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Rambus, Inc.
The Potential Short Squeeze

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By nukejohn
January 26, 2006

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I'd like to explain my thinking to all on the potential short squeeze.

Over the years, I have spent a lot of time studying support and resistance. Trust me at least on this...once we break the 36.60 - 37 range (no matter what the news), the short squeeze will start and we won't linger in the 38-39 range, we will shoot like a rocket into at least the mid 40's. The resistance at 36.60 is indeed very strong and it has been tested numerous times recently, which makes the "rocket ship effect" when we break it even more powerful.

Now why do I think the short squeeze effect will be much larger than what most people would think by looking at the short interest (11 Million shares) and the Average Daily Volume (ADV) and the Days to cover?

It's important to know why the short interest reported (11 Million Shares) and the ADV (8.5 Million shares) giving a Days-to-Cover of 1.29 are totally bogus numbers. First, keep in mind those short interest numbers were based on data as of 1/13/06...not current data. Since 1/16/06, here's what the price volume action was.

Of the 80+ million shares sold since 1/16/06, undoubtedly we have increased the short interest even more (at least 3 - 4 Million IMHO). For example, look at the I-Watch chart for the past week and you'll see very heavy selling on 1/19, 1/23, 1/24, and 1/25. These are the shorts trying to keep it down. They are shorting and covering (a process called churning). They try to cover quickly (sometime for a loss...sometime for a gain), and they try not to leave many of their short positions open over night, but sometimes this is difficult to do. There is no question that we need news to give the buyers strength to get it over 37, but once we do we now have more short fuel.

1/20 was the day the NASDAQ tanked and everything dropped like a rock (except Rambus)...so on that date there was actually moderately heavy buying that kept the stock up (they didn't have to short it to keep it below 36).

Because of this shorting and churning process, we have been averaging 8.5 Million shares per day, instead of the normal 1 million - 1.5 Million that we were averaging before news hit in early Jan. The shares being traded that get us to an ADV of 8.5 million are not being sold by Rambus longs, or Rambus institutional investors, they are "artificial shares" being shorted and covered by the shorts. When news does hit, if these people continue this practice they will be drowned by a tidal wave of buying.

Additionally I know very few long term longs or Rambus institutional investors who will sell their stock at 50, 60, or 70. Most people have an idea what they think it is worth (post settlement), and that number is at least in triple digits. So, we need an announcement to get it over 36. It would be nice to wake up one morning and have a press release on Rambus web site that has "settlement" somewhere in the title.

The final thing I should explain is in relation to the convertible bond offering. The number of convertible bonds sold back in Jan 2005 equated to approximately 10 Million shares, which based on the 100 Million shares outstanding at the time, equated to about a 10% dilution (if all the bonds were converted). The convert price was approximately $27/share. When the institutions bought the bonds, they hedged a percentage (probably 50-70%) in the event the stock price fell (which it did). The short interest prior to Jan 2005 was running about 3 - 3.5 million shares, but when the Feb 2005 Short interest was announced it was about 10 million shares as I recall or about 7 million additional shares. This makes perfect sense...these were convertible bondholders hedging about 60-70% of their purchase. As the situation changed (Rambus has bought back about half of the convertible bonds), and we are now "in the money" as related to the convert price ($27), I think the convertible bond holders now hold a much, much smaller short position, I would postulate only about 2-3 million of the shares shorted are now held by convertible bond holders...leaving 10-11 million shares held by true shorts (IMO). The bondholders didn't care if the price rose, because they would make out on their bonds more than they lost on their short position...but that is not the case with the true shorts.

Now if I am correct, once an announcement is made, the shorts will have to buy "real shares" from longs...I just don't think there will be very much supply in the $40-60 range. When demand outstrips supply...any stock will soar.

Well, now you have my complete thinking on the subject. First, we will likely need a positive news event to get the stock price over 37...but the supply of shares for sale will be very slim at that price, causing us to jump at least into the mid forties...if not the fifties. If the announcement is a settlement announcement, I would think the initial jump would be at least into the 60's or 70's.

I will no longer try to predict when we have a positive news event, as I was totally fooled by the premarket action yesterday (I thought somebody knew something). I'll just wait until I see a press release on Rambus' web site...and we'll see if the stock price behaves like I have predicted.

NJ

Disclosure: Long Rambus


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