This content is from: Portfolio
At Short-Selling Conference, Hope Springs Eternal
Managers and analysts speaking at a Manhattan event offered shorting ideas, ruminated on the agony of short-selling — and wagered that their strategy is on the verge of a comeback.
The sentiment that emerged at a financial conference held on Thursday at the New York Athletic Club in Manhattan was unusual for a group of short-sellers: optimism.
At the event — entitled “The Art, Pain and Opportunity of Short Selling” and put on by former hedge fund manager Whitney Tilson’s Kase Learning — manager after manager pitched short ideas, with several making compelling cases as to why the stock prices of their short targets are sure to fall. For all their confidence, making money off short-selling is notoriously easier said than done. (Tilson should know: He shuttered his hedge fund, Kase Capital Management, after years of underperformance and started Kase Learning earlier this year, which offers investing classes to current and aspiring managers.)
Short-sellers have gotten hammered over the past few years. The bull market for equities has pushed past its ninth year, persistently low interest rates are propping up low-quality companies, and surging merger and acquisition activity increases the risk that takeover rumors could drive up prices of shorted businesses.
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But a number of managers at the conference expressed confidence that the cycle is about to turn.
“This is a great time for short sellers,” said Mark Roberts, founder of the Wall Street Consulting Group, which publishes widely-followed research on short investing ideas. Roberts said that in the last month his portfolio had gained 5.6 percent. “That tells me the environment has really changed.”
Ben Axler of hedge fund firm Spruce Point Capital Management echoed the sentiment.
“Investors are at a structural disadvantage in these markets,” he said. “Now's the time. Rates are rising; the market is churning with more volatility.”
The conference featured presentations from a slew of managers running the gamut from up-and-comers to high-profile names like David Einhorn, whose talk was off the record. (Einhorn attracted a mob of fans as soon as he descended the stage — in spite of his flagship Greenlight Capital funds 14.9 percent loss through April.)
Several managers offered concrete ideas. Anthony Bozza of Lakewood Capital Management is bearish on Celltrion, a Korean drug-development company with market value of about $30 billion. Bozza pointed out that the chief executive officer and co-founder of the company worked at Daewoo Motor, which went bankrupt in 2000 (Daewoo Group founder Kim Woo Choong went to prison on fraud and embezzlement charges.) Bozza said he believes Celltrion’s revenues are massively overstated.
The press department for Celltrion didn’t immediately reply to an email seeking comment.
Jillian McIntyre of 221B Capital — named for Sherlock Holmes’ Baker Street address — said she is short communications satellite services provider Intelstat, calling it “The next SunEdison,” a reference to the solar energy company that recently emerged from bankruptcy. McIntyre previously worked for Christopher Hohn's TCI Fund Management. A spokesperson for Intelstat declined to comment.
A short-selling conference wouldn't be complete without a presentation about Tesla. Mark Spiegel of Stanphyl Capital Partners delivered a presentation called “Tesla is STILL a Zero," a reference to his Nov 2016 presentation called “Tesla is a Zero” at a Robin Hood investing conference.
“After last night's call, it almost seems redundant to talk about Tesla,” said Spiegel, referencing the electric carmaker's first-quarter earnings call on May 2. During the call, Tesla CEO Elon Musk dismissed analysts' questions about cash flows and Model 3 demand as “so dry” and “not cool,” sending the stock plummeting in Thursday trading. It was down about 5.6 percent, to around $284, near Thursday's close.
A spokesperson for Tesla didn’t immediately reply to an email seeking comment.
Tesla's meteoric rise since Siegel's Robin Hood presentation — he said the stock was trading in the $180s at the time — perfectly illustrates the perils of short-selling. Those who still want to short, but with a more cautious approach, got advice from an unlikely source: activist short-seller Carson Block, who rose to fame calling Sino Forest a fraud (the company went bankrupt in 2012) and who says he has faced death threats for his work.
Block suggested an arbitrage strategy involving going long a short target's bonds and using the cash flows to buy long-dated, out-of-the-money put options.
“In addition to providing a good hedge to a long book, in a year when the market rips, we'll get lucky on a few of these options,” he said. “In a year when the market tanks, this positions us to have downside convexity to the market tanking.”
For those who are not confident the cycle is about to turn, there's always the idea presented by Chris Irons, founder of Quoth the Raven Research and senior business writer for research firm GeoInvesting. Irons' presentation, entitled “Short the Whole F------ Thing,” suggested a long position in gold as a way to hedge a vastly over-leveraged global financial system.
“Driving policy based on spending and consumption instead of saving and under-consumption — not saving money, racking up debt, and having to raise the debt ceiling — doesn't really make any sense to me,” said Irons, in a profanity-laden presentation that drew frequent laughs from the crowd. “The government doesn't always know what it's doing, so if you don't want to put your blind faith in the government, having extra exposure to gold is a way to short the system and offer a little extra protection.”
Irons presented numerous examples of people with power in the financial system making horribly wrong calls, including then-Federal Reserve chairman Ben Bernanke, who in 2007 declared the subprime crisis was contained. He also cited several Wall Street analysts who upgraded Enron “four minutes before it went bankrupt.”
Irons, who pointed out that central banks are stockpiling gold, suggested that investors shouldn't have gold dominating their portfolios, “just maybe a little bit more than usual.”
As for how to take a long gold position, Irons rated the various options, from owning a gold ETF to outright physical gold, on what he called “my Alex Jones meter,” referring to the infamous conspiracy theorist and “Info Wars” founder. Owning gold as a physical asset is the most “tinfoil hat-crazy” option. And how does he own it? “I'm full on Alex Jones at this point,” Irons said.