Posts filed under “Short Selling”
I know Whitney Tilson from our Street.com days. He is a smart guy, and a very good Value manager.
But like many value guys, he can be early (on trading desks, they call that “wrong”). In his January letter to investors, he discusses some of his recent shorts that have not worked out (see PDF below). I love any money manager that does that — fearless, honest, self-reflective — these are the traits of a person who won’t make the same mistake twice. (Good for him)
When it comes to shorting, many people are in the dark. It is more challenging to be short, subject to squeezes; the return max out at 100% — versus unlimited upside for longs.
Over the years, I have put together some rules for shorting. These are pretty broad and general, but they have kept me out of trouble when
Basic Rules for Shorting Stocks
1. Shorting Momentum names is dangerous: Unless you are Superman, never step in front of a speeding locomotive
2. Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensive
3. ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses
4. Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation. (We use Money Flow, Short Term Trend lines, Institutional Ownership, Analyst Ratings).
5. It is tough to be a contrarian: During Bull and Bear cycles, the Crowd IS the market.
You have to figure out two things:
…a) When the crowd is wrong — Doug Kass calls it “Variant Perception”
…b) When the crowd starts to get an inkling they are wrong
At the turns — not the major trends — is where contrarians clean up.
6. Look for Over-owned, Over-loved stocks: 95% Institutional ownership, All buys or Strong Buys (no sells), and 700% gains over the past few years are reasons to put names on your short selling wish list. (That is how my partner Kevin Lane found and shorted Enron and Tyco back in the 1990s).
7. Beware the “Crowded Short“– they tend to become targets of the squeeze!
8. You can use Options to either juice your short returns, or pre-define your risk capital (options)
That is my short shorting list . . .
Here is Tilson’s Letter to Clients
“The Chinese delegation has said all week that there will be double-digit growth for years to come and the Brits have lapped it up. But the data doesn’t add up. We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China…Read More
> 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…Read More
BNN speaks to Diane Brady. senior editor, Bloomberg BusinessWeek, and Barry Ritholtz, CE and director of equity research, Fusion IQ.
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]
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…Read More
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.
Residential Construction Member Names and Rankings
D.R. Horton (DHI)
Other Homebuilders’ charts after the jump . . .
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.
Transcript after jump
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. ~~~ UPDATE: …Read More