Data shows heavy airline-stock short selling - September 22, 2001

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[sSRI-Research] 9/11 - Data shows heavy airline-stock short

selling - September 22, 2001

 

 

 

 

Data shows heavy airline-stock short selling

 

Christian Berthelsen, Chronicle Staff Writer

Saturday, September 22, 2001

 

 

In another sign that some investors speculated against the stocks of

airlines whose jets were used in terrorist attacks on New York and the

Pentagon, there was a sharp increase in short selling of the stocks of

American and United airlines during the month before Sept. 11.

 

The trading activity far outpaced the rise in short selling for all

stocks on the New York Stock Exchange -- or other major airline stocks

as a group on the Big Board -- according to a computer analysis by The

Chronicle of data released yesterday by the New York Stock Exchange.

 

A short sale is essentially a financial market bet that the value of a

particular stock will drop. In a successful short sale, an investor

borrows the stock from a broker, sells it and then repurchases it at a

lower price, returning the shares to their owner and turning a profit

on the difference.

 

Federal securities and law enforcement investigators have been looking

at unusual trading activities in the stocks of AMR Corp. and UAL

Corp., the parent companies of American and United, as well as a

number of other securities in the days leading up to the terrorist

attacks. Specifically, the investigators want to determine whether

someone with advanced knowledge of what would happen was trying to

profit on the ensuing financial downturn.

 

The data released yesterday is part of the NYSE's regular monthly

report on short-selling. It shows that investors shorted nearly 4.39

million shares of UAL in portions of August and September. That

represented an increase of 1.25 million shares, or 40 percent over the

previous month's level.

 

Meanwhile, investors shorted more than 2.98 million shares of AMR, a

jump of nearly 497,000 shares, or 20 percent above what it was in August.

 

Those increases were far larger than the average shorting of stocks

for the two companies' major competitors on the exchange, including

Delta, Continental,

 

US Airways and Southwest. As a group, the competitors saw an increase

in shorting of only 11 percent. And shorting on the exchange overall

totaled only a one percent increase.

 

As reported previously, some of the suspicious trading under

investigation by market monitors, the FBI and the Securities and

Exchange Commission include an unusual spike in the purchase of " put "

options on the stocks of AMR and UAL.

 

A put is essentially a bet that the stock will decline, giving the

buyer the right to sell the stock at a set price at a set time and

delivering profits when the share price drops lower than the agreed

sale price.

 

To be sure, there are a number of legitimate reasons to account for

the increase in short selling that have nothing to do with terrorism.

 

For instance, the airline industry was in serious finance trouble even

prior to the attacks, as business and consumer travel demand slacked

off in a weakening economy. And both AMR and UAL posted huge

second-quarter losses in July and said they could be in the red for

the rest of the year.

 

What's more, short-selling on the exchange has become increasingly

prevalent. Each month has seen a record high, with a new peak of 5.98

billion shares shorted this month.

 

Still, anyone shorting shares of AMR and UAL would have turned a

strong profit. UAL closed yesterday at $17.13 per share, off 44

percent from its close of $30.82 the day before the attack. AMR is

down 40 percent, closing at $17.90 yesterday from $29.70 on Sept. 10.

 

Only one carrier, US Airways, saw a higher jump in short sales, with

an increase of 41 percent. But there were obvious reasons to short

that company: US Airways is laden with debt and was the target of a

takeover bid from United that failed in July.

 

As with put options, it is difficult to tell how much money was made

in the short selling of UAL and AMR stocks without more specific

information about sale and repurchase prices and dates of execution.

 

E-mail Christian Berthelsen at cberthelsen.

 

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