After the intense sparring session, the Kingston family gathered in the quiet of the study. The large room, lined with bookshelves and illuminated by the soft glow of a table lamp, provided a sanctuary for their private discussions. John settled into his favorite leather armchair, while Mary and Elizabeth took seats on the nearby sofa. George leaned against the mantelpiece, his expression thoughtful. Michael, still slightly flushed from his sparring, sat attentively, waiting to hear what important matter had brought them all together.
"It's about that prediction Michael made last week," John began, his gaze resting on Michael.
Mary and Elizabeth looked at each other, then back at John, a silent question in their eyes.
George then elaborated for Mary and Elizabeth's benefit. "Michael foresaw that the stocks of some railway companies are going to experience a significant spike and then an immediate and dramatic downfall within the next month."
Elizabeth's brow furrowed, then cleared. "So, big spikes and immediate downfalls? That sounds like a short squeeze." She had a good understanding of the intricacies of the stock market.
Mary looked confused. "A short squeeze?" she asked, unfamiliar with the term.
Michael leaned forward to explain. "Alright, Mother, think of it this way. Imagine a lot of investors think the price of one of these railway companies, let's say 'Iron Horse Rail,' is going to go down. So, they decide to 'short' the stock. What that means is they borrow shares of Iron Horse Rail from someone else and then sell them, hoping to buy them back later at a lower price and pocket the difference. It's like betting the price will fall."
He continued, "Now, what happens if, instead of going down, something makes the price of Iron Horse Rail suddenly jump way up? Maybe they announce a huge new government contract, or they discover a new, very efficient engine. All of a sudden, everyone wants to buy Iron Horse Rail, and the price starts to skyrocket."
Michael's eyes twinkled. "The people who 'shorted' the stock are now in a tough spot. They borrowed the shares, and now they have to buy them back at a much higher price than they sold them for, which means they're losing a lot of money. To stop losing even more, many of them will rush to buy back the stock – any stock they can find – to 'cover their shorts.' This sudden wave of buying from all the short sellers who are trying to get out of their losing bets pushes the price even higher, like squeezing water out of a sponge. That's a short squeeze. The price goes up really fast and really high, not because the company is suddenly worth that much more, but because all the people who bet against it are desperately trying to buy it back."
After Michael finished explaining the concept of a short squeeze, Mary nodded, absorbing the information. "Which companies are they?"
John, Mary's husband, sighed. "Well… only one company is predicted to have that big spike, but more companies will experience a downfall in their stock prices as a result."
Elizabeth's curiosity was piqued. "Don't keep us in suspense! Which company is going to spike?"
Michael laughed lightly. "It is the Northern Pacific Railway."
The Northern Pacific Railway was chartered by President Abraham Lincoln in 1864 as the first northern transcontinental railroad in the United States. It received significant land grants to incentivize the construction of a rail line connecting the Great Lakes with Puget Sound on the Pacific Coast. Construction began in 1870, with efforts moving westward from Minnesota and eastward from the Pacific Northwest.
The railroad faced numerous financial and logistical challenges during its construction. However, on September 8, 1883, the main line was completed with a ceremonial driving of the "golden spike" in Montana, marking a major milestone in American transportation. By 1900, the Northern Pacific Railway had expanded to encompass approximately 6,800 miles of track, serving a vast territory across states like Wisconsin, Minnesota, North Dakota, Montana, Idaho, Oregon, and Washington.
"So, did you do any research based on Michael's prediction?" Mary's tone conveyed both trust in Michael's abilities and the inherent caution of a seasoned businesswoman.
Though they deeply trusted Michael's predictions, the Kingstons were always prudent and conducted their own thorough research.
George nodded. "We did. And we found something rather significant."
"It seems Edward H. Harriman, of Union Pacific Railroad, has been quietly and steadily buying up shares of Northern Pacific."
The Union Pacific Railroad controlled a significant network of rail lines, primarily operating in states like Nebraska, Kansas, Colorado, Wyoming, and extending into Utah.
"But how did you get hold of this news? Harriman buying up shares isn't exactly public information," Mary asked, her curiosity evident.
John smiled knowingly. "Normally, you're right," he replied, "it wouldn't be something we'd easily uncover. But having Michael's specific prediction, the name 'Northern Pacific Railway,' gave us a crucial starting point. Once we had a specific stock name to look into, our people were able to track the significant trading activity and identify the likely buyer as Edward H. Harriman's proxies."
"So if James J. Hill hears about this, he will also buy," Elizabeth said, understanding the escalating situation.
"And Harriman's buying will only increase the price further," George added, his brow furrowed in thought.
"Then the people who are thinking about shorting the stock will need to buy them back to limit their losses, and that buying pressure will increase the prices even more, creating that loop I explained. But," he cautioned, "at some point, this madness stops. The price will fall. And once it falls after such a huge spike, there will be significant consequences."
"Like normal investors, seeing such volatility, might think the entire railway market is unstable and start mass selling their holdings," John continued, explaining the broader implications.
"Then there will be panic," Mary finished, her voice laced with concern.
"Exactly," Michael confirmed.
A tense silence filled the study as they all considered the potential fallout.
Finally, John broke the silence. "George, do we know what a share of Northern Pacific Railway is trading at currently?"
"Last I checked, it was around 95 dollars a share," George answered promptly.
"And how much liquid cash do we have at the moment?"
"We have approximately 2 million dollars in immediately accessible funds," George replied. "We could potentially borrow more if needed."
John steepled his fingers, his mind racing. "Borrow another 3 million. That would give us a total of 5 million. At $95 a share, we should aim to buy at least 50,000 shares."
George nodded, his expression serious. "Understood, John."
A determined look settled on John's face as he glanced around the room at his family. Once again, they were preparing to place a significant bet, guided by Michael's extraordinary gift. The unfolding drama in the railroad industry, fueled by the ambitions of titans like Hill and Harriman, presented a risky yet potentially enormous opportunity.
*******
As the Kingstons watched with bated breath, the month of May arrived, bringing with it the culmination of the fierce battle for control of the Northern Pacific Railway. Michael's prediction of a sharp spike followed by a crash was about to play out on the national stage.
James J. Hill, the "Empire Builder" and the man behind the Great Northern Railway, was determined to maintain his dominance over the Northern Pacific. He had the powerful backing of J.P. Morgan, the titan of American finance, whose vast resources and influence were firmly behind Hill's ambitions. J.P. Morgan was known for his role in reorganizing and consolidating major industries, including railroads, and his support was a significant asset.
On the other side was Edward H. Harriman, the ambitious and shrewd head of the Union Pacific Railroad, who was equally intent on acquiring control of the Northern Pacific to further expand his own railway empire. Harriman's efforts were supported by William Rockefeller, the brother of John D. Rockefeller and a highly influential financier in his own right, bringing the weight of the Standard Oil fortune to Harriman's cause. He also had the backing of Jacob Schiff, the head of the prominent investment bank Kuhn, Loeb & Co. Jacob Schiff was a key figure in American finance, known for his strategic investments and his willingness to challenge the established order.
The tension escalated as both Hill/Morgan and Harriman/Rockefeller/Schiff factions began aggressively buying up shares of Northern Pacific. The intense competition drove the stock price higher and higher. Short sellers, who had bet on the stock price falling, found themselves in a perilous position, facing mounting losses as the price soared. They were forced to buy back shares at inflated prices to cover their short positions, further fueling the buying frenzy and the dramatic spike in the Northern Pacific Railway's stock.
By May 6, 1901, the intense buying had pushed the price of Northern Pacific Railway stock to $150 per share, and it showed no signs of slowing down. The Kingstons, following Michael's prediction, had already begun to execute their selling strategy. When the price reached a remarkable $250, they cautiously started selling their initial 50,000 shares. As the frenzy continued and the price climbed further, reaching an astonishing $700 by May 8th, the Kingstons had reduced their holding to their final 10,000 shares. They sold these remaining shares immediately at that dizzying peak of $700. Although the price surged even higher the next day, almost touching $1000, the Kingstons were far from disappointed. Their calculated gamble had paid off handsomely, netting them approximately 20 million dollars in a single, swift transaction.
The situation was far less fortunate for numerous speculators who had bet against the Northern Pacific, selling the stock short in anticipation of a price decline. As the price soared to unprecedented heights, these short sellers faced financial ruin, desperately trying to cover their positions at exorbitant prices. The very stability of the economic market hung precariously in the balance, with the threat of a widespread panic looming large.
Ultimately, neither the Hill/Morgan nor the Harriman/Rockefeller/Schiff factions could secure a decisive victory in their battle for control. Realizing the potential for catastrophic consequences for the broader market, the powerful figures were forced to call a truce. However, the artificial inflation of the Northern Pacific stock price had created a bubble, and the cessation of the intense buying pressure led to an inevitable market crash, sending shockwaves through Wall Street and beyond.