Shorts don't make money from longs, they make money from the sale and
purchase of the stock: just like longs. Your car analogy is faulty because
shorts (at least absent anything else) don't profit "by destroying its
value." They profit from, not by, a declining value. It is a difference in
words that makes a significant difference, especially in the connotation you
attribute to it.
Longs can prevent shorts from geting shares by simply holding the shares
in a cash account, rather than a margain account, or in certificate form.
Longs can also force shorts out by selling. When the owner of the borrowed
shares sells, the borrower must replace the shares immediately. by buying them
in the open market. My experience with SOLV is that shortable shares
are very hard to find: there are simply not many available. I think that
this also makes it harder for there to be a subsequent short squeeze because
most of the shares being sold over the month are not the ones that were
borrowed by short sellers: they were ones held in cash accounts or certificates.
If outstanding short volume only increased 655K over the past month, then it's
impact seems pretty insignificant, relatively speaking. Given an average daily
volume of around 300K for 22 days, totals 6.6 million shares. Short sales
represented about 10% of the shares. This compares to around 17% of all SOLV
shares shorted, which was about 14.4%. (These numers are all approximates and
assume 22,298,000 issued shares of SOLV: the actual number of shares may be
greater given the convertable debt financing, but this would just make the above
percentages lower). These numbers are not intended to be completely accurate,
but they are probably close enough for the point of this discussion. The point
is that over the past 30 days, the amount of shorting activity has been less
than compared to the abdolute level of short positions in SOLV. This, in my
opinion makes it unlikely that short sales accounted for a signigicant part
of the recent large price declines.
While short selling creates more shares traded, it is not dilution in the same
sense as issuance of more shares. It is not dilution that ever shows up in
reported economic numers for the company, which is generally how companies
are judged. In theory, it is short term trading dilution, not permenant share
dilution. It may create more volatility, but that is about the only effect
of the species of "dilution" to which you refer. In some resepcts, to call it
"trading dilution" is a bit of a misnomer, because it creates more traded shares.
Generally, more shares traded is not viewed as dilution.
Unlike you, I do see a purpose in shorting. Everything else in life has
people betting both ways. Why should stocks be any different. The fact that
a stock has significant short activity should, usually, give longs a reason to
question the accuracy of their decisions. Shorting does not destroy the value
of anything. Ultimately, whether a company survives depends on its performance,
not on how people are betting. To suggest that shorting destroys a company is to
buy into the tail wagging the dog theory.
The best recent example that I can think of is C-Cube. For months, longs moaned
and groaned and complained about the stock price falling. Rather than consider
that there may have been any fundamental reason for it, many of them blamed the
large short interest. As it has turned out, there were fundamental problems
and the shorts did not cause it. The longs refused to consider any reality other
than to blame the shorts for the stock price decline. As a result of their
faulty invetsment analysis, the longs lost money. As a result of their accurate
investment analysis, the shorts made money. Isn't that the way it is supposed to
be.
A good converse example is Nations Bank. A few months ago it had one of the largest
short interests of all stocks. Fundamentally, the company did well. The longs made
money because they were right about the company. The shorts lost money because they
were wrong. Again, isn't that the way it is supposed to work.
SOLV is no different. If the company does well, longs will make money and shorts
will lose money. If the company does not do well, longs will lose money and shorts
will make money. I think (but I am sure someone will disagree with me) that is
the way it is supposed to work. It is called reality.
In some respects, shorts provide balance by offering a perceived economic reality
different from the usual majority. Too much of one thing is seldom a good thing.
Similarly, as a stock price delines some shorts will cover, which obviously
requires buying. This, to me, seems to be a cushioning effect (the degree of
which would be pure speculation) to a declining price.
I don't expect to change your mind about the acceptability or value of
shorting. We will just agree to disagree. While short sales may be frustrating
to longs, reality often is, and the stock market should be and is no different.
BTW, when I refer to shorts, shorting, and short selling, I am referring to
nothing but the trading activity. Non trading activites, for longs and shorts,
is not, in my opinion, a basis or reason on which to consider or evaluate the
usefullness or purposes of short selling. There are plenty of examples of
disinformation from longs and shorts: I do not consider that to be part of the
trading activity discussion.
Have a good weekend.
Just my thoughts.....
Troy McKinney |
