I am up in Maine this weekend at Leen’s Lodge, courtesy of David Kotok’s annual economic summit/fly fishing event. Participants are here from as far away as Chile and Scotland, but its mostly a domestic affair. More than a few names you might know are here: Jim McTeague of Barron’s, BCA research economist Martin Barnes, John Silvia, chief economist of Wachovia, and a soon to be arriving Fed official.
On point to a conversation we had last night is the latest short interest data:
"Short-selling activity rose to a fifth consecutive monthly record at the New York Stock Exchange as interest-rate jitters roiled the market, then gave way to optimism about earnings and the economy.
For the monthly period ending July 13, the number of short-selling positions not yet closed out at the NYSE — so-called short interest — rose 3.9% to 12,950,726,148 shares from 12,467,283,409 shares in mid-June.
Marketwide, the short ratio, or number of days’ average volume represented by the short positions outstanding at the exchange, rose to 8.4 from 8.0."
Over too much Scotch late last night, we had an interesting
discussion last night about the meaning of Short Interest/Margin Debt
expansion: How much of the increased short interest is due to the new
130/30 or 120/20 long short mutual funds?
The mutual fund attempt to
create a product that is competitive to what hedge funds are doing may
be a source of the increased short interest.
I have no idea how much cash is in these 130/30 funds, but I have to guesstimate it in the 100s of billions of dollars.
Might that be a cause of some of the short interest increase? For those who track short interest as a sentiment measure, these funds could be significantly impacting their metric.
~~~
I’ll have a few posts up later, but I will be out on "Big Lake" within the hour . . .
>
Source:
NYSE Bearish Bets Hit Another High
PETER A. MCKAY
WSJ, July 20, 2007; Page C8
http://online.wsj.com/article/SB118489544052672400.html
Sorry about our weather Barry….
:)
Saturday and Sunday will be very nice!
Where are you fishing and what are you fishing for?
130/30 has to have a significant effect. The demand from clients right now is incredible. A lot of stuff is launching in the next 12 months as well so this will get worse.
When CAT reported last quarter, I noted that a large percentage of their profits came from the fall of the dollar, although the actual impact on their financials was low because booked adjustments were about 20% of the total currency impact. CAT properly noted the influence of currency valuations in the notes to their financial statements (which, apparently, nobody reads.)
Briefly, CAT took orders in Euros. These orders had a very long lead time. When the actual sale was consummated, the value of the order was much higher because the dollar had fallen significantly in relation to the Euro. CAT noted that some of the quarterly gains were illusory. But, since orders are not bookable in the financials, they could not place a dollar value of the impact in the P&L statement.
NOW FOR THE PRESENT QUARTER …
In their 8K dated 7/20/07, CAT reported profit of $823 million, or $1.24 per share, for the second quarter ending June 30, 2007. A few lines later, CAT prominently stated that $198 million of higher sales were related to the impact of currency. This amount went straight to the bottom line.
Thus, 24% of their net was due to the fall of the dollar and not due to their productive activities. Removing 24% from EPS would lower it to roughly 94 cents per share.
Dismal.
This is goldilocks???
Perhaps it is time for a stock buyback to raise EPS and look really good?
(PS: I also posted this at Kudlow’s blog. Hopefully, you don’t mind the cross post.)
A lot of DOW stocks that people are pooring money into a seeing this currency effect. When the dollar does bottom out and stabilize, things will come into focus quickly.
Very good/interesting post Barry. I’ve suspected that these market neutral strategies would logically increase the ratios. Yet, a short is a short, no? It still has to be covered (at some point)…so it will make corrections smaller and breakouts bigger (in theory). It should also continue to dampen volatility as well.
Fresh grilled, blackened northern pike! Yummy!
Good luck. You should be able to hook some bigmouth bass. In addition to the scotch make sure you ask David for some wine. He really knows his wine and always serves fantastic stuff.
Usually, high short interest would be a bullish contrarian indicator. This time, I think it is something else. Look at the financial sector stocks…not pretty. Wall Street insiders know subprime is not contained…it is a cockroach indicator (ie. it is not the only debacle out there)…and they are shorting the market. Hedge funds are highly short too…wouldn’t they know how bad subprime is and start shorting?
You would think that it would have some change month to month as each successive whoosh upwards has been fueled by this very same position. Based on the numbers it would seem that the shorties are far from giving it up and reapply at every opp.
market down about 1%……most likely will get cut in half towards the close.
Earnings, not great, are being focused on less and less-but if they were great we would be well over 15k by now. Don’t you love that Cramer piled his minions into tech over the last 6 weeks?
Catch and Release??? or catch and eat??
Ciao
MS
MS,
“Catch and Release??? or catch and eat??”
At first, I thought you meant Cramer and his minions.
Kevin
The market is reacting right now to Citi’s CFO talking about bridge loan problems accelerating…that is what is causing Dow’s drop here
I was shocked to see that someone from the street actually had that call (bridge loan) on Monday
http://www.thestreet.com/s/bridge-loans-leave-bankers-quaking/newsanalysis/wallstreet/10367879.html?puc=_tscs
kevin-
bottom feeders are too chewy……LOL
Ciao
MS
That “CRASH” you just heard was the US$ breaking through the 80 level.
Now 79.96
There’s definitely some short interest there…
No doubt that corporate profits have peaked. All short positions will eventually be in profit. It is almost a slam dunk, if you can handle the draw downs in your portfolio. It is risky but profitable. I don’t see how those lying, cheating frat boys can keep the party going.
The earnings emperor has no clothes…
What was that quip from S&P the other day…you have earnings coming in around 7-8%, but when you add up 2% inflation, 1-2% buyback, and 2% currency effect, they really aren’t making very much real money. Something like that.
Subprime is the first cockroach…bridge loans the second. Jamie Dimon spoke about it the other day…I posted that here, saying he was in heavy spin mode. Citi made the comments at 10:40 AM…C and Dow tanking since then.
and look at Blackstone (BX).
Its important to remember that short selling is no longer used the same way it was 20 years ago (profiting from the market going down). Today we have massive hedge funds that simply short in order finance another position that they think will outperform the shorted stock: For example, if I short Microsoft and use that money to buy Apple, I don’t care whether Microsoft or Apple go up OR down,….both positions balance each other out, and market performance has NO effect on my position. As long as Apple does better than Microsoft (Apple goes up more or down less), I make money, and even better, I didn’t even have take cash out of my pocket. This is a simple strategy many hedge funds, and even individuals are using today, and has no implication as to whether they “think” the market is going up or down since market movement is irrelevant in this position. If one could distinguish what percentage of short sales are pure short plays, that would be more indicative of what the market is thinking, but I have no idea how you would go about doing that…
I’m admittedly stupid. What do the numbers in 130/30 and 120/20 refer to?
Miki,
You could look at put call ratios…the 10 day MA on the equity only put/call ratio is at year lows and turning up, indicating excessive bullishness…the opposite conclusion from the high short interest.
http://stockcharts.com/h-sc/ui?s=$CPCE&p=D&yr=1&mn=0&dy=0&id=p88505842801
Anyone who still owns BX from the get go deserves what they get. Liability offload to retail is what that was ALL about.
Gee how’s Orbitz doing today……..LOL
Ciao
MS
Steve Barry,
Wow, 26.
Makes me almost feel sorry for the bagholders who paid 37 a few short weeks ago.
Speaking of Blackstone (obliquely…as per steve)…can anyone comment on a point I heard raised twice in the last two days. Companies that have been taken private usually come back in IPO form within 18 months. When will we start seeing the pickup in IPOs? Are they behind schedule or on schedule? Private equity cannont afford to hold on to all these companies forever.
Sven-
I see no value to investors by doing that…..but yes you are correct there should be alot more secondary IPO’s with all the activity in the last two years. Maybe the strategy of doing nothing to the company and securing loans through it’s assets and re-launching to pay off the debt is hitting a snag somewhere?? I can’t imagine where they would be running into some problems……LOL
The Hertz IPO was a sign of things to come….
Ciao
MS
BTW I just love that the movement in the dow is CAT and Goog’s fault. They can’t blame oil, at least today they can’t….
Ciao
MS
Pool Shark…where do you see the dollar below 80 on this chart?
http://quotes.ino.com/chart/?s=NYBOT_DX
BKX is forming an intraday inverse head and shoulders..should lead the rebound.
COVER UP
“What do the numbers in 130/30 and 120/20 refer to?”
The long/short position. If I have a billion dollar fund, 130% of the portfolio value is long and 30% is short, netting a 100% invested fund.
This officially in: “It’s the weather.”
All this means is that this market is going higher. Much much higher….
Yesterday’s DJIA 14,000.14 close reminds me of the 9 Feb 1996 high of 995.15 as a numerical milestone. If we are in a market driven by inflated dollars, will 19 July be the “high water” mark for a long time like 1966 high?
Interestingly, according to Bloomberg, as of today, the yield curve has re-inverted.
The 10-year and the 3-month yield inverted over a year ago, raising recession warning cries from the bears.
Then, when it de-inverted a few months ago, many bulls declared victory. Now it’s re-inverted again.
Advantage: bears?
I get the feeling the short interest is not a clear cut bullish contrarian indicator this time. Theres been a mass of bullish feeling in polls etc and that hasn’t dented the bull one bit which is usually how it works. Generally this is just one crazy market in which nothing seems to make sense. Fundamentals and technicals seem shot to bits and does have a slightly contrived feeling about it. I really have to worry though when we have one down day on the market and already people are talking about when the cut will come, what the hell is going on with these people, the dollar will get absolutely smashed and as we all know apart from all the stuff going up in price theres no inflation. If they cut, then thats it fu*k the dollar, people talk about gold, but at the moment only the currency markets can see this for what it is.
Quote Si: “I really have to worry though when we have one down day on the market and already people are talking about when the cut will come, what the hell is going on with these people, the dollar will get absolutely smashed….”
Kevin Depew at Minyanville pointed out the following quote from the FOMC minutes:
“Some participants noted a risk that the saving rate could rise more than currently foreseen, particularly if household wealth were depressed by a further softening in house prices or by a less buoyant equity market that might accompany a potential slowing in the growth of corporate earnings. Several participants noted that higher interest rates and a potential tightening in credit availability might also be factors that could contribute to a rise in the personal saving rate.”
This is an odd statement. A rising savings rate a risk – and the savings rate has been negative now for 8 straight quarters. How can ratitional and prudent behavior – spending within a budgetary limitation – be classified as “risk” unless this is a blanket admission that the entire economy is based on present consumption of future productivity gains. It seems the only concern of the Fed is a continued inflation of assets, while controlling future productivity gains that would lead to higher wages.
What is the next step, the U.S. Treasury Visa card instead of a SS number? Can’t have the proletariat actually saving money, now, can we?