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An Open Letter to All Short Seller Haters

To all short sellers: Please address the following:

1. If selling short drives prices downward, do they not also hold rising prices down?
2. Oil cracked $150, then plummeted to under $100 in less than 2 months. What role did the shorts play in this price action? What role did the shorts play in the Monday rise in oil price?
3. Is it beneficial to give a financial incentive for individuals to identify problems in companies?
4. Name 3 advantages of the existence of shorts.
5. Name 3 disadvantages of the existence of shorts.
6. How do shorts lock in their gains? What happens to the stock price when they do?

I will put forth the following: All of the individuals whining and crying about short sellers are those individuals who have portfolios going into the toilet right now, which is clearly affecting the function of the neurons misfirings in their brains.

It's true, misery loves company. If your portfolio is getting hit, bitch about short sellers and that may make you feel better-for a while. The problem is, after all the bitching, the situation remains the same and you have made yourself look like an uninformed ass in the process. And after all is said and done, it hasn't added one cent to your coffers. Better for you to spend your time re-grouping.

The above 6 points aren't part of some simple stock shorts 101 test. The questions hit at the very essence of short selling, when you actually take the time to answer them. Short selling is akin to Newton's third law of motion...every market force has an equal and opposite force. The only difference is that you can't go below zero in stock price whereas the ceiling is limitless. This illustrates the risk that the shorts take, and the risk when "oversold" hits zero. But I digress slightly. . .

If you honestly answer each of the above questions, there is no way you can go about claiming that the shorts are evil, immoral, unpatriotic, and should be banned.

Yes, I think a temporary ban of shorts to limit panic selling and capitalizing on rumor mongering is prudent. After all, if a company is truly bad enough to go to zero, then delaying things by a week or a month will only delay the inevitable. If the company isn't fundamentally flawed, a delay of short selling will prevent an oversold condition hitting zero, thus preserving the company. Yes, I believe anyone that intentionally tries to manipulate stocks by spreading rumors (long or short) should be prosecuted to the fullest extent of the law. There are rules on the books, and they should be enforced, plain and simple. I do not oppose circuit breakers that will halt the markets in the event of panic selling. Again, it is another prudent device in place to help us when we aren't being rational, and it allows us the time to round up those buyers (Buffett like types) to come in when no one else has the stones to buy.

Short seller haters never make the above distinctions--never. They never distinguish between legitimate short selling and illegal activity. "Shorts" and "illegal" might as well be synonymous.

Short seller haters try to make people believe that perfectly sound companies, those with solid books and great business models can somehow be easily taken out by a rogue short seller. HOGWASH!

The shorts are no more "bad" or "wrong" than long sellers. It is all about what side of the trade you are on. By the way, in regards to the price of oil, shouldn't all of you short haters be thanking the shorts from keeping oil from rising past $150? Or, shouldn't you thank the shorts for the decrease in oil price? Oh, I get it. The shorts are bad only when I lose money out of the deal, am I reading that right? You people need to pull your head out of the sand, or whatever orifice it may be residing at this time. Maybe you should just say "thank you", and then get on your way and trade. There is rarely substance to the blanket anti-short arguments. Bitch all you want about the illegal activity of spreading rumors for profit, in which I am in agreement with you, but the act of short selling isn't the root problem. Taking away the shorts takes away information from the market, plain and simple. Maybe those long sellers should hang tough as these evil short sellers are pushing the price down and not sell themselves. That's another point never addressed by the short haters . . . it compounds their market view so it is easier to ignore. Also ignored are stocks that have been shorted and publicly lambasted, yet are resilient. (Maybe because the management wised up and made changes?) Short interest levels are also ignored, but only when the short interest does not suit their market view. Otherwise, it is shouted from the mountaintops.

Just admit it, short haters. Your portfolio is in shambles, and you're looking for someone to blame. A little honesty goes a long way.

--Jonathan

p.s. and yes, I have read Tom Armistead's Moral Hazard--A Danger to our Financial Ssystem (sic)

Comments: View Comments | Monday September 22, 2008

To Short or Not to Short; More Questions Than Answers

As I look ahead to the next month or two, I am stuck in a bind with my Marketocracy portfolio.

Most of my trading has always been with ETFs and very few individual stocks. I have been able to successfully trade through a lot of the ups and downs of the Financials, the Industrials, Energy, and Commodities. I was able to slowly exit a large position in SKF just before it dropped almost 50%, while buying long individual banks (C, HBAN, and BAC) before they popped. My position in SMN, the Ultrashort Basic Materials ETF increased and has erased my earlier losses. FXP, the ultrashort China ETF has been great with a few buys and sells moving up from $70 to $90 while hedging with FXI. I was able to get into BUCY and MAS before their pops and have since exited.

All of this self-congratulations comes along with some badly timed picks with SEPR, RIG, JOYG, CHK, and YHOO, but the damage has been minimal so far. Though I have kept a significant amount of money on the short side of the market, I have been picking a few stocks long while trading in and out of short positions. This has lowered my losses with the wild jerking of the market. This is also what brings me to my current bind.

I have about 20% of my portfolio in cash, with several limit orders to sell positions that could potentially get me close to "out-of-compliance" at 25%. There's so many clashing market signals that it seems best to keep a large chunk of cash ready to deploy at a later date.

Clashing signal #1: This is a bear rally that will send the S&P to 1370/We are about to begin to retest the July lows again because of the Financials.

I don't buy the current rally in Financials. Though I exited a large portion of my SKF position, I have since bought and sold small positions several times since. I have done the same with SRS, Ulrtashort Real Estate. Both SKF and SRS have rewarded me greatly and bit me hard in the past year, and for those that own either, you know what I am talking about. If you buy into the idea that the naked short sellers are what ground the financials down in July, then it would make sense to buy SKF expecting the same thing now that the short selling ban will be lifted. With continued weakness in the financials coupled with doom and gloom headline stories about the latest woes, it may be a good play. I don't believe the naked short selling myth, so I won't be adding more until it drops below $110. It is too lukewarm for me right now, but I would like to see a good 2.5% one day rally in the S&P to start rebuilding the shorts.

Clashing signal #2 Lower oil price = good for the markets/ lower oil price = strengthening dollar and weaker exports

Commodities have been getting clobbered as of late, with oil and food dropping big and the dollar gaining strength. Even so, I have cut my position in UUP, the Bullish Dollar ETF, to just 20% or my original position. I believe the dollar rally is short lived, although I have not transitioned to other currencies; I have just kept everything in cash. I'm looking for UUP to drop to around the $22.50 mark before getting back in. I am going against the grain buy putting money in Gold (GLD).

How low will oil go? I originally thought $90 a barrel back during the parabolic rise. I am now long on oil in the short term(UOY), and short on oil in the long term (DUG). Let's have a nice recession in China take its toll on the price of oil. Let me take this time to say that we should all call up those wonderful people known as "Short Oil Speculators" and thank them for lowering the oil price. Due to their diligent hard work in selling the market short, we are able to buy gasoline for 30 cents less a gallon this month, with further decreases to come. Long Oil Speculators = Evil and Short Oil Speculators = Good. At the same time, Long Financial Speculators = Good and Short Financial Speculators = Evil. That's the Kool-aid we are supposed to drink, correct?

Will the sinking oil price help the markets? Will the strengthening dollar hurt exports, our only gem in the misery of '08? It depends on who you read or who you watch. Lick your finger, lift it into the wind, then decide.

China has to be one of the most confusing of all trades. I own both FXP and FXI, with FXI being the hedge. I originally planned to dump FXI once the Olympics started, now I am not so sure. The China markets have been deflated more than 50% from the 52 week high. Does that mean it is time to buy China long? How much are companies worth in China anyway? I have always thought that mixing communism with rotten capitalism was akin to the cobra and the mongoose sharing the same cage; a lot of intense moments, some controlled chaos, but the ending isn't pretty. A few blogs ago I mentioned how I was taking a position in FXI because I thought the Chinese could follow the Pakistani lead and ban short selling. Little did I know, the Commies were laissez-faire and the red, white, and blue were the ones to sell and implement the snake oil. I believe it is a matter of time before the Chinese economy gets hit really hard, and I don't think the Chinese markets have fallen far enough. That being said, I am not adding to my FXP position since it already is over 12% of the portfolio. I am comfortable with this position, although I will be selling if it continues higher. Even so, I continue to read articles bullish on China as I have for the past year. The China markets always seem to be two heartbeats away from a major turnaround.

Overall, I am in a holding pattern. I would like to see the rally continue toward S&P 1370, and the VIX sink below 17 before going on a short selling (buying) spree, but as with many of my predictions, it may be best to do the exact oppisite. So is the nature of the market.

---Jonathan

Comments: View Comments | Saturday August 16, 2008

GM-Great Motor or Garbage in Motion?

I am no fan of GM.

Imagine if I offered you the opportunity to buy a company that sells a product that trails its competition in almost every category. It costs more to build their product. Margins are minimal. The company is on the hook for entitlements to its employees. And to add insult to injury, the product they produce is subpar on quality when compared to its competition. Would you buy this company?

If your answer is yes, go ahead and drop some cash on GM. For those with a little sanity, play the risk/reward scenario somewhere else.

Don't get me wrong, GM could be a great trade in the short term. For all the technicians out there, they can give you all the details. For those that buy stocks as a medium or long term play, GM isn't even on the radar. Most bloggers will detail reasons that are pro and con from the standpoint of the fundamentals, the management, or even the technicals. I will cover reasons why not to by GM stock from the consumer's standpoint.

GM makes products with poor quality, plain and simple.

Before all you Silverado driving guys give me a beating, hear me out. I am not saying that every single GM product is garbage. Their trucks and SUVs have been pretty good. I personally like the Silverado, although I do not own one. The Cadillac line has come on strong in the last 6 years. But GM is bigger than Trucks and Caddys. Just like a diversified investment portfolio, a company can't have all it's eggs in one basket when it comes to profits. With GM, that has been trucks and SUVs. What happens when that goes sour? Oh, never mind, that is already happening. Check your local newspaper to see the results to the tune of 15.5 billion dollars. And that's in the red, not in the black. That's chump change compared to GM's third quarter of '07, and the losses just keep on coming.

Most of the time, the debate about GM, Ford, or Chrysler is always framed by the "Buy American" premise. Somehow, people that buy American cars and trucks are suppossed to be more patriotic than those that didn't. If you buy a foreign car, then you are sending money overseas, and are a defacto Benedict Arnold. The problem for GM that has increased over the years--and it has taken a lot of years-- is hard core GM buyers have been slowly abandoning their first love, not because a foreign lady enticed them, but because their first love took them for granted and gave them a poor product time and time and time again. GM customers have ended up broke, sad, and lonely. Sounds like a good GM themed country song.

Case in point: talk to anyone with a GM vehicle that is two years old and ask them how much "upside down" they are in their loan. Don't talk to just one person, talk to as many as possible. Now do the same thing to Honda and Toyota owners. Compare the data.

Toyota and Honda owners are only upside down in their loans for a little over a year after they drive it off the lot. The cars hold their value, regardless of whether or not you want to argue that it is "only perception".

Value perceived is value achieved, and both Honda and Toyota are achieving.

Honda and Toyota cornered the market on fuel efficiency, and they slowly started taking away market share from the domestics with trucks and SUVs. They were smart, though. They didn't put all their eggs in one basket. High oil prices hurt the truck and SUVs, no problem. Diversification wins the day. On top of that, Honda and Toyota planned years ago for hybrid technology, and in the last 3 years it has paid off big. Go back to 2004 and see what GM's vice president of product development was saying about the hybrids at the following link:

http://money.cnn.com/2004/01/06/pf/autos/detroit_gm_hybrids/

What does GM have to show for the hybrid market? Oh yes, I forgot . . . they have the Johnny-come-lately to the party Chevy Volt in which they will lose money on every single one they sell. How is that good business again? My dad used to tell jokes about the dumb farmer from across the river (I grew up in Ohio, so you can guess where he was talking about) that would buy 50 bales of hay for $5 each and sell them at the market for $5 each. The dumb farmer claimed he was making up for the price by selling volume. Seems to me that GM has adopted this policy toward their hybrid line of vehicles. An expensive advertising campaign, perhaps?

GM vehicles simply do not last as long as the foreign cars. My own anecdotal evidence would be completely dismissed by domestic car zealots, but I can tell you that if you have popped the hood and actually turned wrenches on both domestics and foreign cars like I have, you would know what I am talking about. The only upside to GM vehicles have over foreign cars is the parts cost about 1/3 less......but it doesn't help when you have to fix it 3 times as often.

Have you ever had a GM car that had radiator problems? Many people did, since GM used "Dex-cool", and orange colored radiator fluid, in their systems from 1995 to 2004. Most people ended up overheating their cars and blowing their head gaskets (thats a $1600 or more repair). Every winter people are told to "winterize their cars" and some people top off their GM cars with green radiator fluid. The problem is that the orange fluid in the car doesn't mix with the green, causing clogging and overheaing. Only after a lawsuit did GM stop using Dex-cool . . . talk to any mechanic and they would have told you that Dex-cool was garbage back in 1996. Of course, it took 8 years and countless GM owners parting with their money for the change to take place. If you were lucky enough not to have the Dex-cool clog your cooling system, it also would eat away all of the gaskets in came in contact with, and depending on the car, more $$$$ in repairs. Water pumps, heater cores, and even transmissions are affected by this hair-brained idea that took over 8 years to correct. That is just one of many, many reasons people don't want to buy a GM vehicle.

The "Buy American" reason to buy a GM vehicle is also going the way of the dodo. Honda employs well over 15,000 Americans at its plant in Marysville, Ohio. Hondas . . . built by Americans, in America. Jobs supporting American families. Think about all the people connected to dealerships here in America selling Hondas. Now add all the mechanics doing the maintenance to Hondas here in America. The "Buy American" tagline for GM and Ford is tiresome, boring, and specious. It may have given them a bump in yester-year, but you can't treat your customers this bad for this long and expect them to stay.

For argument's sake, let's say that GM turns around tomorrow. How long will it be to gain back a customer's confidence in quality? That's for a marketer to figure out, but I can guarantee you, it doesn't happen overnight. Even if GM starts making the highest quality cars on the road starting tomorrow, it will take years for the perception to change. You must win customers to sell product, and you must sell product with real margin to make money. GM hasn't been doing it, and it shows.

Again, GM may be a trading opportunity for some, but I am staying away from it. For all the accolades I have laid upon TM and HMC, I am not buying them either. In this economic slowdown, there will be tough times ahead, and the shares will only get cheaper in the next 6 months. That will be a buying opportunity soon. Buy quality, and avoid garbage in motion.

-----Jonathan

Comments: View Comments | Saturday August 2, 2008