<<<-- FEATURE-After Enron, short sellers gain respectability --
By Svea Herbst-Bayliss
NEW YORK, Jan. 28 (Reuters) - The stock of short sellers is
rising.
Short sellers -- who make money when stock prices fall --
have sniffed out some of Corporate America's most spectacular
collapses -- energy trader Enron Corp. <ENRNQ.PK> and retailer
Kmart Corp. <KM.N> -- and are circling some of Wall Street's
darlings -- conglomerate Tyco International Inc. <TYC.N> -- for
their next kill. They even are getting credit for forecasting
Enron's fall and alerting mainstream investors to other
potential blow-ups.
That's a sea change from the past, when short-sellers were
blamed for everything from the Great Depression to currency
devaluations. Even these days, corporate executives often call
their behavior downright un-American.
"After the Sept. 11 attacks happened when the stock market
was going down so fast, it was considered pretty unpatriotic to
short U.S. companies for the following month," said Jason Green
a broker at investment firm Summit Capitol Trading.
Mutual funds that are run by short sellers, or at least use
some of their stock-selling techniques as hedge funds do, have
been the star performers in the past two years. Enron, Kmart
and the collapse of the high-tech bubble have added to their
gains while the rest of Wall Street suffered.
"It's a complete bum rap. We are being called the bad guys,
but it is the other way around," said David Tice, the manager
of the Prudent Bear Fund <BEARX.O>.
NEW SCAPE GOATS
Actually, the tables are turning in the blame game.
Accountants, consultants, lawyers, analysts and regulators
associated with Enron shoulder the blame for not having let
investors know about problems -- even as Enron executives
starting dumping their shares.
The Wall Street bulls are being criticized for an overly
optimistic attitude that led many investors astray. Analysts
were putting out "buy" recommendations even as Enron was
preparing its Chapter 11 bankruptcy filing. Many of their
firms, meanwhile, reaped fees for advising Enron on mergers and
acquisitions and handling financial transactions.
Much-maligned short sellers didn't have such conflicts. By
definition, they are professional investors who look for
companies that won't meet earnings expectations because they
massage balance sheets or hide other skeletons that could cause
share prices to collapse.
The Enron case, short sellers say, highlights their
legitimate role as the loyal skeptics of Wall Street. They
argue that they bring a much-needed dose of reality when Wall
Street's always-bullish "buy-side" analysts go overboard on the
sunny side.
"We don't go out and pound the table or try to spread
stories even though this is how we are characterized because
all these rumors are being attributed to short sellers," said
Tice.
SIMPLE STUFF
In theory, selling stocks short is simple. Anyone from a $7
billion hedge fund to a private investor with a few thousand
dollars can bet against a company's future by borrowing its
stock, selling it and hoping to repay the loan for less after
the stock price falls. Chances to make money this way are
especially good now because the economy is in recession and
many firms are missing their earnings forecasts.
Suppose an investor expects International Business Machines
<IBM.N> to report softer earnings and decides to short 100
shares of the stock that's worth roughly $109 now. In a typical
scenario, the investor puts up $5,500 and borrows another
$5,500 from his broker to sell the shares short.
If the stock drops to $100, the investor buys back the
shares for a total profit of $900 (100 shares times $9), minus
interest on the loan and commissions.
Still, it's a tough business, because short sellers
essentially bet against the house. Stock prices historically
have gone up in the long run, leaving short sellers with
meager track records.
When fund managers buy stocks they usually have a wealth of
supportive data to inform their decisions. In contrast, stock
sellers have to read obscure signals to find out when trouble
is brewing, since companies are less than forthcoming when
things go wrong.
Short-seller James Chanos began wondering why Enron's
return on capital was low while insider selling was high, said
investors in his hedge fund, Kynikos Associates. Using that
tipoff, he shorted the stock, they said, creating good returns
for his fund when the stock fell. But when the market is going
up, short selling carries big risks for investors.
"It is a hard way to earn a buck," said Russ Kinnel,
director of fund analysis at research firm Morningstar.
For example, Tice's fund has been down an average 6 percent
over the last five years, even though the fund rose 7.5 percent
in 2001. Even hedge funds, investment funds that cater to the
wealthy, that concentrate on selling short are hurting. Last
year, they lost 0.6 percent while the average hedge fund rose
4.4 percent, according to the research firm CSFB/Tremont
index.
NEW TARGETS
Short-sellers are also likely to become targets themselves
when they aim at a company, Their latest target is Tyco, at
least if you believe Tyco executives.
Tyco executives blamed Tice and like-minded investors for
triggering the 20 percent stock decline that forced the firm,
which makes everything from burglar alarms to adhesive
bandages, to split into four different companies. Recent
exchange data, however, show that just 3 percent of Tyco's
stock is shorted.
Tyce sold Tyco International Ltd's <TYC.N> stock short
recently because he worried the Bermuda-based conglomerate was
facing difficulties in paying for a spate of takeovers that
totaled $19 billion in 2001 alone.
Short-sellers say they don't manage enough money to single
handedly bring down firms. Hedge funds, the most active players
in the short-selling arena, only manage roughly $500 billion
dollars (compared with with a total of close to $7 trillion in
mutual funds) and the handful of mutual funds that sell short
manage only hundreds of millions of dollars.
Tyco isn't the only magnet for short-sellers. Some of
America's best known companies including Lucent Technologies
Inc. <LU.N>, Enron and Kmart are some of this month's biggest
targets.
In last four weeks alone, hedge funds and mutual funds
alike shorted some some 81 million stocks of Enron and shorted
some 69.8 million shares of Kmart making them the sixth and
eight most heavily shorted stocks. Both firms have filed for
bankruptcy protection.
One hedge fund manager who asked not to be identified said
he was shorting greeting card group American Greetings Corp.
<AM.N> which supplies cards to Kmart and has seen its stock
tumble 18 percent this month as Kmart filed for bankruptcy.
American Greeting has said Kmart's bankruptcy will a minimal
impact on its business.
"Short selling has risen so dramatically because hedge
funds generally balance long positions with short positions,"
said Ahmet Okumus, who manages $460 million at hedge fund
Okumus Capital LLC. "As the hedge fund world grows in terms of
dollars there will be more and more short selling," he added.>>> |
