Interesting insight on shorting from Doug Noland.
Excerpt:
I find it interesting that I am reading bearish analysis dismissing the possibility of economic recovery, very similar to that common 10 years ago. With good reason, some very adept economists and analysts are proselytizing that the U.S. economy is today incapable of returning to a period of strong demand. The litany of structural impediments includes poor profits, excessive corporate and household debt loads, a dearth of savings and investment opportunities, global uncompetitiveness, and so on. There are as well the major issues of the U.S.’s structural trade deficits and massive accumulation of foreign liabilities.
I am reminded of some painful memories but good lessons learned over the years shorting stocks. Occasionally, a truly worthless stock would come to our attention. With careful analysis and diligent fundamental research, it would become clear that earnings were being overstated, assets were being overvalued, management was poor and likely dishonest, and that there was little possibility that this enterprise would ever amount to a business of any merit or value. The excitement of finding such a short prospect, however, dissipated over time as the stock would disregard all the sound bearish analysis and rise to a level that made no sense whatsoever. Then, often after a bit of a respite, such stocks would proceed into a parabolic rise (before eventually collapsing and disappearing). There would come a point in the process – usually when true underlying fundamental became absolutely conspicuous yet the stock rose anyway – that our disappointment turned to frustrated dismay. While the fundamental analysis was correct, it did not change the harsh reality that we had failed to appreciate what the game was really all about. The game was to entice short positions and then incite a panic short-squeeze. Stock operators knew all too well that there were few opportunities for spectacular profits than those available during such market disorders. Negative fundamentals were a key variable, but just not in the way us fundamental analysts presupposed. We could have ranted and raved all we wanted and the response in the marketplace would have been the same: “Go ahead, make our day and short some more. We couldn’t care less about fundamentals; we care that you are short and need to cover.” The game was about playing market dynamics.
prudentbear.com |
