On Short-Sellers and Dishonest Executives 18 comments
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Why are some folks in the business media, corporate leaders, etc, taking the nonsensical position that people who take short positions have no goal other then to destroy a company, even going so far as to say that they're anti-capitalism and/or wealth creation? Based on some of the things I've read lately I think some of the critics of short-sellers would've cheered investors who poured money into Countrywide Financial (CFC) after their Q3 '07 earnings report and chided the short-sellers, even though (in the end) it's the short-sellers who created wealth for themselves while the people who went long lost money.
Where is it written that investors can only be bullish? Where is it written that it isn't capitalist to find ways to profit from a company's decline? From my perspective a true capitalist finds way to profit no matter what the situation; there is nothing inherently "less capitalist" about shorting rather than going long because in both cases the goal is to create wealth.
As it is the companies that are targeted by short-sellers are nearly always ones that have fallen on hard times, companies that are losing money, market share, etc., etc. Why are people deriding the people who decide to short these companies in order to profit from the situation, as opposed to those who pour money back into them based on a single quarter's performance being slightly "less bad" then expected? Furthermore it's not like shorts control the markets (short-squeeze anyone?), the markets on aggregate have to believe a particular company is going down hill for the shorts to make money otherwise they'll lose it. All that's happening is that the shorts are recognizing the fact that a company is in trouble before the market does.
Anyone who shorted Enron in February of '01 was simply ahead of the curve, not the source of the company's malaise.
Short-sellers aren't out to destroy companies they're out to profit off of companies that are digging their own graves, pundits shouldn’t be blaming the shorts they should deriding management for creating the situation in the first place. I find it laughable that anti short-selling pundits will rattle of the names of near insolvent companies that need to be protected from short-sellers, as if they're healthy, growing companies that are being oppressed by capitalist Grinches.
I ask (again) where are all the anti-short seller crusaders when a company's management gives overly bullish statements that later turn out to be false, are they giving these liars a pass because they care more about supporting the ideology of always being bullish rather than fair markets? As I said before bad management is what destroys wealth and companies not short-sellers, and overly bullish statements by the management teams of companies like Countrywide, Merrill Lynch and Circuit City (CC) (just to name a few) have destroyed 100s of billions of shareholder wealth. If the anti short-seller crusaders are truly interested in protecting wealth creation perhaps they should focus on the real enemy: incompetent, overpaid and dishonest management teams who destroy companies and shareholder equity.
The markets should be about finding ethical and moral means of making money and generating wealth, not supporting an ideology that says the markets have to go up and anyone who isn't bullish is "against wealth and capitalism".
Anyone who truly supports fair markets shouldn't be too concerned about whether investors are bullish or bearish, they should only be concerned about whether or not their behavior is legal. In other words, they should be more worried about the recent shenanigans of companies like Merrill Lynch than they should about people shorting money losing financials with opaque balance sheets. Because dishonest and incompetent management teams are the true destroyer of wealth.
Methinks a lot of the row over short-selling really stems from corporate managers that need a scapegoat to hide their own incompetence, and investors who need same.
Disclosure: At the time of publication, the author didn't own a position in any of the companies mentioned in this article. He also freely admits that he shorts the stocks of companies he finds abysmal and goes long the companies he believes in.
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This article has 18 comments:
One would be hard pressed to believe your expertise as a "shorter" and praise of that flavor of "investing" would leave you ignorant of the naked shorting problems.
So, where was the discussion of THAT HUGE MARKET MANIPULATION?
First I'd like to thank you for reading my article.
Second, I'd like to point out that in no part of my article did I say anything positive about naked short-selling, or claim that I was in favor of it. In fact I clearly said that anyone in favor of fair markets should be against ALL ILLEGAL and/or UNETHICAL behavior, whether that includes naked shorts, false rumors or executives who blatantly lie about the state of their companies.
The article is more about people who rail against all short-sellers, while ignoring bigger threats from lying executives then it is about naked short-sellers. It was also about the fact that there is nothing inherently wrong with legal short-selling.
When having these discussions it's important to differentiate between naked short-selling and legal short-selling, as they're not one and the same.
-M
LOOK AT GARY WEISE latest article “Naked Short Selling Stunt: 'Swatting an Imaginary Fly'” Note how they no longer allow comments on that crap poster. He should not even be on the shorting ideas list. He has bashed the Overstock CEO implying that he was crazy off balance and was shooting at fairy tales. This guy is working feverishly trying to first say that Naked shorting does not exist and then saying that it is only a insignificant problem. He is a propaganda artist for the Hedge funds.
Now a new book is coming out on Bears and the naked shorting. The HUGE rally in financials resulted with ONLY explanation being the FED disallowed naked short selling. They did not even take away the MM exemption yet some financials rallied 40% in one week!!
Watch who and what organizations try to discredit the idea of naked short selling. Ask your selves who do they really work for.
Look at CALM it has 125% of its shares shorted. Who you gonna belive Gary or your lying eyes.
I'm an investor. Any irrational move threatens me (I can pick my opportunities, but that runaway truck could come through anywhere). If a company mends its evil ways and seems poised for a turnaround, a determined bear raid can drive it out of business. That's as bad for me as a rockstar CEO producing an unjustified run-up, and a good deal harder to anticipate.
So? Well I'd sure like to have the uptick rule back. And on the other side I'd like to see legal margin requirements (and related capital requirements) used to push back on buying stampedes.
The problem with all who justify the merits of short seller (including this author) is that not a single one has said anything about fair disclosure on who is lending and who is borrowing. Also, nothing has been addressed on how the cost of borrowing is determined which reflects the full market value of borrowing shares. When these 2 issues are fully addressed, can I say truly that short selling is fine. Under the current system, short selling is just so skewed to the advantage of the shorter that the longs have been taken for a ride and many don't even know it.
Make sense?
The other issue is that lying executives know their companies are in trouble when they say things like: "We'll be profitable next quarter, don't need more capital, no more write downs, etc", while legal shorts are shorting companies that investors are dumping due to the companies being in trouble.
So who is the real menace?
-M
I too think naked short selling is terrible and I worked a market where actually added to liquidity, however, I also seen naked shorting destroy companies. You have proven short sellers like Rocker funds who's research and clout with other shorts-hedge funds in the market team up on those stocks putting pressure that normally wouldn't exist because most people could get a locate to short a extremely "tight" stock.
I agree with glassbox the average investor doesn't know that their shares are being used in some cases against that. Of course you can always move those to cash and the brokerage cannot borrow them but in most cases those brokerages make a lot of money borrowing shares of those clients so it doesn't matter anyways.
Typically Prime brokers make large amounts on those "tight stocks" it is a daily rate that's computed internally on how hard they are to locate. I can tell you this, that revenue in this current environment is sorely needed.
lobster
Good article. I like to "short against the box" in volatile markets for downside protection of long-term capital gains (and sometimes profit). Since I am shorting companies I already own, this is a good example of shorting that does not have the objective of "bringing down the company". In many cases, shorting against the box is a much more cost effective way to hedge than buying put options. The more volatile a stock, the larger the time value in the premium. Writing calls as a hedge provides limited protection, whereas, whereas selling short provides unlimited value protection. Finally, selling short has no expiration date.
Good luck Markham... many "investors" made one decision buys on stocks a year or two back and have been buying down/catching the falling knife ever since under the mistaken premise that bear markets bestow wondrous "bargains" on the uninitiated, without ever once getting humble and looking at their own decision making process in the losses THEY have sustained... these people aren't going to be patient with ANY type of short selling. Read the message boards... these people are blaming the shorties, the naked shorties, the media, the "manipulators", the bashers, the SEC, the hedgies, their dog, the man in the moon for their losses... never once are they looking at the fact that it was THEY who kept buying into this bear market disaster.
You're a convenient target for people who can't look in the mirror at their own responsibility for their misguided investment decisions.