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Witch hunt against short-sellers
Commentary: Plus, blogs, Web sites and books
By Herb Greenberg, MarketWatch
Last Update: 12:38 AM ET Feb. 24, 2005
Editor's note: This is a free version of Herb Greenberg's column. To receive all of Herb's insights and market tips from his RealityCheck newsletter and updates on his RealityCheck Watch List, click here.
SAN DIEGO (MarketWatch) -- Buyer beware: In recent weeks stock promoters and people hiding behind false identities have been subtly trying to confuse legal short-selling and legitimate criticism with illegal so-called "naked" short-selling.
Unlike legal short-selling, which involves borrowing shares and then selling them -- hoping to buy them back at a lower price if all goes well -- naked shorting involves borrowing shares that don't exist. It's legal for some market participants, such as certain market makers, but is otherwise regarded as counterfeiting.
But, as has been the case for years, naked shorting is subtly (almost subliminally) being lumped in with legitimate shorting - along with anybody who reports their message -- as the blame for whatever doesn't go right.
A stock that has tripled in the past year goes down a little? No worries -- blame it on the naked shorts. A story comes out in the press spotlighting risks or showcasing possible pitfalls at a company? It must be those naked shorts. Krispy Kreme (KKD: news, chart, profile) gets nailed by an internal audit, gets investigated by the U.S. Securities and Exchange Commission and throws out its CEO? Ah -- blame it on the naked shorts. (After all, they're in cahoots with the SEC, too, aren't they? Well, the critics of naked shorting have implied as much.)
Yes, truth is stranger than fiction.
Meanwhile: Part of the fun of this job is introducing you to new sources of information. Along those lines, I urge you to bookmark JeffMatthewsIsNotMakingThisUp.blogspot.com. (See the Web site)
Jeff runs the hedge fund, Ram Partners. I've known him for around 10 years; he was my original tipster on the now defunct Media Vision, whose then-CEO has since gone to jail. (If you only knew how many other stories and scoops started with him!) Jeff's a terrific writer (and Civil War buff) whose insights and critical thought process have made him a favorite on-and-off the record source for quite a few business reporters. His thoughts on naked shorting? From his blog: "Not only is naked selling short illegal, it is, from my vantage point: a) stupid; and b) not the way any professional short sellers I know go about their business."
New and notable: I've always viewed short-sellers as value investors in reverse, which is a sneaky way to turn the topic to value investing. The first issue of Value Investor Insight, edited by Whitney Tilson and John Heins, is hot off the cyber-presses at Valueinvestorinsight.com. In a world where investors seem to be tripping over themselves for the next hot trade, their idea is to fill the void of information geared to value investors. Memo to me, based on their interview with Richard Pzena of Pzena Investment Management: Give Pzena a call and try to use him as a backstop to some of this column's less-than-bullish ideas. A born skeptic, he is quoted as saying, "My personal belief is that you're either born as a bargain-hunter type or you're born as a bright-eyed optimist." As a result, according to the interview, when he's researching a company to buy, "We invite in a Wall Street analyst who is a bear, and they come in and make a pitch why we shouldn't buy this stock." At least he wants to know the other side of the story; that's something every investor should want to know. (Among his favorites: Hewlett-Packard. (HPQ: news, chart, profile) and Whirlpool (WHR: news, chart, profile) .)
Speaking of skeptics (and also on my must-read list): Bill Fleckenstein's Fleckensteincapital.com. Fleckenstein coined the phrase, "the housing ATM," as in, "the housing ATM has allowed consumers to live beyond their means." Bill the bear believes "we are at an ominous juncture" and that "after about as much speculation as any economy could ever endure, our asset markets and economy might finally be ready to 'revert to the mean.'" (Fleckenstein's views are often included on Minyanville.com's novel Buzz and Banter, which is where I turn for real-time talk among traders, including the imaginative Todd Harrison, the prickly Jeff Macke, the prolific Greg Collins, rocket-scientist John Succo and the ever-steady Scott Reamer.)
Finally, from the cash flow counts corral: On the back cover of just-published "Creative Cash Flow Reporting -- Uncovering Sustainable Financial Performance," I'm quoted in a blurb as saying, "With Creative Cash Flow Reporting, Charles Mulford and Eugene Comiskey have established themselves as the Graham and Dodd of sniffing out financial shenanigans. This book is destined to become a classic -- it is the last word on cash flow." I meant it. Mulford (who is quoted here often) and Comiskey are accounting professors at the Georgia Institute of Technology. Their premise: contrary to popular opinion, cash flow can be misleading. Their challenge: Explaining how investors can determine what it really is. The result: Their book should be part of any serious investor's personal reference library.
Herb Greenberg is senior columnist for MarketWatch, based in San Diego. He does not own stocks (except for shares of his employer), and he does not sell stocks short or invest in hedge funds.
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