Short-Sellers Set-Up Shop As Sentiment Starts To Shift

Tyler Durden's picture

"It's dangerous to be short still, but we might be building toward a moment where the market becomes quite vulnerable," warns Bill Fleckenstein who is finishing up the documentation on a new short fund he is about to start marketing. With the slowing growth of the Fed balance sheet, over 70% of the S&P's gains since 2011 from hope-driven multiple-expansion alone, bond and equity market sentiment at extremes, and (as Goldman warned) valuations anything cheap; it is hardly a surprise that, as Reuters reports, after years of hiding under their desks, short sellers are re-emerging - slowly. Whether outright short or long/short funds, the market-share of this corner of the business bottomed at approximately 25% in 2013, but in the last weeks, several S&P 500 companies have seen large increases in shares borrowed for short bets; and the "tide might be turning."


Sentiment extremes in stocks...

and bonds...




Fed balance sheet growth slowing and dislocated from the equity exuberance...


Multiple-expansion the only hope left...


And Goldman dashing those hopes...

S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x. We explore valuation using various approaches. We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history.




The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7)
nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings

Is it any surprise that the Short-sellers are setting-up shop once again as greed dominates fear... (via Reuters)

After years of hiding under their desks, short sellers are re-emerging - slowly.




Buying the most heavily shorted stocks was a much better bet than the S&P 500

Jim Chanos, president and founder of Kynikos Associates and one of the most prominent short sellers, said the market is primed for people like him and as a result he has gone out to raise capital.


"Now I think is not a bad time to be raising capital for what we do. When we got a rough going in the mid-90s, that was exactly the time to raise capital," Chanos said, adding it was better to do this when critics viewed him as "like the village idiot and not an evil genius."


Already, there are signs 2014 may be different.




"We're about done with the document and I'll be marketing it officially very shortly, like within a week," he said.


That's not to say he is brimming with confidence - not yet.


"It's dangerous to be short still, but we might be building toward a moment - whether it's two weeks from now or 10 months from now I don't know, where the market becomes quite vulnerable," said Fleckenstein.




"There's growing interest on (shorting) a number of stocks, concentrated in areas that did well last year," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.




"Biotech is in full bubble mode, meaning companies that have no prospects of a drug continue to grind higher," said John Hempton, chief investment officer and founder of Bronte Capital, a Sydney, Australia-based asset management firm that often takes short positions.


Short sellers say they believe bulls may be getting too confident. The S&P 500's forward price-to-earnings ratio is at its highest since mid-2007.




"Short selling over the last two years has been a hedge against profits," said Douglas Kass of hedge fund Seabreeze Partners Management Inc. But he said recent disappointments from companies as varied as Ford, Intel, and Elizabeth Arden are signs that the "tide might be turning."


For shorts, it appears to be the opposite of "blood in the streets" time...


Charts: Bloomberg, Goldman Sachs, and @Not_Jim_Cramer

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LawsofPhysics's picture

All this technical analysis, when there is no market to begin with. 

OC Sure's picture

Are not the Fed, price controls, and all the other forms of government intervention or market manipulations represented by the prices involved in the analysis?

LawsofPhysics's picture

Do you know what the Fed is going to do and what all the other forms of government intervention are or are going to be?  Please do tell...

OC Sure's picture

I do not. Data analysis does not claim clairvoyance. It is quite a sharp tool to enable one to see the top and see the bottom but as traders, speculators, or short term investors we don't need the be smart enough to time the top or the bottom. We just need to be smart enough to sink our teeth into the journey between the two.

With regards to a market, I mean that there is indeed a market. What I think you mean to say is that there is no free market and that you are juxtoposing a free market against a controlled market. I'd rather look at it as one entire market regardless of the level of controls or freedoms of which all the transactions, processes, and mechanations are represented in the price. (Viewed another way, you could say that the entire market is free but one very powerful group of participants (governments) have cornered the market on interest rates.)


Headbanger's picture

Expect to see many more market gurus piling on the bearish band-wagon soon now that the first taper has begun, the worsening unemployment, housing market, channel stuffing, wars, bitter cold weather, and especially because Obozo has lost all his political power from Obamacare, Syria....

There's nothing moar the Fed can do now that won't doom the US dollar and they know it.  And if the US dollar fails, war will break out all over the world cause we can't fund it!  China, Iran, North Korea, Syria, Russia, all know it too.  The Federal Government will basically cease to exist leaving the States as our only governments... again.


CarrierWave's picture

When all you have is a hammer, everything looks like a nail.

This market is going higher. It's been going higher for 2+ years thanks to the FED and with the FED still committed, it will go higher still.


More_sellers_than_buyers's picture

I think technical analysis as a tool became useless bcak in the 80's when the futures market got tied to the equities market.  

Racer's picture

Oh, they have found more buyers to BTFATH.... and now they will be forced buyers

JustObserving's picture

The markets are as fake as a three dollar bill with Yellen's picture on it.  Never short fake, manipulated markets unless you are especially suicidal.

Besides, the NSA is monitoring all your trades.  Why do you hate America so much that you have to short? 

gaoptimize's picture

What I logged on to say after reading this.

Dr. Engali's picture

" warns Bill Fleckenstein who is finishing up the documentation on a new short fund he is about to start marketing. "

Key words right there. Bill has something to sell. Like I said before. With the banks turning negative and telling's time to BTFD. There will be no currency allowed to be made shorting this "market".

disabledvet's picture

The last time metals prices collapsed the Government stepped in a big way. This time there is no "Uncle Put"....more like "Uncle Punt." The dollar is still weak against the euro and the Pound...but interest rates while incredibly low by historical standards are quite high relative to Europe and Great Britain. Those things look set to reverse to me. I think Mercedes Benz summed it up nicely when they said "cheap luxury." That was just a couple of days ago.

garypaul's picture

Well, Bill closed his short fund over five years ago. He hasn't opened it again until now. Methinks that means something.

Tinky's picture

"with the slowing growth of the Fed balance sheet..."

Best of luck betting on that trend, Bill.

garypaul's picture

I think you're misquoting. Bill doesn't actually say that in the article.

Rainman's picture

Fleck was early and correct on both the NASDAQ and housing bubbles. The only question for 2014 is how early he might be again. Other than that he is a spot on contrarion ready for a hat trick.

garypaul's picture

I guess that's how a short-seller has to do it. Start early to get everything ready into position and then watch it play out. So based on that, I would say we're still not at the shorting point yet.

JustObserving's picture

Jesus, if the NSA can solve all the technical problems on spying on everybody in this world all the time, how difficult is it to manipulate a few markets with fast computers and infinite money?

If you really think that you can short and make money in fake, manipulated markets that are essential to America's power and control of this world, your IQ may be approaching your dick size.  In meters. And so will your bank account.

Winston Churchill's picture

Never use your dick as a yardstick.

It hurts folding it multiple times.

JustObserving's picture

Looks like you speak from personal experience.  Your middle name is not Don Juan or Rasputin?

ABG LINE's picture

In others words, BUY!

GrinandBearit's picture

This will push the market up even more when new shorts get squeezed.  It will collapse eventually, but it's futile trying to top-tick it.

If I was ever to try and guess a top in the SPX, I'd guess 1929.  :o)

evernewecon's picture







I've always been in the let the banks

suck up more of their own losses and

incentivize investing in credit by 

not just giving those banks a private

free credit line.


The following to infinity is an

economy benchmarked to no time value

on money to infinity, until they 

change over.



The Fed's hoping trickle down

will suffice, that people will 

build an economy despite its being

centric to TBTF.



I personally wouldn't want to be 

the lender for any length of time

even after rates should tick up 



We're locked out of the cheap 

borrowing game because of the 

wide net interest margin.


Otherwise the logically larger

demand for cheap credit would

self-correct the system just as

those who SOLD the banks' bubble

could've/should've ended the crisis

long ago.


Those who put down 5/10% should have/

should've had non-recourse, and the

banks should have skin in the game.


Mod's/Loss Sharing have been essentially

holding borrowers' feet to the fire,

those who SOLD the bubble facing 

a deer in the headlights policy of

hand it over.


Those who did sell and who haven't bought

into the new artificial bubble, and I'm

in the camp that thinks even that much

is illusory, are simply spending less,

where safe money's concerned, and 

waiting out the folly.


The more fundamental crime against

those who legitimately SOLD the bubble

created by the banks was the theft of

their "put up or shut up'ability."



The bankers may have attended 

Wharton, but they preferred class

in Atlantic City.


This is perhaps fastest understood

simply by watching "A Big Hand For

The Little Lady."


The whole thing's about self-dealing 

a self-made bubble to sell and an 

adversity to buy, and it's essentially

thoroughly petty in its conception.


Anyone so positioned and allow to do so

can sell credit to produce widgets to

one's own competitors in a field 

dominated by oneself, only to

flood the widget market, and then 

call the loans.


Disclosure/information above board's

the main thing, and again, 

those who put down 5/10% should have/

should've had non-recourse, and the

banks should have skin in the game.






Sudden Debt's picture

between 2 weeks and 10 months....

and a "could be".....


garypaul's picture

WTF? Did you want a date and time? What's your great predictive contribution?

Bunga Bunga's picture

Just another short smashing, Mrs. Y's first test.

MeelionDollerBogus's picture

short-sellers ready to get smashed?
markets will go up.
When I see margined longs enter like nuts THAT is when I would expect a slam down to happen.

SillySalesmanQuestion's picture

What is a "short"?  Can someone refresh my memory...I've forgotten during all of the Bernank's QE.

disabledvet's picture

That's when the Government steps in and determines it will create economic value here.

Rising Sun's picture

Hey Yellen!!!!!


Get those printers working faster you fuckng cunt!!!!!

Save_America1st's picture

sufferin' succatash!

bdub2's picture

Everything in existence, up to and including the end of humanity itself, is simply another cog in a healthy wall of worry. 

The question, "Is this information bullish or bearish" has become obsolete.

Stawks, have become, self-aware. 


El Hosel's picture


"over 70% of the S&P's gains since 2011 from hope-driven multiple-expansion"

"Nobody will see this one coming", too... Unless their eyes are open.

GroovyChick's picture

I haven't even read this article. I give it a +1 for the alliteration in the title.