Convertible Bond Investors Are Natural Shorts

MSTR drop today is the result of Convertible Debt holders shorting to delta neutral. Grok— Buyers of MicroStrategy (MSTR) convertible debt often use **convertible arbitrage**, buying the debt and shorting the stock to hedge risk. The offering was announced February 18, 2025 (yesterday, as today is February 19). ### How It Works Convertible debt can be converted into MSTR shares. Hedge funds buy it and short the stock to offset stock price drops, aiming to profit from volatility and interest. ### Timing 1. **Announcement (Feb 18)**: MSTR reveals the offering. Investors analyze but don’t act yet—terms aren’t final. 2. **Pricing (Feb 18-19)**: Terms are set soon after, possibly late Feb 18 or early Feb 19. Buyers subscribe via underwriters. 3. **Shorting (Post-Pricing)**: They short MSTR stock after securing debt, likely late Feb 18 or early Feb 19, based on the bond’s delta. 4. **Settlement (T+2)**: Debt settles (e.g., Feb 20), but shorting starts earlier. ### Likely Timing - **Debt Purchase**: Committed late Feb 18 or early Feb 19, settled later. - **Shorting**: Began late Feb 18 or early Feb 19, post-pricing. ### Context X posts and financial insights note shorting pressures MSTR stock post-announcement. Hedge funds act fast to lock in arbitrage. ### Conclusion Debt buying and shorting likely started between late Feb 18 and early Feb 19, tied to pricing.

Going Above and Beyond

I need to get this off my chest, as we live in a world where negatives are accumulated for social media clickbait. This one is positive but is also illustrative of what can happen when people do the right thing.

A customer of mine was a fabless semiconductor startup in Silicon Valley. It's one of a few that has achieved over $100 billion in market cap. Back in the day, they were pre-revenue. On a Friday night, their go-getter test engineer, called me up out of the blue. I considered ourselves friends but she was married, so I was surprised as it was Friday night, and their team was working (not surprising, according to silicon valley culture). I was in a social setting, but I took the call anyway.

She said they had a deadline to ship their first products to their first customer ever three days later on Monday. Their problem was the test and assembly subcontractors had no test capacity, as they were fully booked, serving other bigger, more important fabless customers. This also wasn't surprising as the late 90's experienced a huge tech boom, and supply chains were stressed with record orders.

In my fun mode, I casually passed it off as "hey, Christine Deutsch, just wait until Monday to get your parts tested and we will all be fine." She sternly interrupted me and said, "no, everything is not fine. You didn't hear me, this is our first customer ever and we need to ship these parts Monday."

To which I retorted, "what do you want me to do? We're not a chip manufacturer--we merely sell chip testers. I have no machines to help you. Our testers are manufactured in Boston--you know this."

To which she replied, "you have that tester in your San Jose field office."

To which I logically mocked, "Christine, that's a demo tester in a field sales office! It is not a production floor!"

She meekly explained, "well, our test engineers can re program it to make it a production tester--because they are sharp."

Which I replied, "yes, I know your test engineers are smart, but how do I transform a big iron supercomputer demo unit, and turn it into your production floor? Are you crazy?"

She then waved the hail Mary, "Can you get your field installation engineers to help us set it up into production mode?"

At which point, I yelled, "Christine, I'm a little tipsy right now, and it's Friday night, and I can guarantee you my field engineers are more drunk than I am or having downtime with their families, ON A FRIDAY NIGHT. They are salaried--they don't receive overtime compensation."

"Greg, can you please, please try and call them?"

"Dammit Christine, you're putting me on the spot, but yes, I will try."

So I called my colleague John Glazzy, to get Greg Kinoshita's and Daryl Gee's phone numbers, to convince them to come into the office, and work all weekend, and I also had to get their manager's approval, Mike Keith. Greg K and Daryl G are super nice guys, but this was way above and beyond their duties. I had no idea how I did it, but to their credit and sacrifice, they came in that weekend and worked around the clock alongside the Marvell test engineers, and by golly, Marvell shipped their products that Monday to their first big, important customer.

Marvell's VP of Operations Steve Zadig, openly acknowledged the Teradyne team for enabling them to launch their product line, but I have a feeling our team members didn't get their full acknowledgment. Marvell wasn't even John's customer--they were mine. After talking to Mike just this past year, that account scenario, allowed our field office to be open for customer access and turn it into a revenue producer. I also want to acknowledge my manager Kevin Miles for giving me the autonomy to make the call and trusting me to make decisions that weren't PnL positive.

So I wanted to acknowledge Christine, John, Mike, and Steve, but mostly to thank Greg and Daryl because they were the true heroes. They literally helped launch that small, but promising startup into a $100 billion silicon valley juggernaut. The moral of the story? Think outside the box and see the big picture. I initially failed at it, because of the conventional status quo, but thanks to Christine's coaxing, she helped me realized when you do the right thing, you don't need to apologize for "misallocating resources."

They don't teach these principles in business textbooks, but somewhere, sometime out in the enterprise universe, entrepreneurs and employees alike are grinding away outside the spotlight, looking to make this world a better, safer, healthier, and more prosperous one. They are the true heroes.

The Nixon Shock

https://youtu.be/iRzr1QU6K1o?si=w0hlsuo_QpND7TTA

Nixon was “forced to” de-peg the USDollar to gold by pressures from two major factors around government overspending: LBJ’s Great Society and the Vietnam war. Both contributed to the draining of America’s gold reserves, pegged at $35/oz. Why? Because European countries like Italy and Franc, led by De Gaulle, bought gold at that artificially low gold price as they knew the price of gold and inflation would soar, as the U.S. dollar printing machine would go into overdrive. They were right. US gold reserves shrunk from 21000 metric tons to the “current official” 8100 (much of which is long gone), forcing Nixon to close the window of redeemability. Kissinger was brilliant—evil but brilliant, and convinced the Saudis to accept oil exports in USDollars as they were now as “good as gold”. In exchange for accepting petrodollars, America offered the Saudis “protection” by selling them US weapons. Full disclosure: I was too young to know this at the time, but my late father worked at the State department under Kissinger, and I worked in the defense industry, so while I’m proud of contributing to America’s security interests, it’s bittersweet because dollar hegemony is the one of the primary factors in these endless wars for regime changes. Which is why I pivoted to the private tech industry in the 90’s with the collapse of the Berlin Wall and end of the Cold War. Instead of being a benevolent peacekeeper, the US chose to continue its military expansion.

Historically this is how empires collapse, as the Romans experienced twice with their military overreach. That includes debasing of its sovereign currency. America did that in 1965, by removing silver from its coinage, similar to the Romans’ clipping of their coins. Unfortunately I have no confidence we can reverse the sinking of the USS titanic unless we implement sound money . The fiat paper experiment as been a disaster. We need clean air, water, and food. In that sequence. We also need clean money. This is why I’ve been stacking gold since 1999 and later became a distributor. It’s also why I’ve been stacking bitcoin since 2013. While my portfolio has appreciated, I’m not doing celebratory touchdown dances. Because if 97% of the population experiences their purchasing power and standard of living being persistently eroded, it’s not a world I want to celebrate. 

By the way, rising gold prices signal financial distress. This is why the monetary authorities and central banks enlisted commercial banks to artificially suppress prices by using financial futures derivatives. This was why futures exchanges were created in 1975. The official reasons are for producers to hedge their output and to provide liquidity for market efficiency. But the unwritten reason is to manipulate and suppress prices.

This is not conspiracy theory. JPMorgan traders were convicted of manipulating gold futures. The bank paid $920 million in fines. Initial charges were under RICO statutes which labeled the bank an organized crime enterprise.

https://www.bloomberg.com/news/articles/2019-09-16/jpmorgan-s-metals-desk-was-a-criminal-enterprise-u-s-says?fbclid=IwY2xjawE--rxleHRuA2FlbQIxMAABHc6TTI67VrY9uC5moFuM_Z-MlTApA_4GkGvA1dfua-SpKHA0MtZ5sAdEog_aem_kH7xyTgRcN1OxR0vlFNljw

Trump may now be pro-bitcoin, but he ordered the CFTC chairman to create futures exchanges for bitcoin in 2017 to literally drive its price down. It was effective as the price peaked the exact day bitcoin futures started trading December 18, 2017. I literally wrote about it a month prior to the CBOE and CME started trading bitcoin futures.

https://www.coindesk.com/markets/2019/10/22/trump-administration-popped-2017-bitcoin-bubble-ex-cftc-chair-says/?fbclid=IwY2xjawE--x9leHRuA2FlbQIxMAABHeZ1o_NUgP9_vSunNHXBGoZRH3ghl3k1ojhRCOCMqji2LaJ_M8ly4mv4IA_aem_P7oQodFsBE818-FzgXpsNA

Kamala the Terrible

 

The media is now hyping Kamala Harris as the greatest thing since sliced bread

But what did they think of her before?

Roll the tape…
pic.twitter.com/4OneMKmCeO

— End Wokeness (@EndWokeness) July 28, 2024

MicroStrategy Could Merit S&P 500 Inclusion If It Adopts New Accounting Rules: Benchmark

Microstrategy could potentially use fair accounting rules for 2024 Q4 and report blow out quarterly earnings in late January 2025.  This is not financial advice.

https://www.coindesk.com/business/2024/04/25/microstrategy-could-merit-sp-500-inclusion-if-it-adopts-new-accounting-rules-benchmark/amp/

Microstrategy - Bitcoin Bear or Bull?

This is not financial advice.  Please perform your own due diligence.  These are my opinions only.

Microstrategy ("MSTR") will continue to acquire Bitcoin ("BTC") for its own corporate treasury during Bitcoin's projected peak price into 2025, if history repeats itself.  MSTR began its Bitcoin acquisition spree in Q3 of 2020, and has continued to buy Bitcoin for the duration of its rollercoaster ride since then, both up in 2021 and down in 2022, and up again in 2023.  Microstrategy's current holdings are 189,150 BTC purchased at an average price of $31,168 per Bitcoin.  They are obviously in the green.

MSTR is an operational leveraged proxy for Bitcoin, and it uses its income and balance sheet to acquire more Bitcoin either via debt or equity offerings--or cash flow.  This is normally dilutive to existing shareholders, but with careful and strategic acquisitions during favorable conditions (e.g., rising Bitcoin price, low interest rates), these periodic Bitcoin purchases are effectively accretive.

This "dollar cost averaging" strategy ran into perceived problems in 2022, when Bitcoin declined 78%  from its November 2021 peak.  Rumors were swirling that MSTR would have to liquidate if Bitcoin's price dipped below $20K, which it did on its way to a $15.5K cyclical bottom.  Michael Saylor was quick to respond that Bitcoin would have to drop below $5K before Microstrategy would have to liquidate its Bitcoin holdings.  And they certainly weren't in danger of going bankrupt.  In hindsight, Saylor was 100% correct.

As long as MSTR's core business intelligence software operating entity was generating cash flow, those flows and strategic deployment of its balance sheet could continue to fund future Bitcoin purchases.  My thoughts are that MSTR could continue these acquisitions throughout 2024 until 2025, as I believe Bitcoin's price will peak in Q3 2025 before starting another expected steep drawdown.  And in order to avoid any future speculation about MSTR's solvency or lack thereof, Saylor should refrain from any Bitcoin purchases in 2025 before the anticipated crash starting in the second half of 2025--just to be safe and ensure a big enough cushion to weather another inevitable crypto winter.

Meanwhile, if investors are bullish on Bitcoin until 2025, MSTR shares should increase proportionately even higher from its current price of $631 from a January 2023 bottom of $130.  It behaves like a leveraged play for Bitcoin, and will be superior to speculative performances of imminent spot BTC ETF's which should be approved any day now in early 2024. ETF's charge management fees up to 1% annually.  MSTR provides operational leverage, equivalent to yielding 2-3% annually.  That's a 3-4% positive spread in favor of MSTR over a spot BTC ETF..  This may explain why MSTR shares trade at a premium relative to its Bitcoin holdings.

Another bullish catalyst for MSTR is adoption of FASB fair value accounting for Bitcoin as a tangible asset instead of an intangible asset, which it currently is classified as.  This GAAP accounting rule kicks in for Bitcoin on December 15, 2024, but early adopters like MSTR can begin accounting for Bitcoin as an asset which doesn't impair its balance sheet due to "lowest value" accounting prior to the designated transition date.  Until fair value account is applied, MSTR's financial reporting shows repeated losses and balance sheet impairments.  This article explains why fair value accounting will encourage more companies to include Bitcoin into their corporate treasuries. 

https://blockworks.co/news/microstrategy-proposed-fasb-amendments

This chart shows how current accounting rules punish Microstrategy financial reporting.

Realistically, self-custodied Bitcoin is the optimal method to own Bitcoin, with Bitcoin custodied on centralized exchanges being a distant second due to potential for security breaches.  But for mainstream institutional and retail investors, a spot BTC ETF is the next best way to achieve exposure to the price of Bitcoin, even if it is not owning Bitcoin itself, the underlying asset.  In exchange for self-custody, the spot ETF provides convenience and ease of trading a security, without the hassles of managing one's own security keys, which can lead to loss of Bitcoin--if mismanaged.  The downside for ETF's includes this question: can investors trust the BlackRock's and Fidelity's of the world, and their respective custodial agents?  That is another topic better covered in another blog.

To clarify misleading nomenclature, a "security" carries downside risk of being zeroed out.  There are many high-profile examples of bankruptcies, with infamous cases being Lehman Brothers, Worldcom, Enron, FTX, etc., where shareholders are wiped out.  The list of body bags among smaller corporations is even larger.  By contrast, Bitcoin the actual asset, is a commodity, which ironically, reduces and eliminates the risk of it going to zero.  Bitcoin, like crude oil, gold, silver, silver, corn, wheat, natural gas, pork bellies, orange juice, etc. are commodities.  Their digital manifestations and futures contracts are traded at the Chicago Board Options Exchanges and the Chicago Mercantile Exchange, for instance.

The last BTC vehicle to address are the futures based BTC ETF's which are already listed.  They are the least optimal asset because they are subject to high slippage costs.

In summary, the order of preference, in terms of higher security and lower cost, are as follows:

Bitcoin in cold storage (offline, most secure)

Bitcoin on an exchange (convenient for trading, but exposed to potential security threat vectors)

MSTR shares (a security, convenient for trading, offers leveraged BTC exposure with no fees)

Spot BTC ETF (a security, convenient for trading, lower management fees than futures BTC ETF, GBTC Trust)

Futures BTC ETF (a security, convenient for trading, higher management fees and slippage)

Unlocking The Psychology Of Bitcoin's Bear Market

Important note:  a trough low occurs before a breakout to the upside.  We reached a Bitcoin secular low in November 2022, independently of when the next breakout will occur.

https://www.zerohedge.com/crypto/unlocking-psychology-bitcoins-bear-market

Comparing history of GLD to potential spot Bitcoin ETF

https://cryptoslate.com/insights/comparing-history-of-gld-to-potential-spot-bitcoin-etf/

Another day, another downgrade for America. Today it’s the banking sector

https://www.sovereignman.com/trends/another-day-another-downgrade-for-america-today-its-the-banking-sector-148019/

Report: US ETFs Signal Renewed Bitcoin Interest; BTC’s Limited 'Hot Supply' Eyes Bull Market

https://news.bitcoin.com/report-us-etfs-signal-renewed-bitcoin-interest-btcs-limited-hot-supply-eyes-bull-market/

Plan B's Bitcoin Stock to Flow Model

https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25

Timing Bitcoin Halving

Fed Funds Rate and Equities: What's the Lag?

The Fed Funds Rate peaked at 7.03% in 2000.  The target rate was 6.5% in 2000, and was first dropped on January 3, 2001 to 6%.  It eventually bottomed at 1% on June 24, 2003.

This was the so-called tech bubble, so I'm tracking the NASDAQ.

The NASDAQ peaked at 5049 on March 10, 2000 and declined 78% to 1114 on October 9, 2002.

The Fed Funds Rate peaked at 5.41% in 2007.  The target rate was 5.25% until August 7, 2007.  The Fed dropped it to 4.75% on September 18, 2007.  It eventually bottomed at 0% on December 15, 2008.

This was the Great Financial Crisis, so I'm using the S & P 500 Index.

The S & P 500 peaked at 1565 on October 9, 2007 and declined 57% to 677 on March 9, 2009.

The takeaway message?  The Fed was late in dropping the targeted Fed Funds Rate, finally acting on January 3, 2001, a lag of 10 months after the NASDAQ peaked in March, 2000.  And the NASDAQ continued to plummet even as the FFR continued to decline.  In fact, the bottom in the NASDAQ tech bubble didn't occur until October, 2002, some 21 months after the Fed initially dropped the FFR.

With the Great Financial Crisis, the Fed acted more quickly, initially dropping the FFR in September, 2007. a month before the S & P 500 started cratering in October, 2007.  However, the Fed's aggressive easing did not prevent the S & P 500 from declining 57% to its March, 2009 bottom, thanks to the bank bailouts (TAFP, TALF, P-PIP, etc.).

In 2023, despite bank runs and another brewing financial crisis, the Fed continues to raise its targeted FFR.  When they finally do pivot and drop the FFR, it will probably be too little and too late.  Based on the two most recent cycles (and this one should be worse as debt loads and the insolvent Fed's balance sheet is more leveraged than ever), we can expect equities to face severe headwinds for the next 12 to 24 months, post-FFR finally declining (probably this summer).  The silver lining in all this is the S & P 500 peaked on December 29, 2021 at 4793, so we are off our all-time highs (currently 4109 at the time of this writing).  The key question then becomes is the bottom in?  Will bank runs be ring-fenced and contagion avoided?  And how much liquidity will be needed to prevent contagion of counterparty risks?  Monetary authorities have hinted at between $2 trillion and $18 trillion.

A side effect will be inflation as the Fed and US Treasury will provide trillions in liquidity and credit in an attempt to cushion collapsing financial markets if they do indeed collapse, with the latest vehicle dubbed the BTFP.  https://www.federalreserve.gov/monetarypolicy/bank-term-funding-program.htm

Foreign financial institutions will also be feeding at the trough in the form of currency swaps.

But don't worry, it's not "QE", so all is well.  /sarcasm

Disclaimer: The content on this site is provided as general information only and is not investment advice. Content should not be construed as a recommendation to buy or sell any specific security or financial product, or to participate in any particular investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Any opinions, news, research, analyses, prices, or other information contained on this site is provided as general market commentary, and does not constitute investment advice. The author will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your professional investment adviser before making any investment decisions. Perform your own due diligence.

Silvergate Short Squeeze?

February 15, 2023, 12:42 am email to business partners:

Silvergate is the most shorted stock right now

Gregory Nguyen <nguyen.greg@gmail.com>	12:42 AM (0 minutes ago)
to Keri, Edwin

Short squeeze coming.  $14.50 low yesterday, closed at $17.36.

3 Things Most People Don’t Know About Gold, Bitcoin, and Money

I first blogged about Bitcoin in 2011 and 2013.  This one penned in 2023 does a good job of covering Bitcoin from a high altitude.

https://internationalman.com/articles/3-things-most-people-dont-know-about-gold-bitcoin-and-money/

2023: FOURTH TURNING MEETS MASS FORMATION PSYCHOSIS

https://www.theburningplatform.com/2023/01/22/2023-fourth-turning-meets-mass-formation-psychosis/

DEAR NORMIE, DON’T BUY BITCOIN

https://bitcoinmagazine.com/culture/dont-buy-bitcoin-until-you-learn-more

Where Did All the Workers Go?

https://infonomena.substack.com/p/whered-all-the-workers-go

Fiat Standard

https://twitter.com/saifedean/status/1613474102672506883?s=20&t=_CGgiBDsaVvKVXhECBzleg

Pfizer's History of Fraud, Corruption, and Using Nigerian Children as 'Human Guinea Pigs'

https://kanekoa.substack.com/p/pfizers-history-of-fraud-corruption

Fidelity Predicting $100 Million per Bitcoin by 2035

https://bitcoinexchangeguide.com/fidelity-predicting-100-million-per-bitcoin-by-2035/

Fact Check: DARPA Funded Report on Blockchain Centralization

https://www.swanbitcoin.com/fact-check-darpa-funded-report-on-blockchain-centralization/

White Man

https://blog.bitmex.com/white-man/?utm_campaign=Email&utm_source=Sendgrid&utm_medium=email

Why The Yuppie Elite Dismiss Bitcoin

https://www.citadel21.com/why-the-yuppie-elite-dismiss-bitcoin

FTX: The Dominoes Of Financial Fraud Have Yet To Fall

https://www.zerohedge.com/crypto/ftx-dominoes-financial-fraud-have-yet-fall