Larry Rosenblum: ‘Thanks for your recommendation about Kurzweil. I listened to the program and found it very enjoyable. I think he’s probably right about technology, but, like so many other technophiles, he apparently slept through history class. I came across an interesting web page recently, related to the astounding computing power we will have in the future. It is a paper by an Oxford philosopher. The nickel summary is this: pretty soon, we will have the technology to run a computer simulation of a civilization (he uses our ancestors as a likely scenario). Given that, there is a possibility that we, in fact, are nothing more than a simulation being run by some advanced species. (Interesting possibilities about what religion means in that scenario.) Further, in order to avoid simulations running simulations running simulations, it is likely that the beings running our simulation will terminate it just when we are about to run our own simulations. He suspects that will happen around 2050.’

☞ So . . . Second Life but not Third Life?


But only because it’s changed its symbol from HAPN to INHI (and its name to Infusystems Holdings, Inc.). The stock has done badly, down from nearly $6 to $4, but our warrants are still fine (we first bought them around 32 cents when the stock was $5.80; now they’re 35 cents) and give us the right to buy the stock at $5 any time until 2011. As measured by options models, they continue to be undervalued – and, still, highly speculative. I hold mine knowing they could go to zero, but hoping they might – might! – go to $3.

Bloomberg shows a large short interest in the stock – more than 6 million shares – which at first blush suggests some smart people are convinced it will fail. But maybe not. Maybe they don’t have a clue how the company will do, but see an opportunity to make an interesting bet.

Let’s say you had purchased the warrants at 25 cents and later shorted the stock at $4.75. Where would you stand?

You’ve locked in a $4.50 gain if the company fails and the stock goes to zero ($4.75 on your short less the 25 cent cost of the warrants); but are exposed to a maximum loss of just 50 cents if the stock goes to the moon (because all but 50 cents of what you lose on your short you would make back on the warrant.) Heads you win $4.50; tails you lose 50 cents (well, worst case, 75 cents, if when you close your position the stock is exactly $5).

So unlike a normal heavily shorted stock, where a lot of people feel really confident the company is doomed in some way (or else why take so much risk?) . . . with this trade they don’t have to be that confident (because the risk is much smaller). Indeed, the sophisticated short-sellers get paid interest on their short positions, so in the three years they might wait for this to play out, they stand to make even more if the stock goes down or lose even less if it goes up.

(Note that this tactic was more attractive to execute when the stock was around $5 than it is now that the stock is at $4.)

Or say you’re a big player with 1,000,000 warrants you paid 30 cents for and you short only 300,000 shares of the stock at $4.50. If the stock drops to 50 cents, you make $4 on each of the 300,000 shares you shorted – $1,200,000 – less the $300,000 that you paid for the 1,000,000 warrants. If, instead, the stock jumps to $8, you make $3 million on your warrants (exercising them at $5 and selling the stock at $8) and lose only $1 million or so on your short. So: heads you make $900,000, tails you make $2 million. (If the stock rises to $5 and stays exactly there, you lose the $300,000 that your warrants cost plus $150,000 on the short sale. This combined $450,000 loss is the worst possible scenario you face. So I guess it’s heads you make $900,000, tails you make $2 million, edge you lose $450,000.)

I run through all this to suggest why it’s possible some large smart investors have shorted 6 million shares of INHI. Especially when the stock was higher, there were some interesting strategies to be pursued this way. . . not necessarily because they felt sure the stock would do badly; just because they could set up a bet with good odds.

That said, there are few free lunches in the market, and all the above suggests to me that it will be hard for the stock to get much above $5. Because as it gets into that range, it becomes more attractive for warrant-holders to sell short more shares to set up these bets.

So for the next three years the stock could trade at or somewhat below or just a bit above $5 – with our warrants expiring worthless – only to see the stock do quite well in the months following the expiration of the warrants, once the incentive to execute these short-selling strategies disappears, and once the company has received a large influx of cash from all the people who paid the company $5 a share to exercise their warrants, thereby to cover their short sales.

Then again, we could get lucky, and some big mutual fund or three could look at the company’s progress (if it should make good progress) and decide the stock is worth a lot of money, and buy a few million shares each. That could be enough to absorb any further short-selling and actually push the price of the stock up.

I am not holding my breath; but, at 35 cents, I am holding my warrants.


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