Wednesday, November 20, 2013

Economic Shorts

There are two basic unannounced theories of short selling, or indeed long investing.

The first you might call cheap investing. The investor buys something that is under-priced. He is looking for a value, a cheap stock.

In this method, you run the risk of having false information from the company.

The second depends on predictions of the future, usually based on some economic analysis.

Now there is nothing wrong with economic analysis. I have nothing against those who struggle with inaccurate government reports, sudden surprises, unforeseen developments, and all the twists and turns of fate. However, somehow economists have developed a reputation for being mostly wrong, like long term weather forecasts.

The effects of losing your capital are so crippling that exposing it to the risks of economic forecasts is a very brave act that is well known to many hedge fund managers who have large losses.

There are just too many imponderables in the future to be betting your money on it.

Even when you buy $1 for fifty cents, you may find nasty surprises. There are investors who have purchased stock in a company at a price below the cash per share that is in the company, only to find that they still lose money.

However, these losses are very rare compared to the losses to those who predict the stock market or the economy.

We are often told that market timing is a losing game. In fact, it may be.

Now when you go short, you want to be shooting fish in a barrel, not stabbing blindly into the ocean.

The truly aggressive short seller is not content to take position and wait for the future to happen, he makes it happen.

At the least the short makes a big public announcement of his discovery so that the long holders will be stampeded out and new shorts may come in to assist.

He may go further than that and try to start government or media investigations, inform customers, employees, suppliers, sources of finance and those who assist the victim.

In doing so, he risks suits for slander, interference with business relations, and securities law claims.

A wise victim investigates the accusers and any dirt found may be used against the short.

So some shorts have developed the strategy of using fronts or attacking from a hidden position.

The allegation has been made that the people who were short mortgage securities for large profits financed various seemingly independent entities to expose mortgage problems.

So these are the three positions in the game, bet on the future, buy cheap, or make it happen.

Wednesday, November 13, 2013

Short Selling Bubble Stocks - Looking for weak holders

In the old pre-1929 days, the bears would find an overpriced stock and slam the bid hard, driving the stock down and causing the bulls to panic and sell out cheap.

In modern times, the bears would follow a stock up and when they felt it was vulnerable they would go gunning for the stops. The bulls would follow the trend up and put sell orders, stop loss orders, below the market to get out fast if the stock declined. Suspecting the presence of a large grouping of stop orders below the market, the bears would know the stock down through the price of the stop loss orders and then mop up cheap stock when that stock hit the market.

Many of the bulls used stock price charts and by drawing the same lines as the bulls, the bears knew where the bulls were likely to have their stops and went hunting accordingly.

In last few decades, one of the methods used was to find a bubble stock, usually a small cap manipulation, dig up and document the dirt using a private investigator, and give the dirt documents to financial columnists who released it while you blast the bid.

Then came the naked short sellers, shorting more than the outstanding stock and driving the company to oblivion.

Now we have blogs that release the results of their investigations.

Here is stock that just suffered from a negative research report, OMEX. See the drop from $3 down to almost $2.  The company has tried to invalidate all the alleged negatives, but so far without much result.


 Chart courtesy of Stockcharts.com


The bears, good predators as they are, look for signs of weakness.

If they see small public investors jumping in on an overpriced bubble, they know the stock can be driven down.

Recently, the Facebook IPO was done at a high price, the company put a ton of stock on the market at the last minute, and the small investor, aka "the public" was hot to get in on the deal.  Great opportunity for the shorts.

Chart courtesy of Stockcharts.com


When a stock drops that fast from the opening, it is hard to get anyone brave enough to fight the trend.

No doubt driving the stock down into the 20s caused a lot of small holders to sell.

That, is what the predatory shorts are looking for.  A large discrepancy between price and value, a bubble, caused  by small, timid public investors paying too much.

Institutional investors can be more brave, but they also can fear having a loser on their books when they have to report for the period and sell beforehand to avoid being embarrassed.

In fact, having a huge percentage of institutional investors in the stock in very often a sign of impending doom. if you see 85% of the stock owned by institutions, you have to suspect that they may be overdoing it and can be stampeded by bad news.

Look for weakness, but the basic pattern is to prey on the small investor who has been carried away with enthusiasm.