Via the WSJ Deals Conference:
Short-Sellers, The Ackman Approach
June 14, 2008 2:30pm by Barry Ritholtz
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When did common sense become controversial?
Brilliant interview. His best point is that if a public company’s viability is threatened by a simple vetting of the facts comprising their balance sheet, then they are carrying too much leverage on their balance sheets. I love his point about how Lehman should have raised capital back when their stock was trading in the 60’s.
Shorting is a great way to strip out volatility and harvest alpha. In my personal portfolio I nearly always carry an equal short position to counterbalance my long positions. Using this market neutral approach my portfolio has beat the Market by over 20% since Feb 1 this year. I am conducting a “live test” where the next week’s trades are listed each week at allstarstockmodel.blogspot.com
BTW, I am an amateur. Thanks to inverse ETFs it is now ridiculously simple to create portable alpha.
it should be obvious to any rational and fair minded person that shorts should be treated equally to longs in a free market society. as Ackman says, shorts are an important source of information concerning the weaknesses of a company.
the problem is we don’t have a free markets. we have a geared system that is heavily tilted in favor of corporate and investment institutions that have been given free rein to feed at the trough of the taxpayer system. the great shift of wealth from hard working middle class America to the elitists swine of this country who have figured out a system that is just complex enough to avoid public scrutiny.
i’m reading Einhorn’s book now and its clear that he is an honest, well raised son of hard working parents who is trying to expose the unfairness of the system.
its enough to make one ashamed of being an American.
I have no problem with shorting or short-sellers expressing their views in the same forums as longs. But by the same token, if someone scoffs at the latest Lehman buyout rumor (which is certainly justified), then he should also scoff when someone stands up in the middle of a crowded social gathering and shouts, “Allied Capital is heading for disaster.” So don’t hand me a bunch of bull about freedom of speech or how the Einhorns of the world are doing the markets a favor if only we’d listen to them. All you can say is that many shorts are no worse than many longs. BFD.
A market sets prices by a process of discovery. A market is a discussion that comes to an informed consensus on the value of a stock, bond, horse, or whatever. Everyone with money in the market has rightfully expressed their opinion.
Why can’t the idiot interviewer SIT UP like a PROFESSIONAL when conducting an interview. He looks like a 12 yr old boy that’s bored. Another reason why WSJ is not credible, they’re unprofessional.
Another example of the Bush Admin using gov. to oppress the people instead of protecting. This time it’s the SEC…. Remember all the contaminated beef that the Admin. help cover up thro’ the FDA… these people are SO Confused… Worst in History….
Someone answer me this: If being able to short prevents bubbles, why was there a tech stock bubble in the 90’s? Wasn’t it possible to short the tech stocks? Didn’t that bubble only burst when the Fed raised rates like a fighter jet doing a vertical takeoff?
Shortism.
This is shortism pure and simply. Long only, suburban retail investors can’t abide by a short seller socially… or going to their kids’ school(s), drinking from the same fountain, god forbid you marry one. These shortists must be met and challenged wherever they reside: in the home, at work, at church, hanging out all day at the local Schwab office watching the tape.
Our leaders must act, affirmative action-like, to mandate each and every investor have a minimum ten… no thirty percent short (could be 130/30, let’s see what comes out of committee.)
And one day, this great nation, finally living up to its creed may have a short President. hallelujah (no caps) is our cry.
@SSM | Jun 14, 2008 4:22:22 PM
Good point; I think Ackman was wrong on that one. If he had been able to short ABX in 2004 or homebuilders, etc, he would have seen huge losses before the market turned. And it turned because greater fools were becoming increasingly rare for housing just as they were in 2000 for equities, not because of shortsellers.
Shorting investment banks: BAD
Shorting oil futures: GOOD
Wouldn’t shock me to see something like this happen here:
http://blogs.ft.com/maverecon/2008/06/short-changed-on-short-sales/
Britain trying to stifle shorts specifically in banking rights issuances.
In my experience, every time a company attempts to focus attention on short-sellers, it’s a huge red flag.
As an amateur investor I would like to offer an observation:
It seems to me that bubbles are related to interest rates rather than short selling or long selling. Low rates promote leverage which in turn causes the bubble to inflate. The bubbles get inflated by money borrowed at low rates and they burst when the rates get high enough that the bubble investors fear they will not be able to cover the costs of borrowing. You can kind of see the same pattern in the .com and housing bubbles exploding after rates start going up and I guess the expectations are for them to continue going up. It also seems the fed is always late in raising the rates and then late again in lowering.
Another observation is that even if there are no short sellers stock prices can still go down.
I will also offer a prediction that rates going up will burst the energy bubble.
Does this make sense?
I agree it really puzzled me why the interviewer was lounging around the interviewee in contrast was very engaged and upright as possible in that style of chair.
The bottom line is that if you have a good company that does things the right way 100% of the time then you won’t have to worry about short sellers because there will be no cracks to exploit, but if you get greedy and cut corners you just might get burned as short sellers open up the wounds and pour salt. Take short sellers away and the market is screwed because companies can do whatever they want.
The fundamental structure of the market is biased and riddled with conflicts of interest: When brokerages can also be advisor, bank, product originator and investor then the institution providing analyses also manages transactions, designs what is transacted and extends the credit necessary to complete the sale (or leverage it) w/ full knowledge of client order flow providing all arbitrage information necessary, don’t really even have to bother frontrunning unless in the mood to draw a bit more blood than usual.
The real money in that business is made long so short sellers not only swim against the tide of laws and regulations supporting the purveyors of the market they must also dart in and out between the purveyor’s jaws to pick off the bits of flesh hanging therein while dealing with the drag of carry cost pumping through the big predators’ gills.
Metaphors, the right to free speech and action, and all that aside I’d guess short-selling takes some work and those who do it deserve what they earn as much as anyone else …or, stated another way, none of us who delve in financial instruments deserve anything different if only because the big predators are taking bites out of us as well. JMO
When did common sense become controversial
———-
The problem is that common sense is not very common! In French it’s “gros bon sens” (good sense)
SSM—tech bubble in part due to tiny floats of the Internet darlings when they first went public. Until the lockups expired, there were no shares to borrow and sell. Once the lock ups expired, folks like Sir John Templeton made millions selling stocks of companies they understood would never make any money at all…Value guys who tried to short too soon got hammered. Adding to the upside buying pressure at the end.
You would think in a free market environment that there is a balance to be struck between Longs and Shorts that create an equal playing field that will set a stock price. If true, then there is no debate – each should have an equal voice. However, that’s not the reality.
The BIG issue between Longs and Shorts is that Shorts have a significant loop hole that is being abused – and can only be abused by a select few and not the public investor in general. When a stock is anticipated to rise – I can not print my own stock certificate to sell – it’s fraud. However a brokerage house or MM can sell stock certificates (or for a hedge fund) they do not own and issue IOU’s in the form of Fail To Deliver and hold the IOU’s indefinitely – affecting the stock’s demand and supply and artificially flood the market with bogus sell side supply.
Outlaw the Fail to Deliver loophole and acknowledge it is illegal and disruptive to a free market. Let the Call and Puts, Longs and Short ALL trade on a balanced and level playing field.
any company that complains about short sellers is just plain trying to obfuscate real problems at their company. naked shorts usually are only employed against small, low volume stocks.
the whole market is biased to the longs and there is never ending pumping by the entire establishment and media. why? b/c if the market performs poorly then everyone takes there money off the table and goes home and thus no more fees. this is unacceptable.
so if a large, high volume stock is going down in the face of short sellers like Einhorn and Ackman, you’d better listen up b/c something truly is wrong with the company.
There is a lot of talk about this being a common sense issue and perhaps it is. But to me, MM points out the most common sense issue of this whole debate. You want to go short and climb all over TV and rail a company so as to try and make a big profit… fine. But make sure you do it with REAL shares held by the brokerages and not PHANTOM shares that do not even exist.
Ackman’s last point is perhaps one of the most important one’s he makes: company management has very strong incentive to manipulate their financials and spin things in a positive light. This is the bane of stock option incentives. Management now is almost exclusively focused on the performance of the company’s stock rather than on the performance of the company itself. And without their own capital at risk, the incentive is asymetrical: heads, I win; tails, I don’t lose. Stock options need to be eliminated and compensation tied to operating performance exclusively.