Phil Erlanger on "dumb" short sellers (2021)

For the past five years, "dumb" short sellers (those with a poor track record of making money on their short trades) have been the majority of short sellers.  It is particularly true that the recent jump in short selling was established by dumb short sellers.

~ Phil Erlanger, Phil Erlanger Research, April 8, 2021

(as quoted in Barron's, April 10, 2021)

Kevin Duffy on the GameStop frenzy

There is a cyclical aspect of the the GameStop frenzy few are talking about.  Bob Murphy made an interesting point that this is flipping "The Big Short," which was written by Michael Lewis right after the GFC in early 2010, close to the stock market bottom.  Short sellers were held out as heroes.  A decade later, after stocks have quadrupled and short sellers practically wiped out, they're the bad guys.  And the greedy and reckless speculators dancing on their graves are the heroes! 

We've come full circle, i.e. we're probably at peak euphoria for the so-called "everything bubble." 

As for Robinhood temporarily closing the casino doors for a day, this likley had more to do with existing regulations and capital requirements which go up with increased volatility.  Robinhood apparently had to raise another $1 billion so they could fully open the casino for business on Friday (helping push GME stock up 68%). 

Btw, AOC, Ted Cruz and Donald Trump, Jr. all attacked Robinhood for the same reason.  If they're all on the same side of an issue, laissez faire types have to be suspicious.  This will end in tears for the Reddit crowd who, as Bob said, refuse to take their chips and leave the poker table because they're "mad." 

This is amateur hour at the casino, and some angry, young, ideologically-charged traders are about to learn a very expensive lesson.  Who will AOC & Co. then blame?  Will they bail these people out?  The plot sickens...

~ Kevin Duffy, comment about "Ep. 1825: The Reddit/GameStop Phenomenon," The Tom Woods Show, January 30, 2021

Stephanie Ruhle on the GameStop short squeeze and the "democraticization of Wall Street"

Let's talk about the positive here because there is something beautiful about the democraticization of Wall Street and finance... The fact that people can use the RobinHood app... The big guy gets bailed out before the little guy does. Stephanie Ruhle, "MSNBC’s Stephanie Ruhle and CNBC’s Andrew Ross Sorkin Sound Dire Warning on GameStop Surge: ‘The Big Guy Gets Bailed out Before the Little Guy Does’," MSNBC, January 28, 2021

Kevin Duffy on GameStop madness

While I'm not shedding any tears for the big hedge funds getting crushed by swarms of Robinhood day traders, this is a warning - exactly the kind of insane behavior you would see at a generational top. I follow the stocks of retailers pretty closely.  On a good day, GameStop (GME) might be worth $2 billion.  It hit a market cap of $30 billion yesterday and is set to open up 70% (after getting being down 44% yesterday). 

We've lost sight of the fact that the financial markets exist to efficiently allocate capital.  Mock and destroy that function and you've done the same to a functioning economy.

As Charles Mackay warned in Extraordinary Popular Delusions and the Madness of Crowds (1841): 

Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.

~ Kevin Duffy, Facebook post, January 29, 2021

Bill Fleckenstein on the markets: "The craziest day ever?"

Well, it's not too often that I'm speechless looking at a market when thinking about what to say about a certain response to the news. However, watching the SPOOs gain 0.75% last night and the Nasdaq 100 tack on 1% while stocks in Shanghai were being bombed, despite the promise of a liquidity injection by the PBOC and the banning of short selling, was about as bizarre a financial scene as I've seen in my investment career, with the possible exception of some nutty stuff that happened in Tokyo in late 1989, although quite frankly that was so long ago, I don't remember all the small details.

~ Bill Fleckenstein, Fleck Notes, February 3, 2020

Marc Cohodes on what to avoid in selling short

I don't tackle anything that has momentum, unanalyzable, just because it's too high - like the FANG stocks, I could care less.  I could care less what Cramer's touting... I could care less about the IBD 100...  No interest.  And I'm also not interested in well managed, well run companies who invest in the future.  I've never been short Amazon once.  I've never been short Google, Facebook, Netflix, those guys.

~ Marc Cohodes, RealVision interview with Grant Williams, 45:45 mark

Kyle Bass on the long/short investment process

I love being long human ingenuity and short financial innovation.

~ Kyle Bass, video at 20:45 mark: "My investment lessons from the school of hard knocks," September 7, 2017

France bans short selling

Investors wanted to test French resistance. This is our response, as always very determined, and it will be so for all those who want to put us to the test.

"Jean-Pierre Jouyet, Head of the AMF (French Securities Regulator), August 23, 2011

Barry Ritholz on momentum stocks

The bottom line is you don't want to short strong names going higher.

~ Barry Ritholz, as appeared on CNBC's Fast Money, February 3, 2011

Fred Hickey on short selling in the current market

I learned that you can't make money shorting in this market currently. As stocks careen higher, the gap between fundamentals and valuations will widen, providing opportunities to short in the future. In the meantime, I'll try my best not to get sucked in.

[...]

What is worth mentioning is that this market is currently near-impossible to short.

~ Fred Hickey, "The Smartest Dumb People in the World," The High-Tech Strategist, November 5, 2010

Alan Schwartz on speculation and rumor as the cause of the fall of Bear Stearns

During the week of March 10th, 2008, unfounded rumors and attendant speculation began circulating that Bear Stearns was in the midst of a liquidity crisis. Due to the stressed condition of the credit market as a whole and the unprecedented speed at which rumors and speculation travel and echo through the modern financial media environment, the rumors and speculation continued throughout the week. The rumors thus became a self-fulfilling prophecy and there was, simply put, a run on the bank.

~Alan Schwartz, former CEO, Bear Stearns, opening remarks of testimony given to the Financial Crisis Iniquiry Commission, May 5th, 2010

Jim Cramer on being confused by the short-sellers and those who hire them

Despite today's gigunda-, beautiful, incredible rally, with both the Dow Jones and the S&P 500 soaring beyond levels nobody imagined; despite the decision by European governments to go nuclear against the opponents of the euro, these short-sellers, who are leaning all over Greece and Spain and Portugal last week, tossing nearly a trillion dollars of firepower against the euro's enemies in one of the most amazing displays of force I have ever seen in my thirty years of investing; what happened?

The nattering naybobs of negativity and the chicken littles just would not stop all day. In short, probably because they are short, people who can find fault with anything and everything. I have one question for these people: how the heck do these people make money? Or how about a second question: who pays for that advice?

~Jim Cramer, "Embracing Change", Mad Money, May 10th, 2010

Lloyd Blankfein on dog-piling short sellers

“I’m for markets,” says Blankfein, who today describes the situation [financial panic of 2008] as “tricky.” “But when it felt like it had gotten abusive, when it was free money to short-sellers who were piling on, it felt less like the market and more like it was being manipulated.” He adds, “I crossed over.”

~ Lloyd Blankfein, CEO, Goldman Sachs, "The Bank Job," Vanity Fair, January 2010, by Bethany McLean

Charles Schwab on short sellers and regulation of hedge funds

Q: With the SEC trying to crack down on short-sellers, do you see regulation of the market going too far?

A: It's very natural for us all to overreact in times of stress, but I'm not a fan of unmitigated shorting. We have nearly $2 trillion in hedge funds that simply don't have any reporting responsibilities.

~ Charles Schwab, "Chuck Schwab on Scary Markets and Election '08," BusinessWeek, July 16, 2008

Peter Schiff on short selling

It’s not everybody’s cup of tea, but an investor of above-average sophistication might reasonably ask, "If the U.S. stock market is a train wreck waiting to happen, why not just sell it short?"…

Here’s why I would recommend against doing this.

Retail brokers normally require investors to hold any short-sale proceeds in U.S. dollars usually earning no interest. The dollar, seen through my famously jaundiced eye, could lose more purchasing power than the security you sold short lost value…

I’ve got a much better idea, which is to borrow dollars and spend them to acquire foreign income-producing assets, using the income to pay the interest. Short selling accomplishes the opposite, as you end up borrowing assets, which will probably have some intrinsic value, and acquiring dollars, which may have none.

~ Peter Schiff, Crash Proof: How to Profit from the Coming Economic Collapse, pp. 112–113

Ken Heebner when asked if the latest government actions were specifically designed to bail out Goldman Sachs and Morgan Stanley

I wouldn't use the words bail out. These are healthy companies. I'd call what the government did protection from short sellers.

They are bastions of financial strength. They have no problems with their balance sheets, and Morgan Stanley just reported a quarterly profit of more than $1 billion. Yet early in the day (of September 18), Morgan Stanley's stock got as low as $11.70.

~ Ken Heebner, as appeared on CNBC, September 18, 2008

Chanos: 10 lessons of Enron

The convictions of Ken Lay and Jeff Skilling are less than a week old, and yet conclusions are already being drawn about whether "corporate wrongdoing" is a thing of the past. As someone with more than a passing interest in the Enron story -- I was, to quote Ken Lay's bizarre testimony, one of the "short-sellers that were organized and working together and conspiring together" against Enron -- I feel a need to examine what lessons those of us who slog it out daily in the corporate trenches might gain from Enron's spectacular collapse. I propose to offer the top 10 lessons from Enron that executives, investors and lawyers will soon forget:

1. The Enron scandal shows a need for a standards-based accounting system, rather than a rules-based one.

2. Mark-to-Market accounting was not the problem at Enron, Mark-to-Model was.

3. Off-balance-sheet deals and entities are "off" the balance sheet for a reason.

4. Wall Street analysts don't "do" complex.

5. The rating agency system breaks down when most needed. Rely on it at your own peril.

6. Beware of, and question, unexpected executive resignations.

7. Whistleblowers aren't whistleblowers if they blow their whistles inside the company walls.

8. Special investigations by corporate boards are almost always a waste of time/money, and often prove highly misleading.

9. Character cannot be compartmentalized.

And, finally, 10: Friends do not let (possibly guilty) friends take the stand in criminal trials.

Let's face it, the Enron trials of Lay and Skilling had it all; greed, arrogance, an incompetent defense strategy (oh, how I wish short sellers had the power that Enron's defense team claimed we have!) and, of course, larger-than-life corporate villains. One would assume the high profile nature of the trial itself might underscore this observer's list of lessons learned from Enron's spectacular collapse. But thankfully, I'm pretty confident that they will be forgotten soon.

~ James Chanos, "Short-Lived Lessons From an Enron Short," The Wall Street Journal, May 30, 2006