Tag Archives: short selling

Topping pattern developing, stay tuned

Posted on by
Reply

We finally have a weakening trend on the daily RSI (see RSI on bottom of chart). This is a prerequisite for anyone considering taking a short position, especially with leverage.

It would be typical for some type of quick plunge to develop soon, perhap on the order of 5-8% in SPX, maybe 100 points (1000 Dow points). It would also be typical for stocks to recover from such a plunge and test the highs again, as in spring 2011 or Summer-Fall 2007. In May 2010, this process was compressed in the “Flash Crash,” which was followed quickly by a decline of around 20%.

However, the weekly trend is still up, though finally in overbought territory. Perhaps this begins to turn over the next few weeks as the market chops sideways.

Further strengthening the bear case is sentiment, which has now been elevated for at least two months (I recommend sentimenttrader.com at $30/month for all you can eat indicators). Sentiment is a powerful indicator, but actual price tops lag tops in sentiment by several weeks to months, as prices tend to levitate and chop sideways for a while on weakening RSI prior to major declines. Bottoms have a much closer time relationship to sentiment (extreme bearishness among traders is usually quickly followed by rallies).

The best free sentiment resource that I am aware of is the NAAIM Survey of Manager Sentiment. As you can see in the chart below, sustained bullish sentiment is required in order to register a valid sell signal, as the crowd is often right for a while. The relatively short period of bullishness here is another sign that any decline that develops soon could be short-lived.

I should also mention that John Hussman has noted that the market has exhibited his syndrome of overbought, overvalued, overbullish on rising yields, for several weeks now. This set of conditions coincides with many of the very worst times to be long stocks, and has almost no false positives. Advances made during such periods are soon given up, often in severe declines.

The following set of conditions is one way to capture the basic “overvalued, overbought, overbullish, rising-yields” syndrome:

1) S&P 500 more than 8% above its 52 week (exponential) average
2) S&P 500 more than 50% above its 4-year low
3) Shiller P/E greater than 18
4) 10-year Treasury yield higher than 6 months earlier
5) Advisory bullishness > 47%, with bearishness < 27% (Investor’s Intelligence)

[These are observationally equivalent to criteria I noted in the July 16, 2007 comment, A Who's Who of Awful Times to Invest. The Shiller P/E is used in place of the price/peak earnings ratio (as the latter can be corrupted when prior peak earnings reflect unusually elevated profit margins). Also, it's sufficient for the market to have advanced substantially from its 4-year low, regardless of whether that advance represents a 4-year high. I've added elevated bullish sentiment with a 20 point spread to capture the "overbullish" part of the syndrome, which doesn't change the set of warnings, but narrows the number of weeks at each peak to the most extreme observations].

The historical instances corresponding to these conditions are as follows:

December 1972 – January 1973 (followed by a 48% collapse over the next 21 months)

August – September 1987 (followed by a 34% plunge over the following 3 months)

July 1998 (followed abruptly by an 18% loss over the following 3 months)

July 1999 (followed by a 12% market loss over the next 3 months)

January 2000 (followed by a spike 10% loss over the next 6 weeks)

March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002)

July 2007 (followed by a 57% market plunge over the following 21 months)

January 2010 (followed by a 7% “air pocket” loss over the next 4 weeks)

April 2010 (followed by a 17% market loss over the following 3 months)

December 2010

 

This chart from Hussman has data through March 3, but the latest blue band is now about a month wider:

-

This is clearly time to exit stocks or hedge all market risk. The upside is limited relative to the downside.

The myth of the evil short-seller lives on

Posted on by
Reply

Bloomberg’s Jonathan Weil writes a good column. Here he digs into the falacy often cited by executives of failing companies and politicians that short-sellers are responsible for drops in price:

Still Believing

So I asked a Morgan Stanley spokesman, Mark Lake, this week if the company’s executives still believed what Mack said in September 2008 about short sellers to be true. And if so, based on what evidence? No comment, he said. Mack wouldn’t talk either.

I got the same response at a conference in Phoenix last weekend when I posed similar questions to the SEC’s enforcement- division director, Robert Khuzami, who joined the agency about a year ago from Deutsche Bank AG. How are his staff’s short-seller investigations going? Found anything significant yet? No comment, he said. Cuomo’s office didn’t comment either.

My guess for why they have nothing to say is that the whole thing was a farce to begin with. Yet this same urban legend — that mysterious, unnamed short sellers and speculators somehow are to blame whenever markets plunge — still lives on.

In Greece, Prime Minister George Papandreou has tried to blame his country’s budget crisis on speculators who profited by buying credit-default swaps on Greece’s sovereign debt. Actually, it turns out Greece was shorting itself.

Paulson’s Evidence

One of the largest buyers of such swaps was the state- controlled Hellenic Postbank SA, which made a $47 million profit last year after it sold its $1.2 billion position, the Athens newspaper Kathimerini reported a few days ago. The bank’s former chairman later said Hellenic was just protecting Greek bonds it owns against a possible default, not speculating, though that doesn’t change the economics of the trade.

In his memoir, “On the Brink,” Paulson writes like a true believer. “Short sellers were laying the bank low,” he said, describing Mack’s plight a year and a half ago. “But John and his team weren’t about to go down without a fight.” What facts did Paulson cite in support of the notion that short sellers were harming Morgan Stanley, or that they had the capability to do so? None, of course.

Paulson mentioned only one short seller by name in his book, David Einhorn of Greenlight Capital, who shorted Lehman’s stock and warned other investors that the bank’s books were probably cooked. In that instance, however, Paulson said Einhorn was proven right, a point echoed in the findings of this month’s report by Lehman bankruptcy examiner Anton Valukas. (Paulson’s book didn’t name anyone who had shorted Morgan Stanley.)

Wrong Target

Einhorn also was right when he tried to warn the SEC in 2002 about the accounting practices of a business-development company called Allied Capital Corp. The SEC responded by turning around and investigating him, at Allied’s urging, without any basis for believing he’d done anything improper, as SEC Inspector General David Kotz’s office chronicled in a report released this week. Eventually, the SEC let the company off without any penalty, in spite of what the report called “specific, detailed allegations and evidence of wrongdoing by Allied.”

Here’s another idea for Kotz. How about investigating whether the SEC had any reasonable basis for believing Mack’s short-seller story in September 2008 when it acted on his pleas, and whether Mack had any plausible grounds to believe the story himself? Now there’s a probe that might turn up something.

Read the whole article here.

More here on how CDS traders are being used as a scapegoat for a well-deserved decline in Greek debt.

Manuel Asensio’s Sold Short tells the story of a small hedge fund that sought out frauds to short and was eventually pushed out of the business by high-priced lawyers paid for with cash from pump-and-dumps.

Bob Prechter: “Cover your shorts” (edited w/ new video)

Posted on by
6

He said that exactly 12 months ago yesterday:

k


-

Here he is again on November 23 last year, calling for another decline in 2010 at least as bad as 2008, as well as a bullish call on the dollar:

-

And here is a video from Yahoo just a few days ago. Crappy quality on this recording, but not unwatchable. He shows that mutual fund cash levels are at record lows, meaning managers are “all in.”
Also, individual investors have piled into municipal and corporate bonds, which are awfully risky at these prices.

Video presentation: Chanos on China’s state-sponsored bubble

Posted on by
4

Thanks to Pej for finding this:

-

Chanos relays a great quote from Milton Friedman: He was brought to watch the Chinese built a canal, and when he asked why they were using shovels and not bulldozers, he was told that machinery was being eschewed in order to create more jobs. Friedman replied with something like, “Oh, I thought you were building a canal. If it’s jobs you want, why don’t you give them spoons?”

Like the Chicago school that he founded, Friedman was great on most issues except for money. He couldn’t come to terms with the idea that the very existence of a central bank and legal tender laws create insurmountable moral hazard and will always lead to bubbles.

Ok, so how big is China’s commercial real estate bubble? Under construction right now, there are 25 square feet of office space for every person in China.

Family savings are being invested as down-payments for investments in highly-speculative developments. The bust will take care of a lot of the middle class’s much-touted savings.

What do REITs think they’re doing at 2005 prices?

Posted on by
Reply

IYR is an ETF loaded with commercial and residential real estate investment trusts:

Prophet.net

At 4.44%, you can get almost as much yield from a 10-year Treasury note (3.8%). Why mess around with these debt-laden monsters?

SRS of course is the 2x inverse of IYR, and URE is the 2x bull version (not a bad way to short, IMO).

Jim Chanos: China = Dubai X 1000

Posted on by
1

According to Bloomberg, the big bears are circling China.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”…

…The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”…

Risk for Commodities

Last month, banks lent a further 1.39 trillion yuan — almost one-fifth of the target amount for the whole of 2010. Also in January, foreign direct investment climbed 7.8 percent to $8.13 billion. Retail sales during last week’s Lunar New Year holiday rose 17.2 percent from the same period in 2009, according to the Ministry of Commerce.

While China’s resilience has helped support the world economy, raising demand for energy and raw materials, the bursting of a bubble would have the opposite effect. Government efforts to wean the economy off its extraordinary support may roil markets.

In January, the central government ordered banks to curb lending, which put China’s stock market into reverse. In a sign, in part, of how dependent the world has become on China, stocks and currencies slumped in places such as Australia and Brazil that supply commodities to the People’s Republic. On Feb. 12, the eve of the one-week Lunar New Year holiday, China for the second time in a month ordered banks to set aside more deposits as reserves. The Shanghai Composite Index has fallen 8 percent year-to-date, after gaining 80 percent in 2009.

Bidding Up Prices

“If the Chinese economy decelerates or crashes, what you have is a disastrous environment for industrial commodities,” said Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd.

The stimulus tap that Beijing turned on has flowed to projects such as its 2 trillion yuan high-speed-rail network. The 221 billion yuan Beijing-Shanghai line has surpassed the Three Gorges Dam as the single most expensive engineering project in Chinese history.

Some beneficiaries of the government efforts have plowed their loans into real estate and stocks. Property prices across 70 cities jumped 9.5 percent in January from a year earlier, according to government data.

…Chanos, a short-seller who was early to warn about Enron Corp., is one of a growing number of investors sounding the alarm. “Right now, the Chinese market is overheating,” George Soros said in a Jan. 28 interview.

Wait, I thought Soros was a Keynesian. Isn’t printing and spending the way to perpetual prosperity?

Another example Chanos has cited is the city of Ordos, where party officials have built an entire new downtown on the windswept grasslands of Inner Mongolia, 25 kilometers (15 miles) outside the existing municipality of 1.5 million people.

Ordos is really comedic. Check out this video:

Goldman is not invincible

Posted on by
4

I have talked a lot about the conspiratorial tone of frustrated bears lately, and how I take it as a sign that traders are resigned to the market marching ever higher despite the depression grinding on. Much of that anger and awe is directed at Goldman Sachs, which rightly or wrongly is perceived as the all-seeing, all-profiting eye at the top of America’s Ponzi economy. With their men in high places and their high frequency trading bots, they are invincible, or so says their stock price:

Source: Yahoo! Finance

-

I am prone to fading consensus wherever I find it, and here I see the chart of a financial behemoth trading at the same level as at the very height of the credit expansion, 2006, back when it was churning out toxic bundles of AAA debt on houses and malls that are today being abandoned. In 2006, the company earned over $9 billion a year with 20% fewer shares and 20% less debt, and the mood in the stock market was of total euphoria: smooth sailing as far as the eye could see, Goldilocks time.

As far as I’m concerned, the rally from $47 to $165 has been one of the greatest short squeezes and dead cat bounces in history. For this stock to have a market cap over 20% greater than at the height of the bubble is absurd. Yes, they earned a record $3.4 billion last quarter, but trading profits come and go, and it’s not as though any of that is doled out to common shareholders: the company pays no dividend.

Expect their political racket to come back to bite them, and hard, as regulations tighten on all kinds of trading and the skeletons start to fall out of the closet. The heyday of finance is over for America, and political power follows economic power.

I suspect that the lows are not in for this pig, and that in fact it may face a crisis of existence at some point in the coming years. Besides, did you ever see a better chart from a short perspective? Its got a ready-made stop, too, in case there is more steam here than I think.