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Kass: Felliniesque Action in Green Mountain

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair....

-- Charles Dickens, A Tale of Two Cities

Trading in Green Mountain Coffee Roasters (GMCR) in the after-hours last night was as trippy as a Fellini movie, combining fantasy with baroque price action.

While the company's fourth-quarter earnings results and forward guidance were poor , a 10-year agreement for Coca-Cola (KO) to acquire 16.7 million (new) shares at $74.98 (representing 10% of the outstanding shares and equal to the 50-day trailing volume-weighted average share price of Green Mountain's stock) with an option to acquire up to 16% of Green Mountain over the next 36 months lifted Green Mountain's shares from $80.50 to over $130 (a gain of over 55%) on Thursday evening.

According to the release:

Under their 10-year agreement, the companies will collaborate on the development and introduction of Coca-Cola products on Green Mountain's upcoming machine that will serve both carbonated and non-carbonated beverages, including soft drinks, tea and juice.

At $120 a share, Coca-Cola has made (on paper) nearly $500 million from its $1.25 billion investment in Green Mountain. That is a heck of a start to its joint venture with Green Mountain.

I shorted Green Mountain stock at $128 a share at around 6:00 p.m. EST last night.

For the Green Mountain shareholders, it was La Dolce Vita, as the shares climbed by as much as 45%, to over $130 a share from a close in the low-$80s as Coca-Cola announced that it took a 10% interest in Green Mountain for about $75 a share.

For the Green Mountain shorts, it was more like La Strada (one of Fellini's earliest films about a con man's slow descent to a solitary death). La Strada was a Fellini movie that, in the later stages of its completion, caused Fellini to begin to suffer from clinical depression!

In shorting the shares, I paid no attention to one of my basic short-selling tenets -- namely, never short a stock (it is OK to buy puts, however) in which the short interest exceeds over 5%-7% of the outstanding float or when the short position represents a large multiple to average daily volume. As of Jan. 15, 2014, there were approximately 37.5 million shares short against a float of 128 million shares and compared to daily average volume of only 4 million shares.

With short interest at 30% of the float and 9x average daily volume, Green Mountain Coffee Roasters should have been a nonstarter for me to short. Nonetheless, sometimes (but only in rare instances) one has to reject formulae and move out of one's comfort zone. Such was the case with Green Mountain's share price move of almost $50 (or 55%), to $130 last night.

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