Short-Selling, Puts & Inverse ETFs 02 (Feb 12 - Dec 25)

[winston]

In Defense of Short-Sellers

by Joshua M Brown


Source: The Reformed Broker

http://thereformedbroker.com/2015/11/03 ... t-sellers/

[winston]

Know When To Hold, Know When To Fold A Short Sale

By Elvis Picardo

Source: Investopedia

http://www.investopedia.com/articles/ac ... z3qzqJdoVu

[winston]

This Doesn’t Bode Well by John Del Vecchio

As a short seller by trade, I end up reading. A lot.

I’m constantly scouring press releases, earnings statements, balance sheets – you name it. If there’s a red flag and management is doing something to tweak its bottom line, I want to know.

But short selling isn’t the only way you can turn a profit when a stock or asset is going down.

You can put money in an inverse ETF. You can sell put options. You can even practice some good old fashioned patience and wait for a stock to bottom, then pick it up at a reduced price.

It’s just that, what I do is more fun.

There’s something truly satisfying when you catch a company “red-handed” and sticking its greedy paws in the cookie jar.

The funny part is, nothing I read is sealed behind closed doors. Financial statements are available to everybody. They just have to actually read them.

Unfortunately, people focus on the headlines and not the details.

Last week there was a “home run” jobs report that blew away Wall Street’s expectations. The unemployment rate now stands at about 5%, which in economics 101 is full employment.

Sounds great right? Well, under the covers of the jobs report things aren’t that wonderful.

Most of the jobs created were for people 55 years or older. The younger workers who support the economy and its future saw its employment ranks shrink.

What’s worse is over the past several years the labor force participation rate has continued to drop. It’s at about levels seen in 1977. Fewer and fewer people are picking up the slack to help propel the economy forward.

Given this “great” report, we have a few things in store for us…

For one – and most obviously – it’s now much more likely that the Federal Reserve will raise interest rates in December.

That doesn’t bode well for stocks.

The stock market has been on edge every time quantitative easing has been reduced in the past five years.

Now, it will be on edge every time the Federal Reserve makes any sort of indication as to the pace of additional rate increases.

I am dreading that! The fundamentals continue to deteriorate. Revenue and earnings are getting pinched. The U.S. stock market is way overvalued.

A strong U.S. dollar, which could get much stronger, won’t help. Our new normal will be anything but the normal times we experienced in the past.

I long for the days of 2003 to 2007 when the stocks of companies doing well went up, and the stocks of companies faring poorly went down, even as the overall market pushed higher. It was a period of unprecedented low volatility. Things made sense.

You can forget that!

Now, we are likely to see much more volatility, and fast, sharp nosedives in stock prices.

When the unexpected comes, holding stocks will be like a hot potato. Investors will be quick to pass shares off to the next person hoping they’ll be the ones caught with the big decline.

Buckle up; the wild ride is going to continue!

source: Forensic Investor

[winston]

How One Man Turned $1M Into $44M in Less Than Two Weeks By Jeff Clark

Most penny stocks will go to zero.

That's why short sellers love to target stocks that are trading below $1. These are companies that are usually on life support. They're gasping for air. And the odds favor a bankruptcy and a complete wipeout of the share price.

Just look at the short interest (the percentage of the outstanding shares sold short) for many stocks trading below $1. You'll often see the short interest at 30% or even higher. That indicates a lot of traders are betting on the demise of the company.

For a short seller, there's nothing more enjoyable than watching a $0.90 stock go to zero.

On the other hand… there's nothing more painful than watching a $0.90 stock rally 4,500% in 10 days. That action will wipe out years' worth of profitable short trades. That's what happened to anyone who was short shares of KaloBios Pharmaceuticals (KBIO) two weeks ago.

Here's the story...

In early November, executives of drug developer KaloBios Pharmaceuticals announced that the company would be winding down operations and liquidating its assets. The company was running out of cash. There was no way for it to stay in business.

The stock fell more than 50% in the news – dropping from just over $2 per share to $0.90.

It was a short seller's dream. Here was a company that publicly proclaimed, "We're finished. Our stock is worthless." Yet, it was still selling for $0.90 a share.

To many short sellers, that was free money. They could short the stock at $0.90, then just ride the position through the company's liquidation and cover their trades for pennies.

But, the market never makes it that easy.

As short sellers were piling into KBIO – selling stock they didn't own with the hopes of buying it back later at a lower price – a consortium of investors led by Martin Shkreli was buying.

Shkreli is the infamous CEO of Turing Pharmaceuticals. That's the company that bought the rights to Daraprim – the treatment for the rare parasitic infection, toxoplasmosis – and then raised the price of the drug by 5,000%.

No one suspected he would do the same thing for shares of KBIO.

As the short interest of KBIO reached nearly 50%, the company announced it was in talks with Shkreli's investment group for the terms of a possible cash infusion. That would keep the company alive a while longer. And the stock shot as high as $16 per share.

Anyone who shorted the stock at less than $1 was now sitting on a 1,500% loss. But that was just the beginning.

Last Friday – the day after Thanksgiving, and one of the most illiquid days of the year – Shkreli's investment group announced that it would not allow the shares it owned, which was now almost 70% of the outstanding float, to be sold short. It would take possession of its shares, thereby limiting the ability of short sellers to "borrow" stock – which is necessary in order to sell short.

This action created a buying panic in KBIO shares.

Shkreli's action – which was entirely legal – reduced the outstanding float of KBIO shares to less than the number of shares sold short. Brokerage firms, by law, were now required to force short sellers to cover their trades and buy the stock in order to deliver the shares to Shkreli's investment group.

So, if you were watching the stock ticker on CNBC or FBN last Friday, you probably saw KBIO cross the tape as high as $45 per share.

Shkreli's investment group, which bought its majority position for about $1 million, was sitting on a $44 million gain.

Meanwhile, the average rational-thinking short seller was dealing with a 4,400% loss.

There are a couple of lessons here…

First of all, when it comes to the stock market, there's no such thing as a sure thing. Stocks that are on life support can recover.

Also… and maybe the most important lesson here… no one is safe from manipulation.

KBIO is a worthless company. It has no value, no viable products in its pipeline, and no reason for existence. It should go bankrupt. And, it will… eventually.

But in the short term, supply-and-demand pressures can influence the price. When Shkreli's investment group refused to allow their shares to be loaned to short sellers, they significantly reduced the supply. And when short sellers were forced to cover, they jumped over each other trying to close their trades.

Those are the conditions that can send a $0.90 stock up to $44 in just a few days.

Shkreli's actions were a blatant manipulation of the stock market. He targeted a stock with a high short interest, acquired a majority stake, and then issued press releases that would send the stock higher.

There's little doubt that weeks from now we'll learn that Shkreli's group liquidated most of their "investment" in KBIO during this recent run up. And he'll record a $44 million profit on a $1 million investment.

Meanwhile, folks who sold KBIO short – betting on a "sure thing" – got wiped out.

That's how the game is played.

It's not right. It's not moral. But it's not illegal either.

So if you have a spare million dollars just lying around, you might consider doing something similar. Find a stock with a large percentage short interest. Buy up a majority stake in the company. And then take possession of your shares – thereby limiting the amount of shares that can be sold short, and kicking off a huge short-covering rally.

You could turn $1,000,000 into $44,000,000 in less than two weeks.

Frankly… I'm not sure how to feel about this.

I admire the ingenuity of Shkreli's trade. He spotted a flaw in the system and profited well by exploiting it.

At the same time, though, I feel the pain of the short sellers who were right in their analysis but wrong in their execution.

It reminds me of one of the first short sales I made in my career. It was a company called Taylor Gold. The company claimed to have a process that could turn sand into gold. It was a ridiculous claim, and shorting the stock should have been the easiest trade ever. So I shorted the stock at just less than $3 per share.

Two days later, I stopped out of the trade when Taylor Gold gapped above $9 per share. My brokerage firm informed me the stock was no longer available to be borrowed, and I would have to cover my trade. It was a brutal loss to take. But, it was much less than what it could have been.

The stock was at $24 one week later. There was no way I could have handled that sort of adverse move. So I was happy to have covered my short trade for a 200%-plus loss.

Six months later, the stock was trading for less than a penny.

Like I said, the market never makes it easy.

So as our current, seven-year-long bull market starts to run out of energy and the bear starts to take over – something that I suspect is happening right now – short sellers still need to be cautious. There's no such thing as an easy trade.

All the logic in the world can't prevent a short squeeze on a bankrupt company like KBIO. There are other influences that can send the stock higher.

So despite your conviction that a stock is headed lower over time, you still have to be aware of the risk/reward equation.

There will be plenty of opportunities to profit on the short side as the coming bear market takes hold. But, traders need to be aware of ALL of the potential risks to a short position. Market manipulation runs rampant in heavily shorted stocks.

Source: Growth Stock Wire

[winston]

Q: Will you please tell me what ETFs I can use when the markets go down?

~ Tony D.


A: When I’m bearish and want to bet stocks are headed lower, I generally like buying inverse ETFs based on the major market indexes.

ProShares Short Dow 30 (NYSEArca:DOG) for the Dow Jones Industrial Average, ProShares Short S&P 500 (NYSEArca:SH) to short the S&P 500, and ProShares Short QQQ (NYSEArca:PSQ) to bet the Nasdaq is headed lower.

If I’m extremely bearish, and I believe stocks are going to fall hard today or tomorrow, I’ll sometimes buy a leveraged short inverse ETF like the ProShares UltraPro Short S&P 500 (NYSEArca:SPXU). SPXU is a 3X-leveraged inverse ETF. That means if the S&P 500 goes down 1% today, SPXU would go up 3% today.

But leveraged ETFs are only meant as short-term trading vehicles. That’s why I said “if I believe stocks are going to fall hard today or tomorrow.” Because of the way leveraged ETFs are priced, they’re “re-set” every day – they’re not good long holds.

In a perfect world, if you are right and you buy a leveraged inverse ETF and stocks go down right away, and they keep going down for multiple days in succession, you’ll be a very happy camper.

I’m not greedy. If I have a straight run for a few days holding an inverse leveraged ETF, I’d take my profits as soon as I think the selloff is over. I wouldn’t wait another day, I’d ring the register and be happy.

If I own an unleveraged inverse ETF like DOG, SH, or PSQ, I’d probably use a 5%-10% stop to get out if the markets rallied. If you take small losses, you can get out and figure out where stocks are going and get back in if your timing was off but you think they’re going down again.

Source: Shah Gilani, Money Morning

[winston]

Q: Will you please tell me what ETFs I can use when the markets go down?

~ Tony D.


A: When I’m bearish and want to bet stocks are headed lower, I generally like buying inverse ETFs based on the major market indexes.

ProShares Short Dow 30 (NYSEArca:DOG) for the Dow Jones Industrial Average, ProShares Short S&P 500 (NYSEArca:SH) to short the S&P 500, and ProShares Short QQQ (NYSEArca:PSQ) to bet the Nasdaq is headed lower.

If I’m extremely bearish, and I believe stocks are going to fall hard today or tomorrow, I’ll sometimes buy a leveraged short inverse ETF like the ProShares UltraPro Short S&P 500 (NYSEArca:SPXU). SPXU is a 3X-leveraged inverse ETF. That means if the S&P 500 goes down 1% today, SPXU would go up 3% today.

But leveraged ETFs are only meant as short-term trading vehicles. That’s why I said “if I believe stocks are going to fall hard today or tomorrow.” Because of the way leveraged ETFs are priced, they’re “re-set” every day – they’re not good long holds.

In a perfect world, if you are right and you buy a leveraged inverse ETF and stocks go down right away, and they keep going down for multiple days in succession, you’ll be a very happy camper.

I’m not greedy. If I have a straight run for a few days holding an inverse leveraged ETF, I’d take my profits as soon as I think the selloff is over. I wouldn’t wait another day, I’d ring the register and be happy.

If I own an unleveraged inverse ETF like DOG, SH, or PSQ, I’d probably use a 5%-10% stop to get out if the markets rallied. If you take small losses, you can get out and figure out where stocks are going and get back in if your timing was off but you think they’re going down again.

Source: Shah Gilani, Money Morning

[winston]

When the Short Sellers Shout, Investors Should Listen

by Kristin Haugk

In the last couple of weeks, I have heard numerous market forecasts for the coming 12 months. Today, I'll share mine: 2016 will be the year of the short seller.

Don't panic. Just because the short sellers are coming doesn't mean you should dump all of your shares and head for the doors.

I'm not calling for an all-out bear market in 2016. But we will see stock-specific meltdowns and more than one outright fraud exposed.

Short sellers are never popular. They had a rough six years as the market and most of the stocks in it went straight up. Their wins were few and far between.

But the market dynamic shifted last year, and the short sellers began to celebrate a few victories. After several years of being labeled the "boys who cried wolf," a few of them were proven right.

Although their victories were small, more short sellers will be vindicated in 2016. Hear me out.

Historically, the vast majority of accounting frauds occur during the biggest bull market runs... and are discovered immediately after. They do not come to light until the economy or stock market hits a bump in the road. Today, the market's path is pretty rocky.

During boom years, investors happily ignore signs that earnings and revenues don't quite add up. They're blinded by greed, and as long as the share prices keep going up, no one wants to make any waves. A lot of trash on financial statements goes unnoticed.

Take the bull market of the late 1990s.

After the dot-com bubble burst, the market discovered that the success of several high-flying companies, like Enron and WorldCom, had been built on fraud. The signs were there prior to 2002 and so were the short sellers. No one listened. Most investors were caught off guard. They lost nearly everything.

Then, just a few short years later, a new era of corporate accounting scandals emerged. This time, it was triggered by the rupture of the housing bubble.

Once again, the short sellers were ahead of the curve. They recognized that the banks were in distress before the housing market imploded. Several large banks fell... hard. Bernie Madoff's $65 billion Ponzi scheme came to light in 2008 as well. Investors were surprised again, and this time the financial pain they endured was worse.

Fast-forward to today: The rising tide of the current bull market paused in 2015. In the first few days of trading this year, it seemed as though that tide were trying to recede. I don't know how far it washes out or for how long. But I do know the short sellers are ready to expose the junk hidden just below the water's surface.

Debt Graph

Lumber Liquidators Holdings (NYSE: LL) was one of the first companies to see trash come to light.

Hedge fund manager Whitney Tilson first shorted the stock in 2013. He said that Lumber Liquidators' high margins made no sense. With the ferociously competitive flooring environment and input prices, he determined that there was something fishy about the company's supply chain.

After analyzing Lumber Liquidators' financials, he speculated that the company's abnormally high margins were because it was buying illegal wood.

Nearly a year ago, a national news program reported that the laminate flooring sold by Lumber Liquidators contained potentially unhealthy levels of formaldehyde. Tilson's short gained momentum - he was proven right. In just eight days, Lumber Liquidators' stock price declined 55%.

Bollywood film producer Eros International (NYSE: EROS) was also targeted by short sellers in 2015 after they analyzed the company's financials.

They sold short the stock because the shorts believed they had uncovered several aggressive accounting policies, related party transactions, poor financial controls and a lack of free cash flow that demonstrated Eros' profitability wasn't all that it seemed.

Although no charges have been filed, investors have run for the hills. The stock has fallen nearly 76% in the last three months.

Short sellers sounded the alarm about several other companies last year, but 2016 will be the year that investors, regulators and the authorities start to listen.

Heed their warnings and abandon ship before the companies they're targeting sink.

Companies still use "creative" accounting to hide debt and losses, manufacture revenue and misclassify expenses. There are very few incentives to keep executives honest and millions of incentives ($) to make them get creative with their accounting.

Unfortunately, more often than not, regulators, auditors, equity analysts and investors fail to recognize financial chicanery until it is too late.

But history has shown us time and time again that the short sellers are the first to identify a problem and react.

Love them or hate them, short sellers provide a valuable resource to investors like you and me.

As long as we choose to listen to them.

So my advice for investors in 2016 is to use the short sellers as a bellwether to ensure your wealth does not fall victim to fuzzy math. Because when it comes to accounting, more often than not, where there is smoke, there is fire.

Even if the market seems to be ignoring the alarm, get out sooner rather than later. Short sellers know, when it comes to scandals, it doesn't matter until it matters. But when it does, look out below.

Source: The Oxford Club

[winston]

NYSE short interest fell 1.4 percent in late December

Jan 12 - Short interest on the New York Stock Exchange fell 1.4 percent in late December, the exchange said on Tuesday.

As of Dec. 31, short interest fell to about 17.393 billion shares, compared with 17.640 billion shares as of Dec. 15.

Source: Reuters

[winston]

NYSE short interest fell 1.4 percent in late December

Jan 12 - Short interest on the New York Stock Exchange fell 1.4 percent in late December, the exchange said on Tuesday.

As of Dec. 31, short interest fell to about 17.393 billion shares, compared with 17.640 billion shares as of Dec. 15.

Source: Reuters

[winston]

Short Selling: Let This Ratio Be Your Magic 8 Ball

By Kristin Haugk

Source: The Oxford Club

http://wealthyretirement.com/short-inte ... ?src=email