“Shorting is the Worst Job”: Short Seller Andrew Left, Citron Research
No one feels sorry for short sellers when they’re losing their shirts for having dared to short one of the favorite story-stocks that everyone is long and that everyone wants to go up. “Serves them right,” is the normal response. “How dare they bet against me?!”
In China, when push comes to shove, they just arrest short sellers.
“Being a short seller right now is the worst possible thing,” infamous short seller Andrew Left, founder of Citron Research, told Bloomberg Markets.
The risk-reward relationship is out of whack. You can make a maximum theoretical profit of 100% if the shorted stock goes to zero. But you can lose double, triple, quadruple your original investment if the stock keeps skyrocketing. Or you can use options to change the risk-reward relationship, and damage can be more or less.
However impeccable the logic, if timing is off and a temporary miracle happens, or the CEO tweets some ludicrous hype, or rumors of a buyout offer surface, then shorts get their heads handed to them.
It’s the short seller, alone out there, against the aggregate forces that will hype the stock with all their might, supported by the fawning media, and backstopped by a gaggle of central banks.
Someone with a megaphone big enough to trigger a move in the stock has a better chance. Short sellers like Andrew Left, after quietly taking a short position, pull out their big megaphone. They’re on CNBC and Bloomberg and in the Wall Street Journal, and the message spreads from there.
If the stock is a hedge-fund darling, like Left’s infamous target Valeant (with a sordid mess on its hands), the reaction is brutal. Hedge funds, going for the first-mover advantage, try to get out the door first. The selling spree spooks other investors. Investigative reporters swarm around the company. “Sources” begin to talk. Suddenly, the media discover all kinds of crap. Regulators start circling. Congress gets involved. And Valeant’s stock loses 90% in less than a year.
But in this market, short sellers that cannot cause a stock to crash are cannon fodder.
So here’s Left on Bloomberg Markets, discussing what it’s like being a short seller.
“Shorting is the worst job,” he said – even he, with his big megaphone and Valeant trophy on the wall. “If I were invited to career day at my kid’s school, I’d probably miss that day.”
“Being a short seller right now is the worst possible thing,” he said. “I actually started to think that I have like Stockholm syndrome because two weeks ago I said, ‘nothing is going to make this market go down.’ And that night I said, ‘oh my God, when I’m thinking that, then it has to be going down soon.’”
“It’s very difficult obviously,” he added, smarting from his Facebook short.
On June 13, he came out swinging on CNBC in a phone interview. Facebook was “losing an extensive amount of relevancy,” he said. “I am short Facebook.” It was “losing share to Snapchat and overstaying its welcome in other niches.” It wasn’t a “bad company,” he said, it “just will not be a $330 billion company in a year.”
Now, six weeks later, on Bloomberg TV, he was still waiting for the event that would make this bet work.
“It’ll probably be something mentioned on a conference call, talking about a decline in engagements,” he said. “I’m not saying it’s going to be this quarter, and I’m not saying it’s going to be next quarter, but much like we see people discussing Snapchat…. It’s not like Amazon. No one is going to disrupt Amazon so fast. The infrastructure, what it takes to set up the infrastructure, is a lot more. But social networks and what they do – consuming people’s mindshare – can be lost.”
Facebook closed on Tuesday at an all-time high, up 6% since June 13. His megaphone hadn’t been big enough. No investigative reporters are swarming around Facebook. Congress remains suspiciously quiet. They’re all using Facebook. Zuck rules.
The stretched stock valuations and people fretting about these valuations should make his job easier, the interviewer said, but instead, he’s fighting this momentum. Left replied:
“The best stocks to buy right now are the worst companies with no profits. I mean, look, Apple has to come out with earnings. I feel bad for Apple. They actually have to show a profit and show that they’re engaging people and making money. It would be so much easier just to run a company and to say, ‘I’m foregoing my short-term profits for the long term,’ and show me a 2019 model and sell some stock in a secondary [stock offering].”
He didn’t mention the name of the company. He didn’t have to. There’s only one that comes to mind that fits that profile: Tesla. And he didn’t sound like he was going to go short its shares. Once shares have reached irrational levels, there is by definition no rational limit to just how much more irrational they can get. He has enough problems on his hands with his Facebook short.
Update, after-hours, Wednesday, July 27: Facebook just reported earnings. Revenue jumped 59% in the quarter from a year ago. Expenses jumped 33%. Operating income soared 116%. Net income skyrocketed 186%. Shares soared 7% after-hours. If Left is still short FB, he’s got an even bigger problem on his hands.
In the markets, the foundations have crumbled, and all bets are off. Read… Stocks Were Already Crashing the Last Two Times this Happened. So What Gives?
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“… and backstopped by a gaggle of central banks. ”
Should have added,
“””…. and backstopped by a Justice Department that does nothing about CEO lies, and false numbers. “””
The CEO’s in many of these scams like Valeant know full well they can get away with lies and false stories and Nothing will happen to them.
Maybe the company gets a fine, but personally they are protected, so they lie time and time again.
For some reason your comments remind me of the Clintons.
Actually, “lie time and again” sounds like Trump.
There, we’ve exchanged partisan potshots. Do we feel better?
The US political system is the laughing stock of the world right now. The US claims to be the greatest democracy but nothing is further from the truth, simply a rigged-ocracy.
Unlike Hillary, Trump has been saying the same things about the state of the country and economy for decades.
How long do you think it is going to take Hillary to flip flop(polite way to say she was lying to begin with) on TPP.
Unlike Trump, Hillary is qualified to be president. She has vast knowledge and experience in government, law and diplomacy. She is emotionally stable.
How did this turn to a political conversation? Truth is, they’re both liars. And nothing will change as long as we continue to vote for the same groups of people who have screwed it all up all these years. Theyre laughing at us behind doors while drinking champagne and smoking fat cigars. Not that the libertarians have put out a canidate any better. Has anyone ever thought maybe we need someone who doesn’t have all this political experience? What does experience in politics really mean? Knowing better how to control the people and screw other nations? Does anyone in American politics really know what the word diplomacy means? We are the laughing stock of the world and the most hated nation of the world. Full of idiots who follow only what the news says without a shread od critical thought being applied to the information being putforth, only ingesting it at face value. Have a wonderful day!
Until central bank fiat pollution is arrested, shorting is a gov-loaded-dice crap-shoot.
Look no further than US Steel (stock symbol “X”) which is up 10%+ today, above $25/share. There was heavy shorting right after the Saudi November 2015 announcement, and heavy losses reported by X, and the stock tumbled from $40, all the way down to $6-$7 a share in February 2016. Still losing money, but should a stock triple from its low, in less than six months, while continuing to lose money….huge amounts of money, in a world glutted with steel production? David Einhorn and Greenlight Capital was a big short in this stock, who knows if he is now absent as a “short”, and the effect of his trading?
In the ongoing Herbalife saga, the FTC allowed confusion by saying that Herbalife was ‘not determined not to be a pyramid’, prompting a debate about grammar and sentence construction, with discussions about double negatives. The world of short selling is fraught with many dangers, including now the parsing of a phrase by the battling forces, and with opposing sides asserting they are both right though they are using the same information! The shares promptly rose, with the longs the winners, though the short side positions increased significantly.
More reason not to short stocks unless you are playing with someone else’s money.
BTW, the statement is not technically a double negative but a litotes; an assertion by negation of the contrary, an ancient Greek rhetorical device, appropriately, originating with the Sophists …
Always great to get a grammar lesson on a blog.
Except you got it wrong; the actual definition of litotes is “ironical understatement in which an affirmative is expressed by the negative of its contrary (e.g., you won’t be sorry, meaning you’ll be glad) “. I think we can all (well, almost all) agree the SEC does not use irony in writing its decisions.
Ironically, you missed the irony part, but keep up the pedantic work.
Ironically, your definition is the same as the one I presented.
Anyway, it wasn’t a grammar lesson, it was an observation that two parties on opposite sides concluded that they were both right, based on a statement by the FTC, and how the market responded.
Irrational Exuberance 7.0
How is Al Greenspan?
Classic example is AAPL earnings yesterday. Just horrible yoy financials and IPhone sales have plummeted. Yet they manage to marginally beat already massively reduced analyst consensus estimates. The stock was up $8 since Brexit and down $5 in less than a week since 7/21. The overwheliming public consensus was a huge earnings/revenue miss. But the opposite happened. This is the epitome of the stock market today. Nothing is real and everything is artificially manipulated.
The FED and big money shot this stock up over $7 on basically a bad magic trick. Apple says sure IPhone sales (which had been the stalwart for growth and profitability in the past) suck, but now our service sector will pick up the slack – Yeah right! Pure delusion and outright brainwashing continue to be the norm.
Wolf – are you sure that you can only double your money shorting a stock?
I know nothing beyond the basics about stock markets but I thought you could leverage a short position as well as a long one.
I thought that was what the guys in The Big Short did.
Sure you can leverage. That multiplies gains and losses. But your investment/position (based on your own money + borrowed money) can still only gain a maximum of 100%.
BTW (I’m not sure about this because I’ve never been insane enough to even try it): I don’t think brokers will allow you short on margin.
Fed short sale margin requirements:
On day 1 of shorting a stock, margin account must have 150% of the value of short sale (example: you short $100 of XYZ corp – you must have a total of $150 in your margin account = $100 from the short sale of XYZ + $50 additional).
Every day thereafter, your margin requirement is 125% of current (not initial) market value (example: your initial $100 of XYZ market value increases to $140; your margin requirement is now 125% of $140 = $175)
Individual brokerage firms usually require higher margin levels than 25% Fed regulation, and no, they do not lend you any money. As long as you are short XYZ, you cannot withdraw or purchase other stocks with your required margin funds.
If you trade the options you can make multiples of your investment and yes you can use margin. You would buy puts on the stock and sell when the price drops. The larger the spread the cheaper the option. This is how you make multiples of your investment.
For a classic short position, look no further than the gold and silver precious metals sector of the COMEX.
The amount of commercial shorts build up, in silver especially, is mind boggling! The very high amount of shorts in gold are no farther behind.
Of course they (bullion banks) are their worst enemies by way of the massive amount of paper contracts thrown onto the exchange each day, in an attempt to cap the prices of both gold and silver. Hoping for a cascading sell off, so as to cover their position. Its no longer working for them. And every contract is snapped up by speculators going long, who are rubbing their hands with glee!
The repercussions will be epic. Failure to deliver in the offing.
When the Hunts were successfully trying to corner silver in the 80’s the Comex, presumably on orders from the Fed, forbade further long speculation- allowing only liquidation.
This effectively crushed the longs.
It also permanently scandalized the Hunt bothers, who apparently thought the Comex regs were part of the Ten Commandments.
Very true. When they can’t win, they just change the game rules.
That worked for the COMEX when confronted by a single entity – the Hunt brothers. This time around they are opposing a world wide host of players, some of whom have very deep pockets indeed.
The best outcome the exchange could hope for, would be a signal failure and settlement in cash. If this were to occur (which is a very real possibility) the COMEX involvement in the precious metals sector would be destroyed. Their reputation, which is tenuous, would suffer irreputable damage.
there does seem to be a lot of gambling going on. there will be swings.
The best job of shorting affecting the Toronto exchange was done by short seller Carlson Block of Muddy Waters.
He went to China, and determined that Sino- Forest, a multi- billion dollar forestry company was a scam.
It threatened to sue, bla bal
Then it was suspended from trading, referred to prosecutors, etc.
One take away re: stop loss order
One guy had a stop loss of 16 dollars on Sino.
Then the news hit- he got out at 6.
Your broker is not going to be wiped out because a bunch of people have stop loss orders.
The guy was lucky to get anything because its been de-listed.
Second take away- the exchange should have smelled a rat- Sino did a back door entry, buying a shell to avoid scrutiny.
And reputable Chinese companies list on Hong Kong- why are these guys here?- we have our own forests.
But the RCMP are going to China to arrest the perps ( joke)
Does anybody actually short anymore? It seems like a fool’s game to use margin where you can be forced out. And options are a ticking bomb you hold and hope the timer doesn’t wind down on before you can get a profit. Leveraged reverse ETFs seem the reasonable compromise. But even those have some time decay.
But looking at GAAP earnings on SP500 vs the actual index level, they tracked pretty well until the end of 2014. Then GAAP earnings started their massive dump down to $86 now, which is the level we were at in 2012 – when the index was 40% lower. So its like Wile E. Coyote standing off the cliff – when will he manage to look down and start the fall? It’s downright ridiculous with 6 straight quarters of earnings drop and us reaching new index highs, and near 25 trailing P/E. People buying that are asking for a world of hurt.
Update, after-hours, July 27 :
Facebook just reported earnings. Revenue jumped 59% in the quarter from a year ago. Expenses jumped 33%. Operating income soared 116%. Net income skyrocketed 186%. Shares soar 7% after-hours.
If Left is still short FB, he’s got an even bigger problems on his hands.
Are those GAAP figures you just posted, or more like the non-GAPP idiocy posted by MSFT recently ?
I have no direct knowledge of the numbers that you posted ( yet ), but they seem suspiciously high and overly positive.
They’re GAAP, off the FB press release.
Here it is. The tables are at the very bottom:
Anybody who shorts anything associated with advertising in a presidential election year is not too swift. I expect even the tv networks, which nobody watches anymore, to make money in 2016.
exactly right. why swim against the current?
I was nearly laughed out of the room when I said early on I had no problem with Trump. This was when everyone thought he was just a clown and would be washed out early. New Yorkers are a different breed of cat. As long as they are insulting you consider yourself in their good graces. It’s when they stop insulting you that you want to watch your back. I am out of the prediction business, but Trump has a shot, and as Dr. Franklin opined to Adams, politics is the art of the possible. I frankly don’t understand how anyone can keep giving Hillary a pass. I have yet to see any evidence that she’s the smartest woman in the room. She lost me totally when she let her Ambassador be murdered along with the men who rallied to him. Oh well, what does it matter NOW?? I despise the Berne’s philosophy but he was robbed. In the past we would never have been sure. The thing I don’t understand is why his supporters are surprised. What, the DNC would never lie to THEM? Useful idiots I believe is the technical term. As far as the Sophists go, they are alive and well in the halls of power.
Trump doesn’t lie? The Tea / Republican Party does not lie? Diplomats don’t lie? Tea/Republican party has a lock on manipulation by communication, particularly mass communication. Repeat the same lies over and over until they stand as virtual truth. No one does it better
From a NY Times article about the Benghazi report from the House Select Committee on Benghazi, which was controlled by a Republican majority. Democrats were virtually shut out of participation.
The following statement was made by Dr. Anne Stevens, the sister of Ambassador Chris Stevens, who served as a family spokesperson since his death. She is the chief of pediatric rheumatology at Seattle Children’s Hospital. She spoke with the NY Times
After years of congressional investigations, do you feel that your brother’s death has been politicized in Washington?
Yes! Definitely politicized. Every report I read that mentions him specifically has a political bent, an accusatory bent. One point that seems to be brought up again and again is the accusation that the attack was a response to the video. I could understand why that conclusion would be made, because it was right after the attack on the U.S. Embassy in Egypt. But, frankly, it doesn’t matter that that was the thinking, that night, about why the attack occurred. It’s irrelevant to bring that up again and again. It is done purely for political reasons.
It would be much more useful for Congress to focus on providing resources for security for all State Department facilities around the world—for increasing personnel, language capabilities, for increasing staff to build relationships, particularly in North Africa and the Middle East. I would love to hear they are drastically increasing the budget.
Sorry, this comment is in response to Nick Kelly’s comment about the book “Trumped”. My error.
If you re-post your original comment as a reply to Nick Kelly’s comment on “Trumped” as you had planned, I’ll delete the original.
We only have one insider unvarnished look at Trump- the book ‘Trumped’ by former casino right- hand man Jack O’Donnell.
Juicy, detailed and absolutely authentic.
Available on Amazon as e-book for 5.95
From Kirkus Reviews: Trump at work emerges here as a cocksure boor who pays precious little attention to detail and pins the blame for his own misjudgments on subordinates. While he seems surprisingly dumb when it comes to weighing a deal’s downside risks against its potential rewards, he apparently suffers from near- terminal overconfidence.
As O’Donnell makes clear, however, his empire was built on an abiding faith in rising property values, an assumption that came a cropper shortly after the Taj Mahal’s botched opening…A long-running, oddly joyous affair with Marla Maples cost him his marriage to Ivana–and a good deal more.
Not sure how you calculate a maximum return of 100% on short selling wolf
I sold short, unleveraged Valeant and received $29,648 for the shares and closed the position by buying back at a cost of $4,524.
Net of brokerage fees therefore I made a profit of 556 %
You cannot count your profit or loss until you close the trade
Accounting for short sales is a little counter-intuitive…
Your initial investment was $29,648 = the amount you sold short = the number of shares (at the share price at the time) that you borrowed from some other investor and that you have to return at whatever price. This is also your maximum possible gain if the stock goes to near zero (you can buy back the shares at near zero and return them.
Your cost to cover the short (buy back the shares that you first borrowed and then sold) was $4,524.
So your profit was the difference, $25,124, making you an excellent 85% gain. Congrats!
um, tax authorities would have a different view than an 85% profit.
cost of carry plus cost of buy-in = basis. on the other hand, deductibility of investment interest ceiling, etc etc.
i get confused all the time. this might be one of those times,
Check your brokerage statement. That’s what matters to the IRS. The broker will figure your profit for you :-)
Shorting is being increasingly constrained to the HFT’s with the “inside track”, i.e. the “Fraud Preserve’s” (Fed) PPPT off-shore market manipulations.
the hfts are the market makers.
Not being arithmetically agile, I do not understand the ins and outs but what I do know is that the authorities, the companies and the vested interests are intent upon presenting a positive image at all times.
Which in all honesty cannot be right because without the negative there would be no growth, only lop-sidedness.
I’m going to ask a question that’s probably hilarious – is there no reg that says a stock tout can’t hold the stock he is publicly shorting? Looks like Left is well enough known that he could cause a stock to fall just by saying he’s shorting it. Assuming he closes out his position as soon as his shorted stock drops, he should be able to make money every day. Just needs to sell it before other touts point out that he’s an idiot.