As the stock market has surged to records — unbowed by recession, pandemic or warnings of a dangerous bubble — activity has dwindled to a nearly two-decade low for the traders known as short sellers, who make their money betting stocks will fall.
This saddens nearly no one. From small-fry investors to members of Congress, critics paint short sellers as merchants of pain. People around the world celebrated early this year when GameStop’s stock suddenly hurtled higher, causing billions of dollars in losses for short sellers. Many called it a long-due comeuppance.
But academics and short sellers themselves say they provide an important service suited for just this moment: pushing back against stock prices that may be rising too high, too fast. Despite concerns about the pace of the economic recovery and high inflation, the S&P 500 has set 65 all-time highs so far this year, with the latest coming on Monday.
Some critics say stocks look overly expensive, with some broad measures of value close to historical highs. Fewer short sellers in the market means there’s less selling pressure tugging downward on those prices. It can also mean fewer investors looking for overvalued stocks or ferreting out fraud.
“This is the thing that short sellers do, they lean against the wind,” said Charles Jones, a finance professor at Columbia University’s business school, who has researched short selling. “If you have short sellers who are not afraid to do that, you will not get prices that are too high or too low, which is what I think we want when we are allocating capital.”
Jones’ research of Wall Street in the late 1920s and early 1930s, for example, looked at a group of stocks that were particularly expensive to short, which discouraged short sellers from targeting them. They went on to have returns that were 1 per cent to 2 per cent lower per month than other stocks of similar size, suggesting that they had been overvalued.
WATCH | How short selling works
How short selling works
2 years ago
An animated explanation of how people make money from stocks losing value 0:46
When investors short a stock, they borrow the shares from someone else and sell them. Later, if the stock falls as the short seller expects, they can buy the shares, return them to the lender and pocket the difference in price.
So it’s no surprise that short sellers regularly get blamed for driving stock prices artificially low. During the 2008 financial crisis, a few days after the collapse of Lehman Brothers, U.S. regulators temporarily banned the shorting of financial stocks, fearing short sellers would undermine already weak trust in them and trigger a run on the system.
Nearly four years later, though, a study by a New York Fed economist and professors at Notre Dame suggested the ban did little to slow the decline in bank stocks, which fell anyway. The restrictions also gummed up trading for bank stocks, raising trading costs in the stock and options markets by more than an estimated $1 billion.
Shorting activity has been trending down since July 2008, a few months before that temporary ban. Then, it was nearly twice the force it is now, accounting for 2.61 per cent of all the shares in S&P 500 companies. Just 1.35 per cent of all the shares in S&P 500 companies were sold short in August, according to data compiled by FactSet.
The stock market’s mostly relentless rise since 2009 has prompted investors to pull dollars out of short-selling funds, helping to thin the ranks of the contrarians. Why go short when everything is rising?
“You have to look at what is causing the market to reach all-time highs,” said Carson Block, founder of Muddy Waters Research and one of the industry’s best-known short-sellers. “It is most definitely not that humanity is at our all-time greatest state.”
The saga of GameStop drew attention to short selling when millions of retail investors worked together to drive up the price of the company’s shares, in order to punish Wall Street investors who had bet against them (Dado Ruvic/Reuters)
Instead, he said a big reason is the ultralow interest rates set by the Federal Reserve to resuscitate the economy. Those low rates have sent waves of cash into the stock market, and critics say they’re pushing up prices indiscriminately and allowing weak companies to hold on.
Block specializes in rooting out fraud, and one of his earliest victories came with Sino-Forest, a company that was once Canada’s most valuable publicly traded forestry business. Block released a report in 2011 calling the company a “multi-billion dollar ponzi scheme” that was overstating how much it had in timber investments.
Its shares quickly fell as the report reverberated, and the company pushed back on the accusations. But it ultimately collapsed in what an Ontario securities regulator called “one of the largest corporate frauds in Canadian history.”
Short sellers have also been credited with helping to publicize financial practices at Enron and Tyco International, two of the biggest U.S. corporate fraud cases, in the early 2000s.
Of course, short sellers also get it wrong sometimes. Tesla was a favorite target for years, with short sellers betting founder Elon Musk’s visions for the electric-vehicle company were overly grandiose. Tesla recently posted a record quarterly profit and is one of the few companies in the world worth $1 trillion.
Not all short investors are betting only on stocks to fall.
Consider Marc Regenbaum, a portfolio manager at the Neuberger Berman Long Short fund. Most of the mutual fund’s investments do well when stock prices rise, but it reserves some of its holdings for shorter-term short sales.
Regenbaum acknowledges the frustration that comes after identifying seemingly good candidates to short and then watching their prices climb. A rising tide has sent nearly 90 per cent of S&P 500 stocks higher over the last year. But he said he still believes shorting some stocks can help manage the fund’s risk and offer steadier returns during turbulent markets.
“Everyone thinks of shorting as this element of speculation and making absolute returns, as opposed to hedging things out and offering a smoother ride for the underlying investors,” he said.
Doug Ramsey, chief investment officer of the Leuthold Group, says the average stock in the market recently looked more expensive than it did at the height of the 2000 dot-com bubble, based on several measures. The Leuthold Grizzly Short fund has roughly halved in size in three years, down to $51.3 million US in assets at the end of June.
Ramsey said the stock performance between good companies and bad ones could separate once again, offering better rewards for short sellers, after the Federal Reserve pulls back on its support for markets.
Short sellers need the help. The average stock mutual fund that reserves some of its portfolio for shorting has returned an annualized 7.2 per cent over the last five years, less than half the return of an S&P 500 fund, according to Morningstar. The year-to-year difference can be even more stark. Consider 2013, when the S&P 500 returned 32.4 per cent. Hedge funds with a bias for shorting lost 18.6 per cent that year, according to research firm HFR.
Block, the activist short seller at Muddy Waters who sometimes spars with his critics and haters on Twitter, said he’s not anticipating quitting. At least, not as long as he thinks he sees the economy and markets being mismanaged by people he considers fraudsters.
“I think this is the right thing for me,” he said. “It’s a way to try to monetize my constant state of alarm, my constant state of dissatisfaction at the dystopia unfolding all around us.”
TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.
The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.
“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.
The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.
But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.
Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.
“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.
“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”
Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.
The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.
In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.
Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.
The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.
The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.
Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.
Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.
It will also re-evaluate its design ranks.
Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.
Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.
This report by The Canadian Press was first published Sept. 13, 2024.
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
