Friday, March 20, 2015

Economy: Why Do Liberals Love Short Sellers?

(Drivebycuriosity) - This week the "New Yorker" has a hymn on short sellers ("In praise of short sellers" newyorker). These people are betting on falling stock prices. They borrow stocks from a broker and sell the shares immediately (going short or shorting) in the hope that stock prices will fall and then they could buy back these stocks for much less.

The laudation is interesting. The "New Yorker" is a left-leaning magazine. They usually write against capitalism, business and corporates. Last year the liberal magazine attacked, claiming the company is a monopoly and is bad for the book culture (driveby).

This time the "New Yorker" celebrates  Whitney Tilson. The hedge fund manager appeared recently on TV and accused "Lumber Liquidators", specialty retailer of hardwood flooring, that their products are unsafe because of unlawful high formaldehyde levels. The media attack worked form him, the stock tanked around 50% - a huge gain for the short seller.

Later "Lumber Liquidators" defended themselves saying "that they are the victim of a small group of short-selling investors who are working together". They also claim that the allegations are based on improper and "deconstructive" testing methods (seekingalpha   lumber). Even the "New Yorker" concedes that "short sellers are often wrong, and that may yet prove to be the case with Lumber Liquidators" (newyorker). But the stock stays down,  as usual the defamation sticks.

                                                       Ackman`s Crusade

I have written before about short sellers who manipulate stock prices by spreading negative gossips & rumors (here   here). Poster boy of the short seller crowd - and also clebrated in this "New Yorker" article - is William A. Ackman. The hedge fund billionaire  and CEO of the hedge fund Pershing Square Capital Management is betting big against Herbalife, a producer and seller of nutritional supplements traded on Wall Street. In December 2012 Ackman revealed that he had shorted massively stocks of Herbalife and then started bad-mouthing the firm. To bring the stock down Ackman did not just use his huge reputation as a billionaire hedge fund manager - there is cult around short sellers like Ackman -: "His team has helped organize protests, news conferences and letter-writing campaigns in California, Nevada, Connecticut, New York and Illinois, against his victim - although several of the people who signed the letters to state and federal officials say they do not remember sending them" wrote the New York Times (nytimes). He also pulled the political puppet strings and got support from leading politicians.

Ackman`s manipulations seem to fire back. Recently started a federal probe into the possible manipulation of Herbalife stocks by Ackman (businessinsider    social). The Wall Street Journal reported that people connected to Ackman and his hedge fund, Pershing Square, have been interviewed by government officials. At least one person – a hair stylist from Hartford apparently tied to a letter-writing campaign intended to discredit Herbalife – was subpoenaed late last month to appear before a federal grand jury in New York.

All short sellers benefit from falling stock prices. Thus they have a natural interest that the business of the shorted company fails. Ackman openly goes for a bankrupt of Herbalife and he uses his power to bring the stock down. In the James Bond movie "Casino Royale" the villain, named "Le Chiffre", shorted stocks of an airline and then ordered an assassin to bomb a valuable new plane in order to destroy the whole company. This is just fiction, but gives an idea how short sellers could work. Even when short sellers do nothing illegal they can inflict a lot harm by spreading  rumors and allegations which can ruin the reputation of a company and thus irritate customers, creditors, investors and employes and so inflict damage on the company.


                                                  Feral Hogs

Sometimes short selling gets out of control and does considerable damage to the society. Shortly after the bankruptcy of Lehman Brothers, which brought huge gains for short sellers, groups of short sellers tried to repeat their success.  In the months after Lehman´s fall herds of them - hedge funds and their followers - attacked everyone who seemed vulnerable - almost any bank had to be saved. Federal Reserve member Richard Fisher (Dallas Fed President) described this species as " big money" that "does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they go after it."(marketwatch).

In the panic of late 2008 and early 2009 - as the stock prices were already down and still falling -, herds of short sellers massively dumped stocks and sent stock prices further down. Massive shorting enhanced the fall of the stock market, this created panic and downward spirals for almost any stock on the market. The crash, exaggerated by short selling, led to ridiculous undervalued stocks in spring 2009. This under valuation made the massive rally since then (plus 190% plus) possible. The stock market crash was at least amplified by excessive short selling that paralyzed the whole economy. Companies ceased investing & hiring, the recession was on the brink to turn into a disaster like the great depression of the 1930s.

It is remarkable that liberal "The New Yorker" supports short sellers. Maybe their comradeship  is part of their ongoing anti-capitalism crusade.

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