Those Damn Short Sellers Are Just Killing It!

There were a sew of articles in the papers today about just how much money those damned shorts are making!

First up, the WSJ, who looked at who was killing it:

"Some hedge-fund stars of 2007 are having an encore year. In the process, they are defying skeptics who questioned whether they could keep their runs going.

John Paulson, who directed Paulson & Co. to gains of almost $15 billion last year, is up as much as 20% in some of his hedge funds through June 30, according to investors, thanks to continued bets on the woes of financial companies.

Philip Falcone, who saw gains of about 120% in his largest hedge fund in 2007, gained 42% through June in that fund, Harbinger Capital Partners I, from various commodity-related investments, among other areas.

It isn’t necessarily surprising that investors who wagered against mortgage and housing-related investments are excelling, since the housing troubles have spilled over into 2008. The real challenge for these managers will be turning in similar performances when that gambit has run its course."

Next up, Bloomberg focused on the total amount wagered on the short side:

"Investors worldwide are betting more than $1 trillion on a collapse in stock prices.

Managers from William Ackman to Jim Rogers made a total of at least $1.4 billion in July with wagers against U.S. mortgage financiers Fannie Mae and Freddie Mac, data compiled by Bloomberg as of last week show. Harbinger Capital Partners staked $665 million that U.K. mortgage lender HBOS Plc would drop and Sao Paulo-based hedge-fund manager Francisco Meirelles de Andrade’s short selling of Cia. Vale do Rio Doce is also paying off.

More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specializing in securities lending, show. Almost all of that is being used to speculate that shares will fall, according to James Angel, a finance professor at Georgetown University who studies short selling. The global economic slowdown, $453 billion in bank losses and an explosion of funds that can profit from stock declines spurred the increase in short selling, helping send 22 of 23 countries in the MSCI World Index into bear markets."

Next, the FT had an interesting twist: The brokers and iBanks are making lucrative trades lending out shares to shorts!

"Conservative fund management firms and custody banks are making billions of dollars from short-selling by lending stocks to facilitate such trades in exchange for lucrative fees.

Even as short-sellers attract blame for driving big falls in financial stocks, financial services firms – including those targeted by short-sellers – are profiting from the investing strategy.

US prime brokerage firms, most of which are owned by big Wall St banks, will reap revenue of $11bn (£5.5bn) this year, according to a recent study by Tabb Group, a research business.

Prime brokerage units provide services to hedge funds. They do not reveal their financial results, but executives who work for the units say they make most of their money from lending to short-sellers."

Funny — no one really looked at the reasons why the shorts were killing it –namely, the credit and derivative system run amok, a toothless SEC and a Federal Reserve that was guilty of malfeasance in terms of their obligations to regulate lending institutions. 

However, this Bloomberg quote at least makes an attempt to explain the purpose shorts serve in the  investment eco-system:

"Short sellers are a very important part of the ecosystem of our financial markets,” said Angel, a professor at Georgetown’s McDonough School of Business in Washington. “The same way that lions go after a herd, they go after the weaker animals. The shorts will pick on a company where there’s a legitimate controversy over its valuation.”

Shorting ‘makes billions’ for fund managers   
Deborah Brewster in London
FT July 17 2008 22:16 | Last updated: July 17 2008 22:16

Never Have So Many Short Sellers Made So Much Money 
Alexis Xydias
Bloomberg, July 21 2008

As the Markets Throw Knuckle Balls, Hedge-Fund Stars Still Hit Home Runs   
WSJ, July 22, 2008; Page C1

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What's been said:

Discussions found on the web:
  1. Stuart commented on Jul 22

    Short covering operates as brakes in a down market. Take away the shorts in financials, … connect the dots, when the short squeeze is over on the XLF, don’t stand underneath it. They could’ve just set up the missing element for an all out crash within weeks. Disclosure: buying anything contra XLF.

  2. Philippe commented on Jul 22

    Within context of a total absence of truth and vraisemblance in the financial industry balance sheets and incomes statements,short sellers are not only reflecting a true pricing mechanism but an added value to the mental health of the equities markets.
    When looking at these practices through the prism of time,this very late markets behaviours is closer to scavengers than clairvoyant participating actors.

  3. johnnyvee commented on Jul 23

    BR is making an arguement that the speed of that which a stock goes down-helped out by shortening-is good. It is the equal and opposite of how fast the stock went up. I thought excess and greed is what got us into this mess in the first place. Its profit taking. It doesn’t in and of itself make for a better market or economy. The red flag is the bullshit story about lions. WTF is that.

  4. Stanley King commented on Jul 23

    Hmmn! – And how about ‘Naked Shorting’?.

  5. chris_gee commented on Jul 23

    If I have it right one side bet up to a trillion that stocks would go down, and need that to be by a trillion or more plus interest to make a profit and the other took the trillion betting that the markets would not go down by a trillion or more plus interest.
    Some win some lose.

  6. Stuart commented on Jul 23

    Wonder if Kudlow had a hand in putting this together. I feel ill. Read the passage on the home page. Good godly legacy GW.

  7. Simon commented on Jul 23

    Anyone want to go the lake for a quick naked short in the moonlight? It is spring right?

  8. Douglas Watts commented on Jul 23

    Funny — no one really looked at the reasons why the shorts were killing it

    That’d be like pointing out the fishing line holding up the rocket ship in a bad Saturday sci-fi matinee.

  9. Douglas Watts commented on Jul 23

    “Short sellers are a very important part of the ecosystem of our financial markets,” said Angel, a professor at Georgetown’s McDonough School of Business in Washington. “The same way that lions go after a herd, they go after the weaker animals. The shorts will pick on a company where there’s a legitimate controversy over its valuation.”

    Bad analogy. Our world of human beings is already too brutal and heartless to be talking like this, even in metaphor. This talk reminds me of Gordon Gecko in “Wall Street” when he put 10,000 people out of work and said it was good for them.

  10. Steve Barry commented on Jul 23

    A few days ago, I aid the Dow would get to 11650 in a few days and hit major resistance. Thus I am calling for the market to open right there, but VIX and put/call should also be indicating top formation as well. I will update this at 10 AM.

  11. VennData commented on Jul 23

    Putting the finishing touches on a way to structure an 100% “Naked Long” portfolio… no money down, while levered out the wazoo – infinitely in fact – totally safe …AAA rated.

    I’ll let you guys know.

  12. insaneclownposse commented on Jul 23

    Shorting also allows investors to hedge their risk — a point that the current “shorts are evil” narrative being spun completely ignores. Perhaps this is because the MSM is too moronic to portray equity investments in terms other than good/bad.
    Maybe I don’t want to sell my longs for tax reasons so I use a short position to hedge my losses as the market moves down. Is this evil? Of course not. Shorting is just another tool for investors who have a clue.

    If shorts had one percent of the power that is now being attributed to them then maybe we could have avoided all these financial system problems in the first place. The whole discussion really makes me want to puke.

  13. dave c. commented on Jul 23

    You can’t win. If you make money on lower prices, you are evil (shorts). If you make money on increasing prices, you are evil (oil companies). dc.

  14. druce commented on Jul 23

    money is the root of all evil… If a man is after money, he’s money mad; if he keeps it, he’s a capitalist; if he spends it, he’s a playboy; if he doesn’t get it, he’s a never-do-well; if he doesn’t try to get it, he lacks ambition. If he gets it without working for it; he’s a parasite; and if he accumulates it after a life time of hard work, people call him a fool who never got anything out of life.

  15. druce commented on Jul 23

    (attributed to Vic Oliver)

  16. Northern Observer commented on Jul 23

    I saw Patrick Byrne of on BNN’s Market Morning show. Now I know this guy has a weird history and his company is a stuggler at best, but his comments on the difference between Canadian and American markets with regards to naked shorts was interesting. If I got him right the problem in America is that there is an artificial liquidity of stock available to short created by unlimited loaning out of the same stock to multiple short sellers. ie the float available to the shorts is inflated and creates market distortions.
    A rule in Canada makes this impossible to do on the TSX.
    Does the CEO have a point?

  17. D. commented on Jul 23

    July 22, 2008

    A Short Covering Rally
    by John Mauldin

  18. DL commented on Jul 23

    Chuck Schumer wants to bring back the uptick rule… and to require a 10 cent increase from the last price before a short sale can be allowed.

    Cramer had a Congressman on his show a few days ago who also wants to turn back the clock on the uptick rule.

    If Obama wins, maybe the “uptickers” will get what they want.

  19. Azran commented on Jul 23

    Stimulus Package “Deja vu”, Not really!

    As the brains of our economy continue to brainstorm how to get us out of the mess the real estate market first got us in and now high gas prices and a declining economy over all the easy way out seems to be again, an economic stimulus package.

    Not so fast, not again.

    First president bush opposes it.
    Second, according to the experts only 20 percent of the people who got stimulus package number one said the rebate led them to spend more and the rest, well it seems that the rest just took the money and put it into their savings account.

    Economic stimulus package number one was suppose to get our slow economy going, by then president bush had not heard of a 4 dollar a gallon of gasoline.
    By now that’s old news and as he put it on he’s own words “he’s heard of it now”.

    Well now mr president one gallon of gas almost hits the 5 dollar mark, have you heard of it?

    Anyhow, the 100 billion dollars in checks that circulated among many Americans (600.00 for singles, 1,200.00 for couples) apparently didn’t help.
    The money went out on time and gas prices went up just on time as well.
    With gas prices, food prices also went up.
    Isn’t that how it usually works?
    Gas prices go up everything goes up, after all business have to make up for the extra expenses and they just pass the check onto us.

    Here’s an idea!

    How about lowering the tax on gasoline?
    Do we really know how much money we pay on gas taxes in the u.s?
    Aren’t this taxes imposed by our government, well maybe our government can really give a stimulus to our morale and lower the taxes we pay on gas prices.
    A lower tax in gasoline prices will stimulate business and consumers, it’s not rocket science!

    Source for this quote: Wikipedia
    “Fuel taxes in the United States vary by state. For the first quarter of 2008, the average state gasoline tax is 28.6 cents per US gallon, plus 18.4 cents per US gallon federal tax making the total 47 cents per US gallon”

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