO turned out to be pure b/s last time, so as far as I’m concerned, I see no reason to believe any kind of a TO is in the works. If there is, great, otherwise, whatever.
22) Sterling is correct to point out that his “4 months from now” prediction of a TO is pure guess work. Four months ago we thought that by now we would all own a private island. Still, this is a reasonable guess because IMO results from the “oreo” (they should really name the pipe “oreo 1”, don’t you think?) will play a big role in negotiations (if a TO is even being considered). It will take about a month to get the core samples out of the ground and get them shipped off to the lab. It will take the lab at least 3 months to process the samples and get the results back to CMKX. Well, that’s 4 months.
23) Sterling sticks by his $2T valuation of CMKX. I think this is wrong. He came up with this by assuming that each acre of CMKX holdings is worth as much as each acre of the De Beers property, which Dr. Hutchinson said is worth between $40B and $80B total. Well, this is probably not true. It is likely that De Beers really has the best seat in the house. However, it is also true that the new-fangled survey shows that we have on the order of 100 kimberlite pipes on our properties, so it’s not unreasonable to presume that our holdings are worth (on a per acre basis) half of what the De Beers property is worth. Well, that makes CMKX a $1T company, which would mean a $2 pps with a 500B o/s. And of course this assumes that the commercial value of diamonds remains stable over several decades as the diamonds are brought out of the mines.
24) I know that my critique has been harsh. I’ve ripped as many holes in this thing as I could. Well, that’s just how I grade papers. I don’t hold back any punches because I believe in intellecual honesty and I have no patience for self delusion. That said, I really do respect Sterling and think he’s done wonderful things with his classroom and with his theories about what’s going on with CMKX. But lately I have been disagreeing with these theories of his more and more. Optimism is fine, but I have a problem with getting people’s hopes up with these extremely optimistic and unrealistic assumptions that seem to be getting more elaborate all the time. He falls into logical falacies and doesn’t understand some of the basics of how the stock market works, and that bothers me. He also makes a LOT of assumptions, and they are always slanted HARD on the optimistic side. This is why I don’t really pay much attention to what Sterling is saying these days. It’s just so far out in la la land as to not be worth reading really. I think Sterling is a smart guy, but like the rest of us he is starved for information, and this is IMO pushing him over the edge a bit. So just take what you see coming from Sterling with a big grain of salt. Some of it’s right, some of it is wrong, and all of it is VERY optimistic.
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