Spin on a multi-billion dollar scale
Carl Icahn, activist investor
On 13th August Carl Icahn single handedly moved the share price of AAPL by almost 5%. By sending two simple tweets, Icahn added $17.1B in market cap. This article discusses the possibility of a dangerous precedent. This is what it looked like:
The image above displays the Apple share price on 13 August 2013, moving from $475 to $495 over a three hour time span. The blue blobs display Carl Icahn’s tweets (see details below). The green blobs represent trades, and the size of the blobs relates to the volume per trade.
The image above displays Apple’s share price on 13 August 2013, zoomed in on the time window just before and after Carl Icahn’s tweet #1. The blue blob represents Carl Icahn’s first tweet. The green blobs represent trades, and the size of the blobs relates to the volume per trade.
What Icahn wrote
Tweet #1 at 2:21:29pm EDT
We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.
— Carl Icahn (@Carl_C_Icahn) August 13, 2013
Tweet #2 at 2:25:09pm EDT
Had a nice conversation with Tim Cook today. Discussed my opinion that a larger buyback should be done now. We plan to speak again shortly.
— Carl Icahn (@Carl_C_Icahn) August 13, 2013
A 17 billion dollar increase in market cap could hardly escape the media, and sure enough, it didn’t. Curiously lacking, however, was any sign of a critical review. The public and media were generally agreeing that Icahn’s tweets were “OK”.
Wired’s business correspondent Cade Metz suggested in his article “Wall Street Rewired: Apple, Icahn, and the $17 Billion Tweet” of 16 August Carl Icahn was just being “clever” adding “Yes, it’s a game. But that’s Wall Street.”
Some quotes from the article that warrant a closer look
- James Angel, associate professor of finance at Georgetown’s McDonough School of Business “There are plenty of people who like to tout their own positions, and as long as they’re not misinforming the public, there’s nothing wrong with that. There’s no grievous ethical lapses in him using modern communication tools to get his message out.”
- “Indeed, the Securities and Exchange Commission has recently said that companies can use social media to disclose financial information — provided they warn investors that it might happen. Icahn’s investment outfit, Icahn Enterprises, did warn the market, saying — in a notice filed with the SEC a day earlier — that he intended to use Twitter from time to time to communicate with the public about our company and other issues.”
So essentially, Icahn is delivering contrarian news without full disclosure of his trading positions. And nobody seems to care, because “that’s Wall Street”.
Critiquing the above quotes
- First, the statement by Angel adds a condition that Icahn should disclose his positions, which the author of the article manages to ignore. Carl Icahn did not disclose how many AAPL shares he owns. What if Mr Icahn had call options in place to inexpensively expand his stake which he owns in AAPL through the bullish tweets? That would change intentionality and it would not just be “talking his book” (Wall Street parlance for touting one’s own positions). What if Mr Icahn in the process helped some friends make a quick profit by pre-warning them about the contents and timing of his message?
The Ancoa team’s view is that the media simply can’t exonerate Icahn by just looking at the tweets in isolation. All of Icahn’s positions would have to be revealed to know his intentions. The SEC sure must have had a few busy days. And we can’t but wonder: will they allow Icahn’s tweets to become precedent?
- Second, Mr Icahn may well have bent the rules here. Through his Nasdaq listed company Icahn Enterprises (IEP) Mr Icahn filed an announcement at the SEC one day earlier (12 August 2013) that he intended to use Twitter occasionally to disclose “material information”. (Because of this, it’s safe to assume that Icahn knew very well the effect that his tweets would have on the stock price.)
This does not necessarily exonerate him of stock manipulation. Did the tweets really hold any “material information”? I’m not convinced. There is a distinct difference between companies using Twitter to distribute quarterly results (which the SEC allows), and spin on this billion dollar scale. It’s not because the SEC allows companies to provide accurate, objective results via Twitter, that market players can use Twitter to try to nudge the stock price in the desired direction.
However, our key point is that the tweets should raise alarms because of their contrarian nature. Let’s contrast Icahn’s tweets with Larry Ellison’s comments one day earlier. In an interview, he described every Apple shareholder’s nightmare: a slow decline of the firm, with an ever crumbling market cap. Apple has lived through that nightmare scenario before, in the absence of Mr Jobs 1986-1997 after John Sculley fired Jobs.
Are those statements of Ellison manipulative? I don’t think so. Ellison’s narrative can be explained as consistent with an ongoing 12 month trend, and as such wasn’t a real surprise. He also is not a fund manager, although he is a billionaire, and knowledgeable about technology.
What did we find ourselves examining the data?
Using our Ancoa platform, we took an in depth look at the market data just before and just after Icahn’s tweets.
Response speed: the share-price started changing rapidly in less than 3 seconds after the tweet.
At first sight this could be explained through the availability of Twitter based trading technology, but in this case there was a warning shot. Mr Icahn created an element of suspense by announcing to the SEC that material information would be shared, so traders could just be looking at Mr Icahn’s Twitter account. He also communicated this to the media on the day before sending the tweets, so we can imagine a lot of traders having their hands ready on the buy or sell button, waiting for the news to come out.
The image above is a close-up of the seconds before and after Ican’s first tweet. The share price sharply increases and trade volume ramps up almost immediately.
A fun thought experiment would be to imagine for a moment that Icahn had tweeted the following statement:
“We currently have a large short position in APPLE. We believe the company to be extremely overvalued. Spoke to Tim Cook today. More to come.”
Would journalists and professors also have considered this “being clever”, or “talking his book”? Although it’s a lot more consistent with the downward trend in Apple’s share price, I’m quite sure that this kind of tweet would have sparked outrage.
Could it be that so many people own Apple stock, that nobody cares when anyone tries to talk up the market cap? Apple’s share price slipped from over $700 a year ago to under $500 right before Icahn’s tweet. And while Apple shares lost over 30 % over the last year, rivals Samsung and Microsoft maintained their value. At this point, Apple fanboys and shareholders can do with some mental support, especially from an expert investor.
The image above shows the demise in Apple’s share price over the past 12 months.
Our conclusion is that we probably have witnessed some classic “vested interest thinking”. In closing, we think it is interesting to remind oneself of Mr Icahn’s adage: “Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity”.
Author: Stefan Hendrickx