October 2, 2002
Markets Rally as Investors Take Profits
Sorry to spoil the moment, but the party won’t last.
Short Selling Psychology
To begin with, Warren Buffett looks for undervalued assets that generate above average returns. Simple enough. By contrast, the short seller looks for the exact opposite, or overvalued (booked) assets that generating false, misleading, or below average returns. Next, the short seller begins to short stocks on the way down, or just when share price weakness is developing. To be sure, if the 1990s taught the shorts anything it was not to short on the way up hoping for a turn around, because sometimes turnarounds can take a long time to arrive. Lastly, the average short seller, assuming they are not hell bent on waiting for corporate insolvency, begins to cover their position when the market tells them to, or when prices begin to turn higher.
With this interpretation of a short’s motives in mind consider yesterday’s rally: the Dow Jones Industrial average dipped following an unexpectedly weak ISM manufacturing report but the average didn’t die. Keeping in mind the recent activity in the markets, or the 5-weeks in succession when the Dow would decline by triple digits on even a hint of bad news, the shorts knew what to do when the ISM report fell upon deaf ears – cover!
Short Interest Has Been Rising
In January 2001 NYSE short interest was less than 1.4% of total shares. By contrast, as of September 13, 2002 short interest totaled 2.3% of the outstanding shares, or only a handful of shares below its previous record high (total shares) set in August. Point being, a heavily shorted stock market promotes heavy volatility.
With this in mind, that the markets have been freakishly rallying on little else than speculation that Treasury yields are ‘too low’ to attract any further investment is cause for concern, not applause. Why? Because the rallies, much like the steep declines that follow soon afterwards, have really been based upon increased activity by shorts – they cover when prices begin to turn higher and aggressively short (sell) when prices begin to roll lower.
Suffice it to say, that Wall Street points to slumping Treasury yields to justify ‘bullishness’ in stocks while completely ignoring the shorts is not surprising. After all, the U.S. economy continues to weaken and the expectations for a stellar turnaround in corporate profits have been quashed yet again: unless Wall Street wants to begin touting short opportunities themselves, which probably wouldn’t be good for their investment banking business, they have to say something, anything, that puts a positive spin on the situation.
In sum, most of the media and Wall Street spent the late 1990s telling us that despite the financial condition and ridiculously high stock market valuations of companies, the stock market was right – everyday the markets rallied this somehow justified the previous day, week, and month of pyramiding gains. It is now time for the media and Wall Street to admit their mistakes and come to grips with the reality of today’s market. What exactly is that reality? Well, just as every dip during the 1990s meant rich longs were taking profits, likewise every rally in 2002 has meant that shorts sellers have been taking profits.
Winnick The Hero?
Global Crossing’s Gary Winnick gave $25 million to the GS’s retirement plan and stated “I call on other chairmen and C.E.O.'s of other companies to step up and write a check. The only legacy I'm going to leave this planet with is my name.” OK. I am remembering the name Winnick: a man who made $734 million off of fleecing shareholders who gave back $25 million to try and wash away the guilt…
No matter how hard Mr. Winnick tries, cries, or lies -- he still sold the farm and happily kept his mouth shut as he watched his company head towards the iceberg.
Global Crossing Chairman Winnick defends stock sale
“Hindery told Winnick and other officials that like "salmon going up river to spawn, at the end of our journey our niche, too, is going to die rather than live and prosper."
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