The Big Picture | Short Selling

How I Spent My Summer Vacation . . .

Friday, August 22, 2008 | 04:00 PM

Christopher Weyant via Welling@Weedon

In Defense of Short Selling

Friday, August 22, 2008 | 11:55 AM

in Markets | Short Selling | Taxes and Policy

Doug Kass gives us this morning's must read slice of market history:

"Short-selling runs deep in financial history. Perhaps the first case dates to 1609 when the Dutch trader, Isaac Le Maire, targeted the shares of the shipping company Vereenigde Oostindische Compagnie (the Dutch East India Company). VOC was the first multinational corporation in history and had broad powers. Nonetheless, Le Maire, concerned about threats of attack by English ships, sold VOC’s shares short. After learning about Le Maire’s tactics, the stock exchange governing VOC’s trading banned short-selling (although the ban was later revoked).

In the early 1630s, the Dutch economy fell into a depression following a speculative peak in the trading of tulips. Again, short-selling raised the ire of regulators, many of whom saw it as magnifying the effect on the Dutch economic downturn. As a result, England banned short-selling outright.

Almost 420 years later – in the late 1920s – short-sellers warned of the consequences of speculation. But in the aftermath of the Wall Street crash of 1929, many blamed them and the uptick rule – which banned short-selling on downticks – was instituted (and stayed in effect until 2007). More regulation governing short-selling came into force in 1940, with a ban on mutual funds from short-selling (though that law was lifted in 1997). In early 2005, the SEC again sought to restrict the practice."

Interesting history . . Thanks, Doug.

UPDATE: August 25, 2008 12:26pm

Stocks Breaking Down on Volume

Tuesday, August 19, 2008 | 11:00 AM

in Markets | Quantitative | Short Selling | Trading

My partner Kevin sends me a reminder this morning that "When the markets break down investors look for alternative ways to make money such as short selling."

Below is a daily list that FusionIQ generates highlighting stocks that have broken down on significant volume, typically a sign of large institutional selling.

We use these as a source of Shorting ideas . . .
>
click for jumbo table

Table courtesy of Fusion IQ

>
The next release of Fusion (2.0) will be out after Labor Day. 2.0 has many new features and user interface improvements, including a highly customizable home page.

We may set up another free trial again if there is any interest.

Bob Farrell's 10 Rules for Investing

Sunday, August 17, 2008 | 10:00 AM

Bob Farrell was a legend at Merrill Lynch & Co. for several decades. Farrell had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987's crash.

He retired as chief stock market analyst at the end of 1992, but continued to occasionally publish. Rumor has it for a humongous donation to Farrell's favorite charity, you can get on his very exclusive email list.

Marketwatch gathered some of Farrell's more famous observations, and republished them as "10 Market Rules to Remember."

1. Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people's heads. It's easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an opposite excess in the other direction

Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras -- excesses are never permanent

Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get cut in half.

As the fever builds, a chorus of "this time it's different" will be heard, even if those exact words are never used. And of course, it -- Human Nature -- never is different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don't expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction -- eventually. comes.

5. The public buys the most at the top and the least at the bottom

That's why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.

Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold. Gains "make us exuberant; they enhance well-being and promote optimism," says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks."

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks ("Nifty 50" stocks).

8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend

I would suggest that as of August 2008, we are on our third reflexive rebound -- the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.

Even with these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.

9. When all the experts and forecasts agree -- something else is going to happen

As Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.

~~~

Great list! I should get a hold of Mr. Farrell and do a Paul Desmond-like interview.

Previously:
Q&A: Paul Desmond of Lowry's Reports (Feb 18, 2006)
www.thestreet.com/markets/marketfeatures/10269345.html

Q&A: Paul Desmond of Lowry's, Part II
www.thestreet.com/_rms/ markets/marketfeatures/10269355.html

Source:
Ten rules to remember about investing in the stock market
Jonathan Burton
MarketWatch, 6:24 p.m. EDT June 11, 2008
http://tinyurl.com/farrellsrules

Dear Investor....

Tuesday, August 12, 2008 | 09:42 AM

in Credit | Currency | Finance | Hedge Funds | Short Selling

This will be the funniest thing you read today:

>
ACME Systematic Leveraged Macro Momentum Fund LP
321 Overprice Street
Greenwich, CT 00573

Dear Investor,

This letter is to inform you that the wheels have come off of the proverbial wagon at ACME Systematic Leveraged Macro Momentum Fund LP, and that the same awesome thematic portfolio that made you feel (in the first half-year) as if you'd become very rich in comparison to those sucking wind on their leveraged MBS portfolios or Japanese Small-Cap Value Funds, has, quite literally, spontaneously combusted in our faces...

Continued . . .

>

via Cassandra Does Tokyo

Betting on Bear's Bust

Monday, August 11, 2008 | 09:15 AM

in Options | Psychology/Sentiment | Short Selling | Valuation

Today's most talked about article is likely to be this breathless Bloomberg piece on the demise of Bear Stearns:

"On March 11, the day the Federal Reserve attempted to shore up confidence in the credit markets with a $200 billion lending program that for the first time monetized Wall Street's devalued collateral, somebody else decided Bear Stearns Cos. was going to collapse.

In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.

Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 apiece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash."

The article goes on to quote a few option traders who thought the bet was extremely unusual and unlikely without inside information.

While there is lots of anecdotal evidence, I remain less than convinced. A bet of under $2 million is relatively small for any decent sized fund (A trader friend at a major macro fund laughed at the Bloomie piece, calling $2m "A pimple on an elephant's ass").

It was pretty clear at the time that Bear was in deep trouble. And as we noted on the evening of March 10 (Rumor of the Day: Bear Goes Belly Up), paying $4 for a $60 put was expensive.

Here is what was being written at the time at Marketbeat:

Options activity is heavily tilted toward bearish bets, with aggressive players buying put options on March options contracts at the $50 and $40 strike prices – which would be an enormous move in the shares, currently trading at about $62.50 a share. Officials at Bear Stearns were unavailable for comment.

However, “it’s very expensive to buy a put” at a $60 strike price, notes Sveinn Palsson, options analyst at Credit Suisse. “You’re paying $4 for a $60 stock, and there’s not much more than a week left in the maturity, so people are just trying to get that cheaper in sort of a worst-case-scenario thing.”

March options expire at the end of next week, so these are short-term bets, but heavy activity is being witnessed in April options as well. Volatility has spiked dramatically in the options as the bearish bets have multiplied; more than 31,000 March put options have traded today, compared with about 16,000 call options. Meanwhile, spreads on the company’s credit default swaps have widened dramatically, to between 700 and 800 basis points, compared with about 450 points Friday. -David Gaffen

It will be interesting to see what this "investigation" uncovers, but regardless, the Bloomberg piece smacks of some historical revisionism . . .

Sources:
Bringing Down Bear Began as $1.7 Million of Unsuspected Options
Gary Matsumoto
Bloomberg, August 11 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=aLsfDbE1JU_E&

Bearish Bets on Bear Stearns
David Gaffen
Marketbeat March 10, 2008, 12:16 pm
http://blogs.wsj.com/marketbeat/2008/03/10/bearish-bets-on-bear-stearns/

Bear Hunt

Friday, August 01, 2008 | 12:15 PM

While I am off fishing, y'all can enjoy this article:

If President Richard Whitney of the New York Stock Exchange was surprised at being suddenly ordered to Washington by the Senate last fortnight, he did not show it. The Exchange's president must be prepared for all sorts of wild stories and charges, especially when the market is in a bad way.

But Mr. Whitney may well have been surprised, upon reaching Washington last week, to learn the origin of his hurry call. Senator Walcott of Connecticut had, it seemed, received a telegram from no less a personage than Publicist George Barr Baker, faithful friend and volunteer adviser of President Hoover, disclosing the imminence of a "billion-dollar bear raid." The Senate Committee on Banking & Currency, on which Senator Walcott, once a Wall Streeter himself (Bonbright & Co.), is the Administration's spokesman, wanted Mr. Whitney to get up a complete list of persons on the short side of the market, wanted to quiz Mr. Wrhitney on bear practices and the Stock Exchange's rules.

President Whitney, precise in dress and address, confronted the Senators coolly. On his watchchain they could perceive a small gold animal charm which was neither a bull nor a bear, but a pig.* He could perceive that the committee's special attorney, aggressive Claude Raymond Branch of Providence, was irritating to the Senators; that Chairman Norbeck of South Dakota was impatient, Senator Glass of Virginia sarcastic, Iowa's Smith Wildman Brookhart belligerent.

Mr. Whitney flatly denied, as he had often denied before, that professional bears had had anything to do with the decline in market prices. He said that the short interest decreased by 230,000 shares during the previous week, while the market level fell to a new bottom. A similar condition existed last October, he said. As to bear raiding, he simply said: "Our investigations have disclosed no bear raids." He suggested that the Federal Government had put the general public into the market by educating the people to a knowledge of securities through Liberty Loan drives, agreed that public officials had helped to sustain the 1926-29 inflation through bullish statements.

Mr. Whitney explained that the sale of a long stock is far more depressing than a short sale, pointed out that the Administration's reconstruction measures have given investors an opportunity to get out of the market. Small investors have increased during Depression, he said. Asked to what cause he attributed the slump in prices, he replied:

"Liquidation by frightened investors who are giving these United States of ours away."

Senator Counzens of Michigan: It has come to my attention that a broker may use his customer's stock to depress the value of that stock.

Mr. Whitney: Senator Couzens, I deny that. No broker may do that.

Senator Couzens: Oh, don't be so innocent. How do you detect it?

Mr. Whitney: Our men check the brokerage offices.

Senator Brookhart: Do you think the rules you are constantly citing are enforced or evaded?

Senator Elaine: Maybe he thinks they are enforced better than the Prohibition law of the Federal Government.

Senator Brookhart: You brought this country to the greatest panic in history.

Mr. Whitney: We have brought this country, sir, to its standing in the world by speculation. You think you can affect the world by changing the rules of a stock exchange or board of trade?

Senator Brookhart: Yes, we can change them by abolishing the stock exchange and board of trade, so far as speculation is concerned.

Mr. Whitney: And then the people of the United States will go to Canada and Europe to do those very things and pay their taxes there.

The meeting adjourned with Senator Glass wondering why Mr. Whitney had been called at all. Three days later Mr. Whitney told the Senate Finance Committee that the proposed ¼ of 1% tax on stock and ⅛ of 1% on bonds might force his Exchange to close.

Back before the Banking & Currency committee. Mr. Whitney presented a list of 24,000 traders on April 8 (day before the "billion-dollar bear raid" was to have been staged). The committee began sorting out the short-sellers. Many of them bore "nationally known names" but Senator Walcott demurred against their publication. Said he: "You wouldn't print them if they were made public." Washington, realizing how glad the Administration would have been to catch some big Democratic bears, wondered if some big Republicans had been found in bear's clothing.

*A fancier of fine hogs, Mr. Whitney may perhaps wear his pig charm because of the old Wall Street saw: "A bull can make money, a bear can make money, but a pig never can."

~~~

Oh, yeah, I forgot to mention -- this was from 1932 . . .

Source:
Bear Hunt
Time, Apr. 25, 1932
http://www.time.com/time/magazine/article/0,9171,743645,00.html

The "No Loss Sale" Rule

Thursday, July 31, 2008 | 03:30 AM

in Finance | Short Selling | Video

David Weidner's new column (out tomorrow) proposes outlawing the sale of any stocks for a loss.

Very clever!

Cox: But I was getting a pedicure the other day and I thought, 'Why not just short selling?' What about ALL selling?' Why not make a rule that prohibits selling a stock for a price lower than the last trade. We'd stop losses altogether. Everyone would make a profit. Unlike some of these other measures you've heard today, it wouldn't cost taxpayers a penny. So, what do you think of the Cox No-Loss Sale rule?

Source:
The no-loss sell rule
What if we tried a new strategy in the next six months?
David Weidner
MarketWatch, 12:01 a.m. EDT July 31, 2008
http://www.marketwatch.com/news/story/heres-trading-rule-guaranteed-work/story.aspx?guid=%7BCAB604A7%2DDEEF%2D4DF7%2D9389%2D2B71BFB86436%7D

No Shorting. That's the Rule.

Wednesday, July 30, 2008 | 06:00 PM

in Short Selling | Taxes and Policy | Trading

A long/short hedge fund manager of my acquaintance went to short some Morgan Stanley (MS) via a B/D that clears through Wachovia:

The Trader comes back: "Wait a second -- that's on the list -- I cant short that."

The Fund Manager says: No, I don't want to Naked Short it, we have already located a borrow -- this is a clean, legitimate short sale.

Trader: Nope, we clear through Wachovia -- and its on the list - NO SHORTING THESE 19 PRIMARY DEALER NAMES -- PLUS FANNIE AND FREDDIE -- AT ALL.

Fund Manager: That's ridiculous -- how can you not execute a legitimate borrowed short?

Trader: Wachovia. Dems da rulez. You have to go elsewhere.

Fund Manager: Consider it done.

~~~

>
Postscript: FM added to his Morgan short elsewhere, and initiated a new Merrill Lynch (MER) short. I don't know what it says about Wachovia that they won't even allow shorts in those names (deep doodoo??).

I am paraphrasing Jim Grant, but "Shorting is the financial world's equivalent of free speech."

Another Wild Ride On Wall Street

Tuesday, July 29, 2008 | 05:30 PM

in Markets | Short Selling | Trading

Wow, that was something else!

Quote of the Day: James Montier

Friday, July 25, 2008 | 03:00 PM

in Data Analysis | Earnings | Short Selling | Trading

James is an unusually clear eyed analyst:

“In good times, few focus on such ‘mundane’ issues as earnings quality and footnotes. However, this lack of attention to ‘detail’ tends to come back and bite investors in the arse during bad times. There are notable exceptions to this generalization…

Contrary to the silly populist backlash which sees short sellers as rumor mongers and conspirators, they are actually amongst the most fundamentally driven of all the investors I interact with. Rather than being some malignant force within the markets, in my experience short sellers are closer to the accounting police (something the SEC once purported to do!).

Whilst companies often accuse short sellers of lying and conspiracy, it turns out that the accusers are often the guilty party. Owen Lamont from Chicago University has examined the battles between corporates and short sellers in the U.S. between 1977-2002. He found that ultimately it was the shorts that were right; the stocks underperformed the market by a cumulative 42% over three years after the start of the battle.”

-James Montier
Mind Matters: Cooking the books, or, More sailing under the black flag
June 30, 2008

via Welling@Weedon

Paulson & Co Opening New Fund to Re-Capitalize Banks

Wednesday, July 23, 2008 | 01:40 PM

in Derivatives | Hedge Funds | Short Selling | Trading

There is no small amount of irony in this:

"John Paulson, the money manager whose wagers against the U.S. housing market helped him earn an estimated $3.7 billion last year, is now seeking to profit from Wall Street's search for capital to offset mortgage writedowns.

Paulson plans to open a hedge fund by December that will invest as the world's biggest banks and brokers add to the $345 billion they've raised in the past year, according to two people with knowledge of the matter. His Paulson & Co., which oversees $33 billion, hasn't set a size target for the fund, said the people, who declined to be identified because the plans aren't final.

The New York-based firm's credit funds rose as much as sixfold last year, helped by bets that rising defaults on subprime home loans would pummel the value of mortgage-backed securities. The meltdown has forced the world's biggest banks and securities firms to take $467 billion in asset write-offs and credit losses and led to the collapse of Bear Stearns Cos.

"Investors who are able to make money in a declining market and then rapidly turn around and profit from a rising market is highly unusual,'' said Thomas Whelan, president of Greenwich, Connecticut-based Greenwich Alternative Investments, which advises clients on investing in hedge funds. Paulson declined to comment. His 2007 earnings made him the highest-paid hedge-fund manager, according to Institutional Investor's Alpha magazine."

Note that Paulson was early in shorting Mortgage back securities, but had the conviction and the patience to wait out the eventual sell off. I would expect something similar here . . .

Previously
Those Damn Short Sellers Are Just Killing It!
http://bigpicture.typepad.com/comments/2008/07/those-damn-shor.html

Source:
Paulson & Co. Plans Fund to Provide Capital to Banks
Saijel Kishan
Bloomberg, July 23 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aANbt26C4Kuk&

Those Damn Short Sellers Are Just Killing It!

Wednesday, July 23, 2008 | 07:00 AM

in Financial Press | Short Selling | Trading

There were a sew of articles in the papers today about just how much money those damned shorts are making!

First up, the WSJ, who looked at who was killing it:

"Some hedge-fund stars of 2007 are having an encore year. In the process, they are defying skeptics who questioned whether they could keep their runs going.

John Paulson, who directed Paulson & Co. to gains of almost $15 billion last year, is up as much as 20% in some of his hedge funds through June 30, according to investors, thanks to continued bets on the woes of financial companies.

Philip Falcone, who saw gains of about 120% in his largest hedge fund in 2007, gained 42% through June in that fund, Harbinger Capital Partners I, from various commodity-related investments, among other areas.

It isn't necessarily surprising that investors who wagered against mortgage and housing-related investments are excelling, since the housing troubles have spilled over into 2008. The real challenge for these managers will be turning in similar performances when that gambit has run its course."

Next up, Bloomberg focused on the total amount wagered on the short side:

"Investors worldwide are betting more than $1 trillion on a collapse in stock prices.

Managers from William Ackman to Jim Rogers made a total of at least $1.4 billion in July with wagers against U.S. mortgage financiers Fannie Mae and Freddie Mac, data compiled by Bloomberg as of last week show. Harbinger Capital Partners staked $665 million that U.K. mortgage lender HBOS Plc would drop and Sao Paulo-based hedge-fund manager Francisco Meirelles de Andrade's short selling of Cia. Vale do Rio Doce is also paying off.

More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specializing in securities lending, show. Almost all of that is being used to speculate that shares will fall, according to James Angel, a finance professor at Georgetown University who studies short selling. The global economic slowdown, $453 billion in bank losses and an explosion of funds that can profit from stock declines spurred the increase in short selling, helping send 22 of 23 countries in the MSCI World Index into bear markets."

Next, the FT had an interesting twist: The brokers and iBanks are making lucrative trades lending out shares to shorts!

"Conservative fund management firms and custody banks are making billions of dollars from short-selling by lending stocks to facilitate such trades in exchange for lucrative fees.

Even as short-sellers attract blame for driving big falls in financial stocks, financial services firms – including those targeted by short-sellers – are profiting from the investing strategy.

US prime brokerage firms, most of which are owned by big Wall St banks, will reap revenue of $11bn (£5.5bn) this year, according to a recent study by Tabb Group, a research business.

Prime brokerage units provide services to hedge funds. They do not reveal their financial results, but executives who work for the units say they make most of their money from lending to short-sellers."

Funny -- no one really looked at the reasons why the shorts were killing it --namely, the credit and derivative system run amok, a toothless SEC and a Federal Reserve that was guilty of malfeasance in terms of their obligations to regulate lending institutions.

However, this Bloomberg quote at least makes an attempt to explain the purpose shorts serve in the investment eco-system:

"Short sellers are a very important part of the ecosystem of our financial markets,'' said Angel, a professor at Georgetown's McDonough School of Business in Washington. ``The same way that lions go after a herd, they go after the weaker animals. The shorts will pick on a company where there's a legitimate controversy over its valuation.''

Sources:
Shorting ‘makes billions’ for fund managers
Deborah Brewster in London
FT July 17 2008 22:16 | Last updated: July 17 2008 22:16
http://www.ft.com/cms/s/0/8919240e-543e-11dd-aa78-000077b07658.html

Never Have So Many Short Sellers Made So Much Money
Alexis Xydias
Bloomberg, July 21 2008
http://www.bloomberg.com/apps/news?pid=20601208&sid=aNDnqybULZdo&

As the Markets Throw Knuckle Balls, Hedge-Fund Stars Still Hit Home Runs
GREGORY ZUCKERMAN
WSJ, July 22, 2008; Page C1
http://online.wsj.com/article/SB121668343357771931.html

In Defense Of Speculators

Thursday, July 17, 2008 | 09:00 AM

in Markets | Short Selling | Trading

This morning's Ahead of the Tape column in the WSJ discusses the absurdity of targeting short-sellers during downturns.

"Some free markets are apparently freer than others: The price of oil is free to fall, while the stock price of a bank is free to rise.

That is one takeaway from Washington's recent response to market turmoil. By singling out "speculators" who want to push bank stocks down and oil prices up, lawmakers and policy makers reinforce a message that the free market is a wonderful thing as long as it isn't going against you.

It is a potentially slippery slope."

Apparently, Free markets means free to go up only . . .

Source:
Easy Targets: In Defense Of Speculators
MARK GONGLOFF
WSJ, July 17, 2008; Page C1
http://online.wsj.com/article/SB121625520953660253.html

~~~

Fed: No Discount Window for FNM, FRE

Saturday, July 12, 2008 | 06:43 AM

in Federal Reserve | Legal | Psychology/Sentiment | Short Selling | Trading

Go figure: In the midst of a deep selloff, a bullish rumor seems to have been planted that would allow for the rescue of Fannie Mae (FNM) and Freddie Mac FRE).

It turns out to have been shite:

"Federal Reserve has not had any discussions with Fannie Mae and Freddie Mac about access to direct loans from the central bank, Fed spokeswoman Michelle Smith said.

"Federal Reserve officials are following the situation closely,'' Smith said in a telephone interview today. "However, there have been no discussions'' with the companies ``about access to the discount window,'' she said.

Shares of the two largest U.S. mortgage-finance companies plummeted this week on concern they don't have enough capital to offset losses from the mortgage meltdown. The discount window offers direct loans to commercial banks at an interest rate that's now 2.25 percent, a quarter point above the Fed's benchmark rate.

Chairman Ben S. Bernanke and his colleagues opened the discount window to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis."

These bullish bull$%*# rumors end up costing investors real money. Remember the story about Buffett buying Bear Stearns? That made the rounds, including all of the financial television channels, Forbes, etc., sending the stock to $126.

I am waiting for Jamie Dimon to call for an investigation over who started that enormously expensive, money-losing false rumor.

Previously:
About Those Companies Brought Down by Rumors . . . (July 11, 2008)
http://bigpicture.typepad.com/comments/2008/07/about-those-com.html

Buffett to Buy Bear? Bull$%*# ! (September 27, 2007)
http://bigpicture.typepad.com/comments/2007/09/buffett-to-buy-.html

Sources:
Fed's Bernanke tells GSEs discount window open
Patrick Rucker
Reuters, Fri Jul 11, 2008
http://www.reuters.com/article/topNews/idUSWBT00938820080711

'Fed Says No Talks With Fannie, Freddie About Loans
Scott Lanman
Bloomberg, July 11 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a79GKfbIbW10&

Bernanke told GSEs they can use discount window: report
Wallace Witkowski
Reuters/Marketwatch, 3:10 p.m. EDT July 11, 2008
http://tinyurl.com/5gqf5f

~~~

About Those Companies Brought Down by Rumors . . .

Friday, July 11, 2008 | 06:45 AM

Here's a question I'm curious about:

We've heard from oh-so-many people how whisper campaigns have brought down so many firms like Bear Stearns (BSC) and Indy Mac (IMB) and Fannie (FNM) and Freddie (FRE) and now Lehman Brothers (LEH).

Why is it that all these rumor-mongerers and shorts are only bringing some firms to their knees? How come they always seem to be the over-leveraged, under-capitalized, unhedged, most poorly-managed companies? Isn't it funny that all of the firms that are the subject of such rumors have so many similar characteristics? Bear and Lehman and Fannie Mae and Freddie Mac and AIG and . . . the list goes on and on.

Why is it never the firms with strong balance sheets, good business models, making lots of profits? Why aren't we terrified that these powerful shorts go after Intel (INTC) or Google (GOOG) or Apple (AAPL) or Berkshire (BRK) or GE or Exxon Mobil (XOM)?

Or is that merely a funny and unexplainable coincidence?

According to Jamie Dimon, a whispering campaign can bring down a firm. Vanity Fair blames shorts and CNBC. If that's true, why not go short Bear AFTER it fell 100? Why not go after a really big firm, with lots of room on the downside to make even more money? Perhaps an alternative explanation is in order.

Yesterday's pasting of Lehman (LEH) was based on a rumor that Pacific Investment Management Co. (aka PIMCO), manager of the world's biggest bond fund, and SAC Capital, one of the world's largest and most actively trading hedge fund, were backing away from the firm. Both came out and reaffirmed that they were still Lehman customers -- but it had the feel to me of a manoeuvre, and not a true and full disclosure.

My best guess: We are likely to find out what the full truth is some time from now. How much does anyone want to bet me that we will find out in a few quarters that each of these firms were cutting back a big chunk of their business with Lehman?

Any takers?

Sources:
Psst! Hear the Rumor of the Day?
ANDREW ROSS SORKIN
NYT, July 8, 2008
http://www.nytimes.com/2008/07/08/business/08sorkin.html

Bringing Down Bear Stearns
BRYAN BURROUGH
Vanity Fair, August 2008
http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808

DealBook’s Andrew Ross Sorkin vs. DealBreaker’s John Carney
NY Magazine, 7/ 9/08
http://nymag.com/daily/intel/2008/07/dealbooks_andrew_sorkin_vs_dea.html

Rumors, subpoenas and the pursuit of truth on Wall Street
Robert Teitelman
The Deal, July 8, 2008 at 11:07 AM
http://www.thedeal.com/dealscape/2008/07/rumors_subpoenas_and_the_pursu.php

~~~

Lehman Brothers $20 Price Target Complete

Monday, June 30, 2008 | 05:15 PM

in Quantitative | Short Selling | Trading

In the beginning of June, I noted that Lehman Brothers (LEH) was reiterating a sell signal on the Fusion IQ ranking system. So too was CIT Group (CIT).

Lehman closed at $19.81, and is now at an eight year low on "Take-under" speculation. CIT is $6.81, about 32% below the June 3rd call.

At the time, we put a $20 price target on Lehman, and warned against owning CIT. LEH is since down 41.4+%; CIT is down 28.77%.

>
I rarely use the blog to promote our Quant tool, but damn, if you missed this one, you left a lot of money on the table. I am reiterating these two calls because they were such jumbo winners -- 30% in less than a month. If you haven't tried the tool you are missing out on an enormous moneymaker.

Advertisement over.

Short-Sellers, The Ackman Approach

Saturday, June 14, 2008 | 02:30 PM

in Short Selling | Video

Via the WSJ Deals Conference:

Updating Lehman Sell Call

Thursday, June 12, 2008 | 12:25 PM

in Corporate Management | Credit | Earnings | Short Selling | Valuation

2 weeks ago, we reiterated a previous Sell on Lehman Brothers (LEH). That worked out pretty well. Even with the Dow up 160 points today (after falling 1,000 points in only 14 trading sessions) Lehman cannot catch a bid and remains under pressure.

The LEH news is the management shuffle -- CFO, COO out. I suspect more heads will roll, including Fuld's. The bottom line is the Short sellers and bloggers were right, management was full of crap, and my friend Charlie Gasparino was --w ell, watch the video below.

Let's go over the two calls from two weeks ago on CIT Group (CIT) and Lehman (LEH):

CIT is a break-even -- you lost nothing by avoiding the stock. The Lehman Sell call was a jumbo winner:

If you avoided the stock, well, good for you! You stayed out of trouble;

If you sold it, Congrats! You just saved yourself a 30+% whackage.

And if you shorted it or bought put options, well, you should be covering half here, and letting the rest ride. Then you should visit this portion of my Amazon wish list. (Pick out something nice !)

~~~

Here's the breaking news about the first heads rolling at Lehman (more to follow).

Sometime ago, my pal Charlie Gasparino quoted a CEO about how "the shorts were full of bullshit" on air. (were is that link?) or that "the shorts are getting desperate" or "the shorts are full of it."

As it turns out, not so much.

Charlie -- who is buying me a beer next week -- is now on CNBC, breaking the news, discussing Lehman's CFO and COO, bloggers, shorts, and more. Charlie admits these guys were liars, and that they sandbagged everyone.

click for derogatory video

Previously:
Financial Sector: Beware LEH, CIT http://bigpicture.typepad.com/comments/2008/06/financial-secto.html
(back up post)

Dirty Tricks at Lehman?
http://bigpicture.typepad.com/comments/2008/06/dirty-tricks-at.html

Lehman posts Jumbo $3B Loss; To Raise $6B http://bigpicture.typepad.com/comments/2008/06/lehman-posts-ju.html

Chart(s) of the Day: Bear Stearns & Lehman Bros http://bigpicture.typepad.com/comments/2008/03/charts-of-the-d.html

Fuld's Misquote Contest

Tuesday, June 10, 2008 | 07:00 PM

in Corporate Management | Short Selling

At Lehman's annual meeting held in April of this year, Richard Fuld, CEO of Lehman Brothers, was rumored to have said: "I will hurt the shorts, and that is my goal."

That quote was widely circulated -- but it turns out to be wrong. You see, Fuld never actually uttered that phrase. The speech he gave was incorrectly transcribed.

What Fuld actually said was "____________."

~~~

You can fill in the blank below

Dirty Tricks at Lehman?

Thursday, June 05, 2008 | 06:46 AM

in Corporate Management | Legal | Short Selling

Today's must read commentary: naked capitalism calls shenanigans on Lehman Brothers illegal leak of an insider memo to CNBC's Charlie Gasparino:

"On the issue of Lehman supposedly deleveraging (particularly to such a dramatic degree), The New York Times reported that Lehman had reduced its leverage from 31.7x to 25X via a $100 billion asset sale. Note even that claim demands more explanation. How was so much unloaded? What losses were taken? And (most probable) was this done the way recent disposals of leveraged loans have been accomplished, via part of the proceeds being financed? If so, the "sale" is far less meaningful than a true sale and involves the risk that the supposed buyer might try to put the asset back in the future (in this environment of high financial stress, do not underestimate the odds of extreme measures).

And of course, it's also intriguing (to put it way too politely) that the leak to the Times is considerably at odds with the "internal memo" that got into Gasparino's hands. 25x and 12x leverage are hugely different numbers.

Now to the tactics, which stink to high heaven. Why, pray tell, is Lehman resorting to leaks and whispers rather than the proper procedure of public disclosure via a press release?"

I usually love Charlie Gasparino's work, but at this point he has been fed more ~~disinformation~~ propaganda and inside info.

Regardless, leaking an internal memo with non-public, material financial information to CNBC is an SEC violation. Of course, the toothless tiger in charge of regulatory enforcement is too busy chasing down who spread what rumors about Bear Stearns (that turned out to be true) to be bothered with such obvious and blatant illegality.

More naked capitalism:

Don't tell me this may have been an unauthorized employee leak; if this memo was circulated broadly to employees, it was done with the full intent that word would get outside the firm. That happens predictably with mass employee communications. And if it was limited distribution, the recipients, as anyone who has passed a Series 7 exam ought to know, selective disclosure of material information is a big no no under SEC Rule FD.

Would someone please tell me how this could be leaked to a major news organization without an immediate SEC investigation being opened? Or is Cox & Co. to busy investigating David Einhorn to look into his?

Color me disgusted . . .

Disclosure: no position in any stock mentioned.

Sources:
Dirty Tricks at Lehman? (And a Defense of Shorts)
Yves Smith
naked capitalism, JUNE 5, 2008
http://www.nakedcapitalism.com/2008/06/dirty-tricks-at-lehman-and-defense-of.html

Video:
Future of Lehman
CNBC Wed. Jun. 4 2008 | 1:00 DT
http://www.cnbc.com/id/15840232?video=761190267

Financial Sector: Beware LEH, CIT

Tuesday, June 03, 2008 | 11:19 AM

in Derivatives | Finance | Short Selling | Trading

Every day, we run a series of screens, large and midcap, buys & sells, breakouts and breakdowns.

Today, our Large Cap Sell Screen identified Lehman Brothers (LEH) as a Sell. It has a current master score of 33 (out of 100) and has an abysmal technical score of 17. It went to a sell signal back in March around $52, and two weeks later, traded as low as $20.25. It recovered somewhat, flipping to neutral around $44.

Its now back on a sell signal, with a $20 price target. (See chart below)

The MidCap Sell Screen found a smaller financial: CIT Group (CIT). It also went on a Sell signal. Same set up as Lehman Brothers: First sell signal was in March about $16, fell to $6.45 a few weeks later, back to a neutral a month later. Now, CIT is back on a Sell/Short rating, with a possible target about 30% lower.

Lehman Brothers (LEH) Six month daily

CIT Group (CIT) Six month daily

NOTE: Traders who short stocks should always work with stop losses. The financial sector, with outside investors, have been very volatile, with squeezes occurring regularly.

Regular FusionIQ posts can be found here.

Tuesday, June 03, 2008 | 11:19 AM |