The Northern Pacific Corner (1901)
In the spring of 1901, J.P. Morgan fought with a group of investors led by Edward Harriman for the control of the Northern Pacific Railroad — which would lead to the control of all railroad freight receipts and fares to the Pacific coast. Harriman started by acquiring $40 million in common stock, running just short of 40,000 shares of gaining control. J.P. Morgan got wind of the scheme and, in a panic, rushed out to acquire the remaining float of stock. Morgan’s large purchases sent prices soaring from $114 to $147 per share in five days.
The Short Pressure Increases
A group of short sellers noticed the unusual increase in prices and built a large short interest in the stock. On May 9, short sellers realized that they were caught in a bear squeeze from both Harriman’s corner and Morgan’s response and the price went from $170 to a record level of $1,000 during the day. The market for other stocks plummeted, since short sellers were hard pressed to cover their positions by selling their other stocks.18 The trading volume was 3,336,000 shares for the day, a record not broken until 1925.
Morgan and Harriman agreed to settle with the short sellers at $150 the next day. The lesson here is that it was very dangerous to short sell, even back when it was easier to do it. Today it is harder, and I don’t ever want you to think about short selling. You can accomplish the same goal as short selling with far less risk using stock options — just buy puts.
– Doc Brown
BIO: Doc Brown is a national expert on the stock market. His courses “How to Make a Million Dollar Portfolio from Scratch” at the Oxford Club is a national bestseller. Dr. Brown’s research appears in some of the most prestigious academic journals in the field of finance. See Journal of Financial Research and Financial Management. Scott is an associate professor of finance in the Graduate School of Business at the University of Puerto Rico.
SURVIVAL RULE: Never sell short in the stock market — buy puts if you must go short!
NOTE: Thomas, D., 1989, The Plungers and the Peacocks: an Update of the Classic History of the Stock Market, New York: William Morrow and Company, Inc.
FURTHER READING: Kyle, A., and W. Xiong, 2001, “Contagion as a Wealth Effect,” Journal of Finance, Vol. 56: 1401-1440 develop a model that captures this contagion effect.
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