U.S. stocks slide allows short sellers to smile again

Wed Oct 15, 2014 1:03am EDT
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By Svea Herbst-Bayliss

BOSTON (Reuters) - The stock market's long-suffering short sellers finally have something to smile about.

    Investors who make a living betting that stock prices will fall are in a position to profit handsomely as the U.S. equity market sinks, with its biggest weekly plunge in more than two years last week and continuing to decline so far this week.

    After lean years in which short-biased funds tracked by eVestment have posted double-digit losses every year since 2008, some were able to post among the investment industry's best returns in September and may well have done even better in the first two weeks of October.

    "Short-selling is the worst way to make money but recently I've had a change of heart and I think there are enough valuation obscenities to create an opportunity," said prominent bear William Fleckenstein, who shuttered his short-only fund in 2009, but continues to invest money through another portfolio. "It felt like putting on an old, comfortable leather jacket."

    The short funds - who borrow shares and then sell them in hope of buying them back at a lower price - are hopeful that the bull market that has lasted more than 2,000 days, and has not experienced a 10 percent correction in three years, may be coming to an end.

    And that's potentially bad news for names that shorts have had in their crosshairs for ages - the likes of electric car company Tesla Motors Inc (TSLA.O: Quote) or online video company Netflix (NFLX.O: Quote) - stocks some investors see as overvalued.

    Equity markets now look vulnerable, thanks to the winding back of U.S. Federal Reserve easy money policies, concerns about weak global economic growth, a plunge in the oil price, and fears about the spread of the Ebola virus.

    Fleckenstein, who along with other notable short sellers, such as Jim Chanos, Doug Kass, and David Tice, built a reputation for successfully betting against companies that crumbled, said he put on aggressive short positions recently for the first time in five years.   Continued...

Traders work on the floor after ringing the opening bell at the New York Stock Exchange, October 14, 2014. REUTERS/Eduardo Munoz