“An intelligent investor gets satisfaction from the thought that his operations are exactly opposite to those of the crowd.”
Benjamin Graham
Considered by many investors to be one of the "dark arts" of Wall Street, short selling is by its very nature, contrarian. The simple reason for this is that the vast majority of investors are long only. In essence, the “house” is stacked against stocks going down. Nonetheless, we brave souls that consider ourselves short-sellers have existed since the beginning of modern markets.
Since at least the SEC adoption of Rule 10a-1 in 1937, there has also been some form of uptick rule that has served as a structural impediment to short selling. In effect, short sales on down ticks were forbidden. While this was eliminated in 2007, there remains an alternative uptick rule in place. And as we saw during the Great Financial Crisis, we are only a big market crash away from the SEC banning (at least for a time) short selling in certain sectors.
Naturally of course, many companies despise short sellers. In the their view, short sellers are viewed as nefarious rumor mongers attempting to capitalize on short term price dislocation. They are often called “haters”, “jerks”, and “not super smart” and, of course, that was just by Elon Musk, the CEO of Tesla.
On a humorous note, CNBC "Mad Money" host Jim Cramer once even accused Hedgeye of orchestrating a bear raid on the MLP Linn Energy which we recommended to short. As you may recall, Linn eventually went bankrupt.
Despite this continuous attempt to discredit short sellers, the reality is very different. Most academic studies conclude that short selling is critical to market efficiency, price discovery, and uncovering financial frauds. As the "Oracle of Omaha" himself Warren Buffett noted at his 2006 annual shareholder meeting:
“The situations in which there have been short interests very often have been later revealed to be frauds or semi-frauds.”
As a long-time advocate of shorting, Hedgeye is excited to be hosting a Short Conference next week on April 2nd at the Yale Club in NYC. We are partnering with two other independent research firms, The Analyst and Vision Research, and will pitch six ideas over the course of an afternoon. If you are interested in attending the event please email to register.
Back to the Global Macro Grind...
Back in the world of central banking, this week we’ve had anything but transparency from the relevant talking heads.
A few cases in point:
- Dallas Fed President Kaplan (non-voter) said that it may be too early for the Fed to cut rates, and that he would be careful not to over react to what markets are saying;
- Chicago Fed President Evans (voter) said it was a good time for the Fed to pause and doesn’t expect any rate hikes until mid-way through 2020;
- Boston Fed President Rosengren (voter) indicated he thinks the Fed’s next move will still be a hike; and
- Vice Chair Clarida reiterated that U.S. policy makers can’t ignore global risks.
Confused yet?
Meanwhile, back in the real world of market prices, the 10-year yield, as a proxy, is up in the last 24 hours, but it’s been in free fall in the year-to-date and in the last month. As well, the implied Fed Funds target rate has basically priced in close to 40bps of cuts in 2019. Who knows, maybe the policy makers will get this one right . . . albeit we wouldn’t recommend holding your breath on that.
Economic data released this morning provides little support to a rate hike. If anything, it is incrementally dovish. February personal income is reported at +0.2% versus a consensus estimate of +0.3% and February personal spending came in at +0.1% vs. +0.2% consensus. Core PCE in January was also revised lower to +1.8% from +2.0%. Not exactly inflationary readings.
In global trade news, Treasury Secretary Mnuchin has described his working dinner with the Chinese as “productive”. This obviously has a serious impact on our GIP model . . . and if you believe that we have a bridge to sell you in Brooklyn! (True story: famed American conman George Parker once sold the Brooklyn Bridge twice in one week.)
Please ignore the banter on the China trade deal! But if you would like to get informed on this and hear a contrarian view, please join us for our call next week “A Bear in the China Shop – With AEI’s Derek Scissors” on April 2, 10:00am ET. Ping .
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.31-2.57% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 57.01-59.38 (bullish)
REITS (VNQ) 84.13-87.41 (bullish)
Housing (ITB) 33.51-36.03 (bullish)
Energy (XLE) 64.57-67.56 (bullish)
Financials (XLF) 24.59-26.23 (bearish)
Shanghai Comp 2 (bullish)
Nikkei 206 (bearish)
DAX 111 (bearish)
VIX 12.98-16.96 (neutral)
USD 95.25-97.00 (neutral)
Oil (WTI) 57.72-60.57 (bullish)
Nat Gas 2.65-2.89 (bearish)
Gold 1 (bullish)
Copper 2.82-2.94 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
