Tony and Paul,
The WSJ must have been reading your posts today. This from the Heard on the Street column:
January 4, 2000
Heard on the Street
'Shorts' Continue to Struggle
Against Roaring Bull Market
By DANIELLE SESSA
Staff Reporter of THE WALL STREET JOURNAL
There are few things in the financial world more frustrating these days than
being a bear on Wall Street.
For evidence, look no further than short sellers. It has been five years since
these traders, who make a living by betting that stocks will go down, have
turned in a profit amid the record bull market. Even pockets of weakness,
such as Monday's 139.61-point drop in the Dow Jones Industrial Average,
aren't enough to make them smile.
"It's been difficult because everyone else is making money and we aren't-we
are losing money," bemoans David Tice, manager of Prudent Bear Fund, a
mutual fund that is short some 75 stocks. Prudent Bear finished 1999 down
23.4%, compared with a 19.53% gain for the Standard & Poor's 500-stock
index.
Short sellers were down 3.2% last year through November; early reports on
December returns aren't expected to boost returns. That is according to
Harry Strunk, an investment adviser with Morgan Keegan & Co. in Palm
Beach, Fla., who has tracked a group of short sellers since 1985. The last
time shorts on average ventured into positive territory for the year was in
1994, which, not surprisingly, was also the last time the S&P index finished
down for the year.
Short sellers borrow stocks, then sell the shares, betting that the stock will
decline. Once the stock falls, they buy the stock back at the lower price,
return it to the lender and pocket the difference. But if the stock takes off,
shorts lose money. They are forced to buy back the stock at the higher
prices to return it.
Since he started the short index, Mr. Strunk has
seen the number of short sellers he covers
dwindle from a high of 25 down to 10 this year.
The latest one to close its doors: A San
Francisco-based short seller with $100 million in
assets decided to call it quits in December after
being down 20% for the year, Mr. Strunk says.
"I had a talk with him, and he said he can't understand valuations and hasn't
been able to understand them for a couple of years. They don't have a
rhyme or reason. He's going to return the money and get out of the
business," Mr. Strunk says of the 14-year veteran.
"It's clearly been an unusual decade," says Paul McEntire, chairman of the
BearGuard fund, which is used as a defensive hedge for clients who are long
on the market. "It's gotten easier to find stocks we believe are overvalued,
but on the other hand, because of the way the market has behaved, most of
them haven't produced positive returns from the standpoint of being short."
BearGuard was down 20% in 1999 amid some bad technology-stock bets.
(He wouldn't disclose individual positions.) But considering how well the
overall market performed -- especially the Nasdaq Stock Market, which
soared 85.5% last year -- Mr. McEntire isn't too disappointed with the
returns.
Indeed, the Internet revolution that has sent traditional stock valuations out
the window and propelled the technology-heavy Nasdaq index into the
stratosphere also has burned many short sellers who have bet against the
pricey Web issues.
"The shorts have shorted stocks that are terribly overvalued, no profits, no
prospects," companies that go "to wild multiples because they have dot-com
at the end of their name," Mr. Strunk says. "Most short sellers by now have
totally gotten away from technology and are keeping a conservative stance
until interest rates start moving again."
To be sure, not all short sellers are down for the count. Message boards are
filled with chatter by shorts who boast making a tidy profit from some
beaten-down issue. One fund that specializes in shorting was slightly above
water in 1999, despite the record gains across the board in the nation's stock
markets.
Until the waning days of 1999, the AdvantHedge was up 1.4% for the year.
But a strong performance by the markets to close out the year sent the fund
into negative territory to finish 1999 down 2%.
In an interview before the fund slipped into the red, Steve Leuthold,
president of Leuthold Weeden and Associates, which runs the fund, said the
portfolio's performance was helped by a mechanical stock selection.
"Compared to the S&P, it's pretty good to be up at all," Mr. Leuthold said.
The Minneapolis fund has an equal weighting of 50 stocks with an average
market capitalization of $4 billion. Potential short candidates must go through
a screening of 18 factors to assess their potential vulnerability and
attractiveness.
The fund also employs a strict policy of covering and closing out short
positions to take the emotional factor out of the process. "If we get a 30%
gain in the stock, we immediately cover half of the profits," Mr. Leuthold
says. "Anytime we get a 45% gain, we take the whole thing."
On the flip side, when a stock the fund is short rises 25%, losing money for
the fund, Mr. Leuthold will automatically scale back the position. Such was
the case with Peoplesoft, the software developer. Once the stock started to
climb and lost 25% for the fund, Mr. Leuthold cut down the fund's exposure
to the stock. When Time Warner stock also started to rise, Mr. Leuthold
closed out his short position in the stock once the losses reached 25%.
The fund shorts only companies with at least a $1 billion market
capitalization. "One of the things that has helped us is that we are in the
larger-cap stocks, and the damage isn't so great when they go against you,"
Mr. Leuthold says.
The situation wasn't always this bleak. The bears roared loudly from 1985 to
1990, bringing home an average of 26% a year, Mr. Strunk says, beating the
return of the S&P during the period.
"In the late 1980s and 1990, you could make money selling short even though
the market was going up," Mr. Tice recalls. That is partly because in that
period, unlike now, when individual stocks soared to heady valuations, they
frequently came crashing back to earth.
Even though it has been a sweet market for longs and a sour market for
shorts, that hasn't stopped the naysayers from placing bets that stocks will
fall, albeit eventually.
The number of short sales outstanding on the both the New York Stock
Exchange and the Nasdaq Stock Market is at or near record levels. The
short-interest levels are considered a good gauge of the level of negative
sentiment on Wall Street.
Mr. McEntire says his fund recently has received an increase in interest
from investors about his short fund, but the money has yet to flow in. He
says investors aren't interested in the long-term purposes of being short
anymore; instead, they seem to crave the potential for short-term bonanzas.
At a New Year's party he attended over the weekend, Mr. McEntire says,
all people were talking about were the money they were making on the hot
tech stocks.
Still, the shorts will again have their day in the sun, the bears argue.
"People forget that Dean Witter and Charlie Merrill (founders of the
brokerage firms Dean Witter Reynolds and Merrill Lynch, respectively)
were warning people about the market in 1928 and 1929 and suffering
derision from their friends because they were negative on the market," says
Mr. Tice of Prudent Bear.
"We still think its too early to count the amount of money we lost versus the
amount of money everyone else has made."
Write to Danielle Sessa at danielle.sessa@wsj.com |
