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Posted 3/13/2006
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Confessions of a short-seller
It's never easy to make money betting stocks will go down. Here are three things I've learned that short-sellers might want to keep in mind right now.
By Bill Fleckenstein
In this week's Contrarian Chronicles, I'd like to "package" three lessons about the vagaries of short-selling, drawn from my daily column:- First: Be vocal about potential corporate chicanery, be prepared to endure the whipping-boy label and know you're onto something.
- Second: Never underestimate the power of bullish psychology.
- Third: Be mindful of Fed-related minefields.
Greenberg fends off first-degree Byrnes
Let's begin on point one with the recent flap over the SEC, Overstock.com (OSTK, news, msgs) and my friend Herb Greenberg. For those who don't know, Overstock's CEO Patrick Byrne is (to be generous) a bit of a wild man. In any case, Byrne claims that his stock price has been taken down by a conspiracy promulgated by short-sellers and Greenberg, a financial journalist.
To address that preposterousness: Short-sellers do not make stocks go down. That is, they don't cut the dividends. Nor do they drive stocks to ridiculous prices in the first place to make them attractive short-sale candidates. It's company managements that make the mistakes that lead to problems that short-sellers attempt to capitalize on.
In any case, I do not have an ax to grind with Overstock, because it's too kinky for me. But I do know a disaster when I see one, and, if I had to make a bet, I'd bet that Overstock will turn into a disaster, if it isn't already.
Related news and commentary on MSN Money
Whenever companies start blaming short-sellers, management is almost always guilty of whatever you think it's guilty of -- and oftentimes much worse. Herb Greenberg is an incredibly honest, ethical man. For Patrick Byrne, of all people, to accuse him of being sleazy is just absurd. Thanks to SEC Chairman Christopher Cox for suspending Herb's subpoena, but maybe he should send one to Byrne.
Beware gotta-believe bulls
Next, let's take a look at the recent sweet-and-sour BlackBerry news from Research in Motion (RIMM, news, msgs) -- and what lesson that holds. In the after-hours on March 3, RIMM rose 14% on the back of the company's lowered guidance for the current quarter. Conveniently enough, RIMM made that news go down easy -- by simultaneously announcing the settlement of its lawsuit with NTP, for less money than folks had feared.
I believe that bulls will say RIMM's quarter has been going as poorly as it has been simply due to fears of a BlackBerry shutdown -- and now, with that behind the company, everything will be hunky-dory.
Folks so inclined to tangle with Research in Motion need to understand that this is the wildest of wild animals. It's imperative to pay attention to the bullish psychology surrounding RIMM and its ability to run roughshod over company fundamentals. That's why, even if the stock is still up around 10% since March 3, I think it's probably too early to be short RIMM -- though I have been short the stock in the past and plan to be short it again in the future.
Easy Fed, queasy shorts
Lastly, in the macroeconomic department, short-sellers face the potential of grief unleashed by a Federal Reserve that, in my opinion, could clearly tip its hand at any time about backing off. The market fears the Fed might stay tighter longer than folks had recently hoped -- a view that readers know I do not share. To the extent that the tape has been heavy on the back of those fears, which I think are wrong, I wouldn't want to join in that selling.
I think a major inflection point is going to occur sometime in the not-too-distant future, when folks realize that the Fed is in fact done, or is about to be finished, with raising interest rates. Quite possibly, that outcome could produce a big bounce in stocks (if it doesn't get discounted ahead of time). That is why I am essentially on the sidelines, waiting to see what happens.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Fleckenstein was short Intel and long Intel puts.
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