Big investors who make money by selling stock short have enjoyed a money-making paradise. The Wall Street Journal provided a valuable public service by investigating how they made money shorting Morgan Stanley (NYSE: MS), helping its stock plunge in mid-September.

Conceptually, what shorts did was very simple -- they shorted the stock then they bought thinly-traded Credit Default Swaps (CDSs) on the bonds of the stock they wanted to short. (The Journal quotes Erik Sirri, a Babson Finance professor now working at the SEC whose office is next to mine, on the ease of manipulating CDS premiums.) This forces up the premiums and scares investors. The short sellers, in many cases, also withdraw their considerable funds from the targets' prime brokerage accounts; when asked why, they say that the firm in question is going bankrupt.

Needless to say, these rumors get spread around trading desks. Whether or not they're true, many investors are inclined to withdraw their money first and ask questions later. (The bankruptcy of Lehman Brothers highlighted the dangers of waiting too long to get out -- in the form of frozen hedge fund accounts.) As the stock goes down, the CDS premiums rise further, which spooks more investors and creates a vicious downward cycle for the stock -- and a short seller's paradise.

Continue reading Short seller's paradise: Panic means big profits

Short seller's paradise: Panic means big profits originally appeared on BloggingStocks on Tue, 25 Nov 2008 14:55:00 EST. Please see our terms for use of feeds.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

There's a way to make money on falling stocks. It's called "going short" or short selling. But before you put in your order, you need to know exactly what you're doing and the consequences. One of them: You can lose an infinite amount of money when you short a stock. Maybe reading further is a good idea.

We've all had stocks that have dropped dramatically in a day or two or week, sometimes 50% or more. What took months or years to achieve is lost in a matter of hours. Wouldn't it be nice if you could make money that fast, or at least make money from stocks when they go down? You can if you short a stock and understand the total concept.

First, shorting a stock means you sell something you don't own. The process is simple: You put in an order to Sell Short a stock, and your broker executes the order, if the stock can be shorted. Sometimes certain stocks aren't allowed to be shorted but that's another column. Let's deal with the ones that can.

Continue reading Comfort Zone Investing: Going Short: Easy Money?

Comfort Zone Investing: Going Short: Easy Money? originally appeared on BloggingStocks on Sat, 01 Sep 2007 10:30:00 EST. Please see our terms for use of feeds.

Richard Rhodes, professional trader, money manager and editor of The Rhodes Report was one advisor who accurately forecast the recent decline and moved into short positions going into this past week.

And while he sees the potential for a near-term bounce, this week's action leads the advisor to say, "A major trading high has formed, which will lead to a -10% to -20% correction...perhaps deeper."

He explains, "If there was ever a 'bell' to signal the end of an intermediate or long-term rally; we think the decline from the S&P 500 high of 1565 to yesterday's low at 1465 suffices as such."

The constriction of credit and liquidity, he notes, has led to very poor advance/decline figures. As such, he suggests being a seller during any rallies that result fro the "month-end bullish pattern and short-term oversold condition."

Indeed, even in his Long Only Portfolio - a portfolio that as its name implies only holds long position - he now says, "We are going to a very rare, but very prudent 'no position' stance." As for his Long/Short Portfolio, he says, "We are now aggressively short."

Continue reading Trader sees 10% to 20% decline

Trader sees 10% to 20% decline originally appeared on BloggingStocks on Fri, 27 Jul 2007 11:00:00 EST. Please see our terms for use of feeds.

General Electric Co.'s (NYSE:GE) stock has had a nice run recently. It is up 10% over the last three months, outpacing the S&P. However shares in Its major rival, Siemens AG (NYSE:SI) are up 30% despite a bribery scandal that cost both its chairman and its CEO their jobs.

With the sales of its plastics unit, investors want to believe that the company will dump some of its dogs and focus on businesses that have high margins and good growth prospects. GE management continues to insist that its forays into India and China will help pump revenue in the years ahead.

The concern about GE that lingers is that it is not a company, but rather it is a collection of companies which have little to do with one another. The structure disguises the real value, or lack thereof, in each part.

On April 13, GE announced first quarter earnings. Net was up 2%, hurt in part by sub-prime mortgage issues at the company's financial services business.

Short interest in GE's share rose 6.4 million to 60 million shares between May 15 and June 15. Perhaps the market realizes that most of GE's recent gain was on rumors that the company might be broken into two or more pieces. Barring that, GE will slip back into a pattern of meeting modest earnings. But, that will be the extent of it.

GE doubters increase short interest in conglomerate originally appeared on BloggingStocks on Fri, 22 Jun 2007 10:47:00 EST. Please see our terms for use of feeds.