Barrons
by: ed_wesnofske (59/M/Oneonta, NY) 05/18/03 08:33 pm
Msg: 143000 of 143001
THERE'S SOME IRONY HOVERING OVER the SEC's hearings this week about possible new regulations on the hedge-fund industry, which seem motivated in part by a desire to scapegoat short sellers for making money in the bear market. (For more on the hearings, see Fund of Information.)
Just as Washington has gotten around to targeting these funds, the market's thrust higher has inflicted plenty of hurt on what had become a somewhat crowded short side of the market. Not to conflate selling short with the underworld, but it's as if Robert Kennedy's showy organized-crime hearings were held at the moment that the mob found itself unable to make a buck running numbers.
Short interest on the Nasdaq actually rose to a record high from mid-March to mid-April, meaning traders augmented their bearish positions against the headwind of the rally's first up leg. A glance at some of the most heavily shorted names from April gives a sense of the agony being inflicted on the shorts. Research Frontiers is up 83% from its March low, FPIC Insurance ahead by 70%, Brio Software up 68%, Luminex 58%.
For sure, those moves have likely been intensified by short sellers buying (at a loss) to close out their positions and get out of the way. There's no real evidence yet of widespread capitulation by bearish types, of the sort that might exhaust buying power and precipitate a swift decline in the markets, but anecdotal signs are out there.
One analyst, Mark Kelleher of First Albany, downgraded EMC to the equivalent of a Sell rating April 15 with the shares at 7.81, offering a well-reasoned argument that the stock was overvalued after doubling, amid limited earnings-growth prospects.
The market has since engorged the stock much further, and Wednesday Kelleher cried "uncle" by upgrading it to Neutral at a price of 10.10. The stock's still overvalued, he wrote, but "we believe the valuation has separated from the fundamentals. Without a negative catalyst, there is no reason the valuation cannot continue to inflate."
Most professional short sellers have enough of a sense of market tendencies to recognize that when they finally cave in and take off their negative trades, it could mean acting as the last buyer before a stock finally rolls over.
Netflix, the online DVD-rental company, is a heavily shorted stock that was cited here as overvalued in the fall, at less than half the current price above 23. Clearly that was absurdly early or painfully wrong. One ardent investor who's wagering against Netflix reported last week his "pain threshold is at a maximum, which generally means the top in the stock." |
