The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

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While bullish sentiment towards the equity market has rebounded sharply since the end of August, at least one group of traders is not feeling the love, especially when it comes to technology-related shares.

Based on recent data from the Commodity Futures Trading Commission, commercial traders (i.e., defined by the CFTC as those who manage their business risks by hedging in futures and options) now have their biggest net-short position in NASDAQ-100 futures in recent memory.

As the follow chart (courtesy of SentimenTrader) shows, the “smart money’s” track record when it comes to identifying tradeable short-term trend reversals is not too shabby.

Combine that with the fact that many hedge funds have major exposure to technology darlings like Google, Microsoft, and Apple — according to Goldman Sachs, the latter is a top 10 holding of 75 funds — and one could argue that you have the makings for a nice little rout.

I guess we’ll soon find out.

BNN speaks to Diane Brady. senior editor, Bloomberg BusinessWeek, and Barry Ritholtz, CE and director of equity research, Fusion IQ.

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Did I just smoke a fattie? I don’t recall . . .

Click for video

Headline : September 16, 2010 : Panel – Part One [09-16-10 12:15 PM]

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This looks better (sober). . .

Click for video

Headline : September 16, 2010 : Panel – Part Two [09-16-10 12:25 PM]

BNN speaks to Diane Brady. senior editor, Bloomberg BusinessWeek, and Barry Ritholtz, CEO and director of equity research, Fusion IQ.

Good article from Bob O’Brien in Barron’s warning about the dangers of 2X Short funds: Beware of Leveraged Short ETFs.

Its not just the short leveraged ETFs, its all of the leveraged ETFs that have the same slippage characteristic over time.

As anyone who has ever traded them can tell you, they fail to track their benchmark dollar for dollar. This is because they use futures contracts and swaps, and are reset each day. The slippage from their targets us anywhere from 200 to 500 basis points — the longer the time held, the greater the potential slippage. (We use the 2 for 1 leveraged ETFs, both long and short).

Barron’s:

“These short ETF funds – and there are 39 of them available – afford investors the opportunity to capitalize on a market decline in a relatively inexpensive, accessible fashion. Like all ETFs, these products are listed, so they trade like stocks. Their associated fees are half – or less – than the cost of comparable mutual funds. And because many of these products use leverage – mainly through the use of swaps – investors can effectively double or triple their exposure to a market decline at no additional cost or risk.

So if you’re betting that the market is going to fall, leveraged short ETFs have a lot of appeal, at least conceptually.

Their performance in the last three months testifies to that appeal. Since the S&P 500 topped out this year on April 23rd, the ProShares UltraShort S&P 500 has gained 20%. By comparison, the S&P 500 itself has lost 12%.”

Note that the ProShares UltraShort S&P 500 (SDS) has about $3.7 billion of AUM, and is the most popular ETF of its kind . . .

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Source:
Beware of Leveraged Short ETFs
Bob O’Brien
Barron’s AUGUST 23, 2010
http://online.barrons.com/article/SB50001424052970203534304575441874200791144.html

I was just discussing how ugly the Home builders look with AJ, one of our institutional sales traders.

Nearly every builder has been on a SELL SIGNAL in the Fusion IQ ranking system for several weeks now. These names are down 20 to 35% over that time.

AJ has been flashing TOL to various institutional clients as a possible short, but all of the builders — DHI, KBH, LEN, PLT — look pretty punk.

Considering we are now in the early stages of a second leg down in Housing, plus the excess new and shadow inventory that is out there, its hard to consider anything other than selling these names. Clients who are short have been advised not to cover yet.

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Residential Construction Member Names and Rankings

click for larger charts

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D.R. Horton (DHI)

Other Homebuilders’ charts after the jump . . .

Read the rest of this entry »

Hedge fund manager Jim Chanos, founder of Kynikos Associates Ltd., spoke with Bloomberg Television’s Erik Schatzker for a special that will air on “For the Record” next Friday, 6/25. Chanos talks for the first time about his new short positions since he went public with his bet against Chinese property in January 2010.

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Transcript after jump

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This is simple to resolve: All Congressional trades should be reported within 30 days. Problem solved.

In light of this Wednesday morning’s commentary, a few emailers asked me were we stood after today’s action.

The short answer: We are now all cash. We have no positions long or short. We are actively looking for shorts.

I will post an update when we make a serious change in our tilt.

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UPDATE:  May 6, 2010 5:27am

Several readers wanted to know the reasoning behind this:

1) Greece/EU had nothing to do with our tactical rebalancing.

2) This was strictly a technical call — market internals, sentiment, duration of rally, volume were amongst the factors that came in.

3) This is not an end of primary trend expectation — rather, it is looking at the potential of a  secondary trend.

4) Ideally, if we get lucky, we will see a rally over the next week, with deteriorating characteristics — that sets up a better entry for shorting new positions.

5) We had a very good Q1 with a handful of strong positions — EK, MGM NYT, THOR, C — so some of the thinking behind our move was locking in a profitable 1st half of the year. We can now look be very selective in identifying trading opportunities.

6) We are now concentrating on screening and identifying new short ideas . . .

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Source:
Congress Members Bet on Fall in Stocks
JASON ZWEIG, TOM MCGINTY And BRODY MULLINS

http://online.wsj.com/article/SB10001424052748703871904575216491495135642.html

William Ackman, managing partner of Pershing Square Capital Management, discusses the benefits of short-selling, Goldman Sachs’ fraud charges and more with CNBC.

Airtime: Tues. Apr. 27 2010 | 7:10 AM ET

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Short selling is a key focus of the Goldman Sachs hearing Tuesday on Capitol Hill. James Chanos, of Kynikos Associates, and Bill Ackman, of Pershing Square Capital, share their insights.

Airtime: Tues. Apr. 27 2010 | 8:05 AM ET

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Hedge fund manager Bill Ackman shares his parting shots with CNBC.

Airtime: Tues. Apr. 27 2010 | 8:54 AM ET

Interesting discussion by the always worth reading Mark Hulbert about a recent research paper on Short Selling.

While I agree with the paper’s conclusion, it overlooks two major related issues regarding short selling.

Let’s look at a few excerpts first:

“Short-selling became particularly controversial during the recent bear market, when many of its practitioners turned a profit while almost all other investors were suffering. This fueled long-held concerns that short-sellers might be inducing the very price declines from which they profit. A series of regulations have been imposed in the last few years to restrict short-sellers’ behavior.”

This reflects the classic Keynes aphorisim that “It is better to fail conventionally than to succeed unconventionally.” Short selling has always been controversial for that exact reason. The small minority who makes a profit when everyone else is panicking into giant losses are always looked at askance.

On a related note, it also has given cover to dishonest management. I have never forgotten advice given me early in my career by a very successful fund manager: “Anytime management complains about short sellers, run-don’t-walk in the opposite direction. Its prima facie evidence of bad leadership — and a guilty conscious about something untoward at the firm.”

That’s been good, money saving — and in the case of Shorts, money making — advice.

So how do short-sellers find their trades?

“According to the new study, titled “How Are Shorts Informed? Short Sellers, News and Information Processing” — Its authors are Joseph E. Engelberg and Adam V. Reed, both finance professors at the University of North Carolina at Chapel Hill, and Matthew C. Ringgenberg, a Ph.D. student there. The study has been circulating since January as an academic working paper.

Their work suggests that the average short-seller has done well through astute research and analysis, not market manipulation.”

So far, so good.

Where I disagree with the paper’s results is in the statement “for the most part, at least, ‘short-sellers do not uncover and trade on information before it becomes publicly available,’ the researchers wrote.”

We know that is untrue in several high profile short situations. Jim Chanos discovered the fraud at Enron through forensic accounting. David Einhorn figured out that Lehman was playing games with their capital levels and cash ratios. Tyco, World Com, Bear Stearns, AIG, Fannie Mae were all high profile shorts that a small handful of people figured out were not what they claimed to be.

Perhaps the difference is psycholgical in nature. Wall Street research tends to cheerlead ore than it analyzes. Approaching analysis without that natural bias allows the discovery of errors and frauds The Street misses. This might be true even using the same publicly available information . . .

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Sources:
The Wisdom of the Short-Sellers
MARK HULBERT
NYT, March 26, 2010 
http://www.nytimes.com/2010/03/28/business/28stra.html

How are Shorts Informed? Short Sellers, News, and Information Processing
Joseph Engelberg,Adam V. Reed, Matthew Ringgenberg
University of North Carolina at Chapel Hill, February 22, 2010
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535337