Short Squeeze phenomenons are not new
E.L.Bruce Company was founded in 1911 by Edwin L. Bruce.
E.L.Bruce was one of the leading suppliers and installers of hardwood flooring and lumber products in Memphis, Tennessee. A publicly-held corporation with 300,000 shares of common stock issued and outstanding which in May 1958 had a share price of 50.75 USD. A substantial market cap of over 15 million dollars and claimed to be the largest of its industry globally for decades. This translated into higher stock prices with wall street brokers pimping out the stock to eager investors.
This thought was not completely true. E.L.Bruce co. was controlling merely 5.4% of the market share. The competition was fierce, no less apparent in San Francisco Bay and the suburban area of Los Angeles, California. Especially with Empire Millwork Corporation, more commonly known as ‘EMPIRE’. Their market share standing consistently at 4.12%.
THE PUMP
With great interest springing up on the American Stock Exchange investors into E.L.Bruce co. the technical patterns and stocks Moving Averages (MA) were compelling to novice investors with the get rich schemes and with long term investors buying into any dips. With the stock price jumping 5 to 8 points weekly without any downward reaction and weekly volumes climbing 41.500 -54.000 to 76.500, this was the hottest stock on the market. BRUCE went from 18 dollars a share to 50 dollars in under 3 months. The first and probably the only dip reaction came when ‘EMPIRE’ filed for the acquisition of BRUCE with the petition being downplayed due to monopoly concerns.
THE SHORTS
By June of 1958, the price advanced to 77 dollars a share. The fundamentals of the company certainly did not hold up with certain Wallstreet traders. Their fundamental approach had decided that BRUCE’s book value and earning indicated that the stock’ price could not be more than 30 dollars a share. With capital powers, they started to sell the stock short between 45 and 50 dollars. Confident they would be able to fulfill their bargain by buying it back at a price more in tune with 30 dollars a share.
What they didn’t know, would hurt them. The news didn’t travel fast enough, unlike today. Edward Gilbert's filing for acquisition in BRUCE proceeded as he was trying to oust the Bruce family from the control of the company. He and his associates trying to obtain a majority stake of the 314,600 outstanding shares which the Bruce family-controlled.
THE ORDEAL
EMPIRE took hold of the majority by buying up shares, which skyrocketed the price even further with increased trading volumes leading up to 275.000 BRUCE shares traded in 8 weeks. The unfortunate short-sellers misinformed about EMPIRE’s intentions frantically started buying BRUCE shares to cover their short positions. They couldn’t buy the shares at any price to fulfill their obligations. Hence eventually, the American Stock Exchange suspended trading due to a frenzied stock price.
The short sellers had to deliver the stocks borrowed to their brokers who loaned them shares on margin. They were willing to pay a steeper price for these shares. With the shares halted with an over-the-counter price at 100 dollars a share, brokers advised investors to sell. Most did, some smarter investors didn’t. Why would they? When you have buyers willing to pay any price for it.
The short squeeze was a relatively rare phenomenon in the early and mid-century. Investors frantically sending telegrams, phone calls, or storming into their brokerage firms not fully understanding the concept and its workings. But, these investors were about to be wealthy. The new investors holding positions at an average price of 51 dollars while early investors at an average of 25 dollars a share.
TO THE MOON
For most investors who didn’t sell at 100, the phone calls didn’t stop from the brokers. Calls came from various brokerages around the United States to ‘hold’ investors offering higher and higher prices of the shares. Gradually investors sold blocks of their shares for 130–150 and even up to 180 dollars a share. Making of a handful of millionaires and most investors turning small investments into a fortune.
FAST FORWARD 2021
Gamestop (GME) recent stock surge fuelled by rebellious swarms of day traders from Reddit group r/wallstreetbets bought shares against the big hedge funds like Melvin Capital and Citron Research who shorted them in excess. This brought me back to this incredible phenomenon in capital markets mostly under-utilized trick to ‘short’ the shorts. I believe in both cases, stock squeezes are always here to stay. My immense discomfort comes in with Robinhood and its founders. Where a first-to-market game-changing brokerage app controlling buy and sell trades of new investors to capital markets sell out as on their mission statement…
‘Robinhood’s mission is to democratize finance for all. We believe that everyone should have access to the financial markets, so we’ve built Robinhood from the ground up to make investing friendly, approachable, and understandable for newcomers and experts alike.
Robinhood’s demise might be imminent.
