This may have been posted already, but I do not recall seeing it. Sorry!
TH
RPT-Wall Street bears look to '05, nurse '04 wounds
Thu Dec 30, 2004 02:03 PM ET
(Repeats to delete extraneous words)
By Michael Flaherty
NEW YORK, Dec 30 (Reuters) - After ending the year with a whimper, Wall Street bears are foraging for new prey, with home builders, banks and oil producers likely targets.
Short-sellers, or bearish investors who profit from stocks falling, are also holding on to their bets that high-flying Internet stocks will be humbled in future quarters.
And while the fate of these sectors remains uncertain, many financial experts say rising interest rates, decelerating earnings and an economic slow down could put the majority of short-sellers in the black this year -- the first time since 2002.
"Most people think it's going to be a banner year for short-sellers," said Harry Strunk, an investment consultant based in West Palm Beach, Florida who has tracked short-sellers for more than 20 years. "There seemed to be a lot of speculation in the late-year rally. The expectation is that the market will return to fundamentals next year."
This year, in fact, looked to be a banner year for short-sellers, with the market flat for most of 2004.
Then November rolled around.
The late year rally dragged the short bias fund category down 7.7 percent last month, according to CSFB/Tremont. The category, a group of short-heavy hedge funds, is down 3 percent year-to-date after being up as much as 9.1 percent late in the summer. Last year, it ended the year down 33 percent.
Short-sellers who questioned Corporate America's obsession with the low-carb diet craze and who bet on further woes for the airline industry won big this year. Those who bet against new Internet stocks such as Overstock.com Inc. (OSTK.O: Quote, Profile, Research) , an online seller of close-out goods, and Web search engine Google Inc. (GOOG.O: Quote, Profile, Research) mainly lost out.
But the technology sector is due for a pull back, making it still tempting for the bears, said Michael Metz, chief investment strategist at Oppenheimer & Co.
"To me, the most vulnerable sectors next year will be consumer retail and technology," Metz said. "I think you'll see capital spending disappoint, which will put the tech sector under pressure. Next year will be dotted with earnings disappointments. It's a great opportunity for short sellers."
SOLD SHORT
Despite the surge in heavily shorted stocks such as media company Martha Stewart Living Omnimedia Inc. (MSO.N: Quote, Profile, Research) , Internet travel Web site Travelzoo Inc. (TZOO.O: Quote, Profile, Research) and stun gun maker Taser International Inc. (TASR.O: Quote, Profile, Research) , do not expect the bears to back away, Wall Street analysts said.
And expect them to enter some relatively new territory. Housing stocks and banks are not typically areas popular among short-sellers, but rising interest rates could change that.
The historically low interest rates throughout much of the year prompted a rise in money lending and borrowing, a boon to both sectors. But interest rates rose this year and are expected to go higher in 2005.
"Housing stocks in particular are going to have to deal with higher rates and I think that will be a big challenge for them," said Rick Meckler, president of investment firm LibertyView Capital Management. Big name stocks in this sector include Lennar Corp. (LEN.N: Quote, Profile, Research) , Toll Brothers Inc. (TOL.N: Quote, Profile, Research) and KB Home (KBH.N: Quote, Profile, Research) .
Some analysts say that more and more short-sellers may be dipping into the oil producing sector in 2005. These companies went on a tear this year on the back of a 30 percent increase in oil prices, boosting shares of companies like Exxon Mobile Corp. (XOM.N: Quote, Profile, Research) and ChevronTexaco Corp. (CVX.N: Quote, Profile, Research) .
Short-sellers were emboldened by bearish year end forecast. Merrill Lynch's chief U.S. strategist, Richard Bernstein, said an unidentified "major financial company" will be brought to its knees by rising interest rates.
Meanwhile, Chris Dialynas, managing director at bond fund management company PIMCO, said the weakness in the U.S. dollar creates the potential for a "dangerous financial crisis."
"We are highly confident that 2005 will be a lower year for the market. Rates are going to go higher and the dollar problem is going to be more and more apparent," said investment advisor David Tice, of David W. Tice & Associates, LLC. "There's going to be a lot of money made on the short side."
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