Ok first some hard news about Trump's social media company, called Truth Social and trading under DJT:
- Two large firms of auditors resigned from the company before its "listing"
- One small IPO mill auditor provided the necessary paperwork so that the company could be acquired, yet indicated that the company had issues as a going concern.
- Since then the auditors have been shut down by the SEC for being an IPO mill where more than 500 companies were affected, and more than 1,500 SEC filings were issued (fraud in terms of audit standards). Truth Social has hired Semple, Marchal & Cooper LLP, a small Phoenix-based auditor (may 6) (there is a real shortage of auditors anyway)
- Truth Social has seen its stock price rise to above $50 per share giving the company a market capitalization of nearly $7 billion. Trump received another 36 million shares increasing his ownership of the company and diluting outside investors (Trump is now 65% owner of Truth Social)
- Truth Social announced that Q1/24 results would be delayed while the company sought new auditors. The timing delay of the release of Q1 results is unknown.
- No new metrics for the site have been released (traffic etc).
- The CEO of Truth Social has asked that Congress investigate short sellers because the share price is too low...The only results available for the company are that it generated sales of $4.1 million and losses of more than $20 million.
Now, I was until 2019 a strategist for high-net-worth investors in the UK. There are many things wrong with the US capital markets, Truth Social is small potatoes, and some of the recent IPO news has been far worse; how about the listing of a Chinese EV company on the New York Stock Exchange where it raised nearly $4 billion with an implied market cap of $40 billion. The history of Chinese EV companies listing in New York has a 100% rate of failure for American investors....draw your own conclusion. So the Trump game is almost of no consequence, outside investors are still a tiny sum of money.
Why people buy the hype is unclear, but even among high-net-worth investors comments at times about the valuation of a company led to hair-raising thoughts on my part. Many play in the stock market and fundamentally don't understand the link between price and value, granted there have been some unbelievable exceptions, Facebook, Google, Microsoft and Tesla, but they all shared one aspect in common, they were disruptors and not followers.
However, for many investors who are generally uninterested in the basic concept of investments these issues are of no concern, and so like all fools eventually they will soon lose it all because the day that Trump sells his stake in Truth Social is the day the share price collapses. If you see the role of Truth Social as an engine of wealth creation for Donald Trump it makes perfect sense.
There are 34 million shares available for trade, the rest are locked in for 6 months after the IPO. The daily volume is around 6 million shares, the implication is that 100% of the float is traded every week. This means that the average hold of DJT is around 5 days. Those who play in the shares are probably not long-term investors but day traders looking at the volatility and seeking to make a quick return. For the short sellers (the one the CEO complained about) the cost of borrowing a DJT share is high, around 5% per week) so short sellers are not very active here. The borrowing premium is too high, two reasons for high volatility but also with an average hold of 5 days (actually 5.7 days) holders just don't want to lend their shares, they are not value investors they are trend followers. A very different animal. Part of the issue for the company is that they are well aware of this, and the day that the market goes Bear on this stock the price will drop very quickly, Short-term term holders are active market participants.
Note: In April 2024 the annual cost of borrowing DJT was between 700% and 900% of the face value of the stock, or 1.5% to 2.0% per day. To short at these costs makes almost no sense, unless you are naked shorting which is a very very risky strategy because it is illegal and brokers who are caught doing this lose their licenses. Right now the price has gone from mid 30s to $50 per share, not a lot of short interest then, rather it will be 100%, momentum traders. This is not a buy and hold is a buy watch like a hawk and sell stock.
Note: naked short selling occurs when an investor sells the share without owning it (or borrowing it), so when the transaction comes to close (T+2), it is rejected. However, if the "investor is fast enough" he can have bought the share outright and say the transaction failed, but he had the share, It's illegal because the seller cannot deliver the certificate, therefore the buyer will never get his share...its simple fraud!
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