Keth:
Although I have never contributed to "the porch", your recent post includes some comments with which one might differ.
- Lots of money on the sidelines? This does not jibe with the reports emanating from Trimtabs and other research houses that track flow of funds. Additionally, recent personal contact with a small but representative cross section of professional money managers also does not suggest that there is plenty of dough on the sidelines. More foreboding, the large money flows from offshore, which have sustained our markets, appear to be slowing (albeit only marginally to this point in time). Any continuance of this would exacerbate an already worrisome market situation. Finally, one must also accept that as the market's capitalization contracts, much of the dough that was previously perceived as being available to market participants has in fact died and gone to money heaven. That money isn't on the sidelines, it has evaporated.
Tech stocks "oversold"? To a chart follower, this may well be true, but to anyone tracking the collapsing fundamentals, many stocks that have lost in excess of half their previous market caps, remain remarkably, even insanely over-valued. Yes, some of them may rally, but given saturated end markets, massive inventory overhangs, price wars, clogged distribution channels, shrivelled corporate buying, shrinking consumer borrowing (the dough that has provided the purchasing spree of the last three years), and gutted tech sector balance sheets, those rallies will not be of any lasting consequence.
Large short positions? True for a small handful of stocks, but definitely not accurate with respect to the majority of tech stocks. The truth of the matter is that unfortunately, the vast majority of bears were carried from the field of battle on their shields over the last two years, victims of the greatest mania in modern history. The few that have survived have become so gun shy (as a result of having been smacked so many times in the past, even when their homework has been superlative) that they have been slow to "engage" (to borrow a term from "Top Gun"). As an aside, while it is true that short players may absorb nasty wounds in the pursuit of their targets, it is also well recognized that large short positions inevitably signal an approaching collapse in the targetted stock. Because it is such a dangerous game, shorts inevitably do much better homework than do the majority of market participants, which accounts for their remarkable track record for sniffing out the stocks that crater. They may frequently be "early" but they are always right.
Finally, let me comment on the idea that it might not be intelligent to short "oversold" stocks. Many folks believe that as a stock falls in price, the profit potential that might be derived from a short sale contracts. This is simply not true. As with any investment, percentage-gain-over-time, as well as the risk-reward ratio are the two key considerations. Frequently, and in particular when a company is being consumed by its accumulated debt, it is a much better short once it has fallen dramatically from previous highs than when it is still enjoying "darling" status. As a wounded company's stock falls, previously enthusiastic stock holders fall by the wayside or turn negative and prospective "white knights" decide to pick over the bankrupt bones rather than attempt a rescue in a dangerous sea of debt. Once into the downward spiral, it is amazing how quickly a market cap of zero can appear on the horizon.
Best, Earlie |
