Short Circuit
By John T. Mulqueen, Interactive Week
November 20, 2000 8:26 AM ET
Vultures, worms, ghouls, goblins, pariahs, unchristian and un-american quick-buck artists. Those are some of the descriptions on Wall Street for short sellers, people who try to make their money by betting that share prices will decline.
It's a practice that backfired and left a lot of people high and dry during the bull market of the 1990s. But the crash of technology stocks this year has driven short sales up nearly 50 percent, reigniting the debate over whether short sellers are really loathsome gamblers or some of the best analysts on Wall Street.
"I hate their guts," James Wade exploded. "They are vultures."
Wade, a well-regarded securities analyst at investment firm Deutsche Banc Alex. Brown, said: "They are not accountable to anyone. If I make a mistake, I hear about it on the squawk box. If Henry Blodgett [Merrill Lynch & Co.'s Internet analyst] makes a wrong call, he ends up on the cover of Fortune. But with shorts there is no accountability. They work against the best interest of my largest clients, the big funds - Janus, Putnam - that can't go short."
Defenders of the practice, however, said competent short sellers help to weed out overvalued, hyped stocks and expose crooked and incompetent corporate managers. "If there were no short sellers, the market would be less efficient," said Jay Ritter, a professor at the University of Florida.
The simple definition of a short seller is someone who bets that a stock will decline and hopes to profit from that by selling borrowed shares and buying them back later at a lower price.
Christian Invest.com, a Web site for Christian stock market investing, lists as Investment Mistake 11: Never Short Stocks. "I would declare it ungodly . . . this warped practice," the site says, citing Proverbs 24:17: "Do not rejoice when your enemy falls, and do not let your heart be glad when he stumbles."
Despite their reputation, shorts provide liquidity in the stock markets and allow investors to get better prices for shares that might be difficult to sell otherwise, said William Seale, a former member of the Commodities and Futures Trading Commission. Seale is director of portfolio at ProFunds, which has several short index funds.
A lot of the more conspicuous short sellers lost big, and the practice dropped sharply in the late '90s as the bull market raged. But the practice never went away and is regaining popularity this year. In the middle of October, short sales were up 40 percent from the middle of January and 48 percent from October 1999. The Nasdaq National Market System, where most leading technology companies are listed, makes up 98 percent of those shorts. Numbers for this month will be published Nov. 28.
The Internet stocks that shorts have liked are the obvious ones: Amazon.com, Garden.Com, Priceline.com, and the business-to-business and business-to-consumer companies that have floundered. Stocks of optical networking and equipment vendors are also favorites of short sellers. Some admitted to having been burned badly by the wild swings in share prices - especially by Amazon in 1998 and 1999 when the stock split and doubled. Rambus, the semiconductor manufacturer whose death has been repeatedly prophesied even though it continues to flourish, was heavily shorted early in 2000 and then the share price jumped 600 percent to $110, squeezing the low bettors, said Joe Toms, manager at Hilspen Capital Management, a Burlingame, Calif., fund.
But short sellers are doing better than they have in a long time, according to recent studies. Credit Suisse First Boston Tremont Index, a firm that tracks hedge funds, said funds with a dedicated short bias were up 5.6 percent in the third quarter and .98 percent in the second quarter. In September, shorts were the best performing funds, up 9.9 percent while the Nasdaq was off 12.7 percent and the Dow was down more than 5 percent, CSFB Tremont said.
VAN Hedge Fund Advisors International, a consultancy, reported that short hedge funds were up 11.7 percent in September and 4.4 percent for the whole third quarter, compared with the average mutual fund, which was off almost 4 percent in September and up only 0.6 percent for the quarter.
"We are doing good fundamental analysis, and we work very hard at it. We are not these greedy guys making all this money," said David Tice, portfolio manager at the Prudent Bear Fund, a mutual fund that shorts stocks. He bristled at the abuse shorts receive. He also castigated brokers who put investors in overvalued stocks, the analysts who tout those stocks and the corporate managers who sue shorts for disclosing their failings.
zdnet.com |
