{"id":32308,"date":"2015-09-24T09:55:50","date_gmt":"2015-09-24T13:55:50","guid":{"rendered":"http:\/\/www.technologyinvestor.com\/?p=32308"},"modified":"2015-09-24T09:55:50","modified_gmt":"2015-09-24T13:55:50","slug":"a-different-mindset-shorting","status":"publish","type":"post","link":"https:\/\/www.technologyinvestor.com\/?p=32308","title":{"rendered":"A different mindset — shorting"},"content":{"rendered":"

Have we got it all wrong?<\/p>\n

We respond to a squirrelly market by sitting pat — tough it out. Maybe sell a little and raise more cash. We’re tentative.<\/p>\n

But to turn our head from actively bullish to actively bearish seems traitorous, out of synch with all what we’ve been taught about investing.<\/p>\n

Yet, the world has turned.<\/p>\n

The first inkling was in commodities, minerals, and oil. They plummeted. That we’ve seen.<\/p>\n

Then we’ve read about emerging countries — Brazil, Russia, and others in trouble because of drastically falling commodity exports.<\/p>\n

Then we hear China slowing. I now read they’ve now become an exporter of steel, diesel, etc. — stuff they used to import in spades to keep their burgeoning economy burgeoning.<\/p>\n

We now hear talk that the companies supplying these industries\u00a0 are destined for serious financial problems. Heck BHP can’t be as profitable if the price of the iron ore it ships from Australia to China drops in price by half. Ditto for oil.<\/p>\n

An inkling: This morning Caterpillar says it’s cutting 10,000 jobs and lowering its 2016 sales by 5%, as “the maker of construction and mining equipment continues to feel the impact from weakness in the energy and mining markets.”<\/p>\n

We try to pick stocks in a market and go long — virtually impossible today. Nothing is predictable.<\/p>\n

Yet stocks that go down are more likely to keep going down than stocks which go up are more likely to keep going up. (Read that again.)<\/p>\n

In today’s world, many companies are in the wrong place. We can see their agony — in declining commodity prices and weakening emerging markets.<\/p>\n

Shorts are predictable and each have specific, explainable reasons for going down.<\/p>\n

I’m short BHP, KMI, XOM, WYNN, GS and CAT. All these shorts were\u00a0 profitable, though WYNN has just turned up a little this morning.<\/p>\n

It’s time to hunt for more shorts. This market is not going to recover any time soon.<\/p>\n

I have been neglectful. I have been fearful of bigger bets among more stocks.<\/p>\n

I had money in Australia. I got out at $1.04. But I didn’t think (at that time) of shorting the Australian dollar. It was weakening. I knew it was weakening. And I knew why — weaker mineral exports. I didn’t flip my brain from protecting my money (sort of like going to cash) to going aggressively to shorting the Aussie dollar. It’s now 70 cents.<\/p>\n

Shorts are getting more play in the financial press. Here’s today’s New York Times story on a big short bet against China’s currency:<\/p>\n

A Big Bet That China’s Currency Will Devalue Further<\/p>\n

When Mark L. Hart III, a hedge fund investor based in Texas, makes an investment bet, he does it in the style of his home state: big time.<\/p>\n

Since 2007, his winners have included high-risk, high-return wagers that the United States housing market would collapse and that Greece would go bankrupt.<\/p>\n

But Mr. Hart’s most audacious gamble to date may well be the one he is making on China. He is betting that the mini-devaluation of China’s currency last month was a mere appetizer to a 50 percent currency implosion that he predicts will come when foreign investors pull their money out of China.<\/p>\n

Such an extreme drop in China’s currency, the renminbi, would propel a broader rout in emerging-market currencies – from South Korea to Turkey to Brazil – and result in a sustained global slump as China’s borrowing binge grinds to a halt.<\/p>\n

“Extreme credit growth usually leads to a credit bust,” Mr. Hart said in an interview on Real Vision TV – a new media venture in which sophisticated investors and financial experts offer their insights to fellow practitioners in a Charlie Rose-style format. In the video, which was produced a year ago – well before the recent currency devaluation – Mr. Hart explained how investors pulling their money out of China would lead to a collapse of the renminbi. “It is the story of 1997 and the Asian currency crisis,” he warned.<\/p>\n

A growing number of investors like Mr. Hart have concluded that a dollar that strengthens with the United States economy will have a devastating effect not only on China but on emerging markets in general. Their view is that the trillions of dollars that chased risky investment opportunities in China, Brazil, Turkey and other countries are swiftly exiting and that the pace will pick up when the Federal Reserve eventually raises interest rates.<\/p>\n

The result, they say, will be plunging currencies, corporate defaults and a sustained growth slowdown over the next few years. This week, emerging-market currencies continued their decline, led by Brazil, Turkey, Mexico and South Africa.<\/p>\n

John H. Burbank III, a veteran emerging-market investor at Passport Capital, a $4 billion hedge fund in San Francisco, has earned stellar returns this year by betting on weak commodities and imploding emerging-market stock markets and currencies.<\/p>\n

In a report by HSBC on top-performing hedge fund managers, a special opportunities fund managed by Mr. Burbank increased 29 percent through July of this year. Through August, his Global Strategy Fund was up 14.5 percent.<\/p>\n

“Emerging markets are being liquidated,” Mr. Burbank said in a separate Real Vision interview. This will continue, he argued, as investors keep taking their dollars out of these economies.<\/p>\n

At the root of this investment thesis is the belief that China’s 3 percent currency devaluation last month was not a one-time event, as many analysts have suggested.<\/p>\n

Instead, these investors think that after a borrowing and investing frenzy – much of which was financed by dollar-based lenders – China is experiencing a run on the bank similar to what happened to Asian countries in 1997 when their semi-pegged currencies collapsed.<\/p>\n

In the first quarter of this year, $109 billion left Chinese banks for overseas institutions, according to the Bank for International Settlements, a clearinghouse for global central banks.<\/p>\n

And the investors further think that the country’s $3.5 trillion in foreign exchange reserves – down from $4 trillion a year ago – will not be enough to prevent a large-scale currency rout.<\/p>\n

According to Tim Lee of Pi Economics, a research firm based in Greenwich, Conn., emerging-market borrowers have accumulated $3 trillion in cheap dollar-based loans in the last decade of extra-loose central bank policies.<\/p>\n

China has been at the forefront of this so-called carry trade, in which corporations and countries tap dollar-based lenders and then invest the proceeds in higher-yielding assets denominated in local currencies, such as real estate, commodities and large-scale investments.<\/p>\n

As long as interest rates in the United States remain low and emerging-market currencies remain strong, these trades have been highly profitable. But as rates in the United States increase and the values of local currencies plunge, these profits evaporate, causing investors to flee – as they have in countries like Turkey, Brazil and South Africa.<\/p>\n

Mr. Hart calculates that the size of the Chinese carry trade is around $2 trillion, by far the highest figure for any emerging-market borrower. And his view from the beginning has been that the dollars that have flowed into China – financing an investment rate of 50 percent of the overall economy – must eventually flow out again.<\/p>\n

“It is the greatest carry trade in modern history,” Mr. Hart said. “There is nothing that is even close.”<\/p>\n

To calculate China’s ability to prevent a run on the renminbi, Mr. Hart has focused on an obscure financial measure that is attracting increased attention as analysts scramble to gauge how vulnerable emerging-market currencies have become.<\/p>\n

The ratio examines a country’s stash of dollar reserves – its primary asset pile – relative to all the short-term money it must pay back on demand, such as deposits socked away in banks.<\/p>\n

In the event of a currency crisis, these funds would flee. So economies with a large proportion of cash reserves compared to these broad liabilities would be in the best position to defend their currencies.<\/p>\n

According to a recent paper by economists at Prudential’s bond division, China’s foreign currency reserve ratio – in effect its net cash position available to defend against speculators – is just a bit over 20 percent, putting it in the neighborhood of countries known to be vulnerable to capital outflows, like Brazil, Turkey and South Africa.<\/p>\n

“If there is a run on the currency, everyone will want to turn their yuan into dollars,” said Jurgen Odenius, the chief economist of Prudential Fixed Income. Yuan is a shorthand reference to China’s currency. “And on that basis, China’s foreign exchange reserves do not rank among the stronger countries. There is a lot of leverage in the system.”<\/p>\n

Since the dollar began its relentless move upward about a year ago, the Turkish lira has lost 35 percent, the Brazilian real has dropped 65 percent and the South African dollar has declined 20 percent.<\/p>\n

But many analysts point to the weakness in currencies that are trade competitors with China as being a more telling sign that China’s currency will devalue further. The Japanese yen has fallen 60 percent against the dollar since 2012, and over the last year, the Korean won and the Taiwan dollar have lost more than 10 percent.<\/p>\n

As such, China’s 3 percent currency adjustment does absolutely nothing to improve its export competitiveness, said Julian Brigden of Macro Intelligence 2 Partners, an independent research firm based in Vail, Colo.<\/p>\n

Of course, having a bright idea does not guarantee it will make money. Mr. Hart, who reaped 500 percent and 200 percent returns on his mortgage and European trades, has yet to hit the jackpot on his China play even though he first put it on in 2010.<\/p>\n

It could also be that the Federal Reserve’s reluctance to increase interest rates will weaken the dollar and take the pressure off China and other emerging-market currencies.<\/p>\n

Mr. Hart, who is 43, has a different approach compared with most hedge fund managers. There is his Texas domicile, which he credits with keeping him and his team at Corriente Advisors at a safe distance from the groupthink traps found in traditional hedge fund centers in New York, London and Greenwich. (The name of his firm is taken from Corriente cattle, a longhorn breed.)<\/p>\n

A classic macro investor, he will identify a theme, raise money from wealthy individuals and institutions and then return the cash, regardless if his bet has paid off or not.<\/p>\n

So he gets paid not for sitting on a pile of assets but when the gamble pays off, at which point he takes a slice of the profit. Mr. Hart’s China bets consist mostly of buying currency derivatives that pay off if the renminbi loses value against the dollar.<\/p>\n

This June, he closed his China fund, just months before the devaluation. But he has kept his China bet on for himself and several private investors. Mr. Hart would not comment on whether he had plans to start a new China fund.<\/p>\n

In his Real Vision interview, Mr. Hart explained that since 2006, he had been putting on a series of disaster trades in the belief that the world economy would be entering a sustained phase of deflation and low growth.<\/p>\n

The United States mortgage and European bets represented the first two legs of this thesis; China was the third.<\/p>\n

“My fund would have benefited quite a bit, but my timing was off,” Mr. Hart said in an email exchange. “I believe that there is still much more downside in the yuan.”<\/p>\n

Friendly investing.<\/strong> <\/span>Your dear friend tells you XYZ is the greatest stock that ever walked the face of the earth.<\/p>\n

You buy it. Then this happens:<\/p>\n

\"SODATwoYears\"<\/a><\/p>\n

You’ll learn two things:<\/p>\n

First, your friend will forget to tell you to sell the dog. (He’s embarrassed.)<\/p>\n

Second, when you ask him what went wrong, he’ll say something insightful like “Life’s a gamble.” (That’s a real quote.)<\/p>\n

I asked for a more thoughtful response and got, “Lots of competition and also a failure to grow the business in the U.S. I don’t know why.”<\/p>\n

I came away with four lessons:<\/p>\n

1. Friends are the worst source of investment tips.<\/p>\n

2. Sometimes a great product doesn’t make it for a reason we can’t figure.<\/p>\n

3. One shouldn’t hang on, though the product is great. Maybe the management isn’t?<\/p>\n

4.\u00a0 One should kick the stock out when it’s down, say 10% — i.e. invoke our inviolate Stop Loss Rule.<\/p>\n

\u00a0Save. Save. Save. <\/strong><\/span>Companies have web sites to make you, their customer, do all<\/strong> their work. That’s fine — when their web site works. Which it doesn’t — much of the time.
\n<\/strong><\/span><\/p>\n

Two lessons:<\/p>\n

1. Do your banking, buying or airline reserving fast. Very fast. You can lose a great deal if you dilly-dally. Their site will cut you if you dilly-dally.<\/p>\n

2. If their site doesn’t work the way it should, call the company instantly, if not sooner. Get a nice operator to fix your problems and give you a better deal. Operators respond to kindness and flattery. Computers respond to nothing.<\/p>\n

Need a new job? No skills required.<\/strong> <\/span>Just a strong stomach. Saudi Arabia is advertising for eight new state executioners.<\/p>\n

\"executionar\"<\/a><\/p>\n

An advertisement for the positions, posted on the country’s civil service jobs website, states that no specific qualifications are required for the job which involves “executing a judgement of death” and performing amputations on those convicted of less serious crimes.<\/p>\n

The good news there’s been a spike in executions in recent months. Hence, lots of business. And security in your job.<\/p>\n

I don’t know if he post of executioner is a full-time job, or maybe you get paid per head? (Sorry about that. I couldn’t resist.)<\/p>\n

I don’t make this stuff up. Here’s a link. Click here.<\/strong><\/a><\/p>\n

I’m Jewish. They won’t let me into Saudi Arabia. I’ll never be able to check this story out, or I guess, apply for the job.<\/p>\n

The Pope visits the U.S. And Matt Taibbi (of Rolling Stone) writes a scathing piece:<\/strong><\/span><\/p>\n

Why Do We Care Whose Side the Pope Is On?<\/strong>
\nThe unseemly left-right war over the pope’s affections<\/p>\n

So the pope is here. His arrival has spawned a Drake\/Meek Mill-style diss battle within the pundit class, pitting conservatives bemoaning the pope’s false prophecy against liberals swooning over his platitudinous anti-capitalism.<\/p>\n

Taibbi’s article contains these gems:<\/p>\n

I was raised Catholic. To me the Church is just a giant evil transnational corporation operating on a dreary business model, one that nurtures debilitating guilt feelings in its followers and then offers to make them go away temporarily in exchange for donations. I realize the Church does some nice things with the money it raises and that other people have a different opinion, but this is my experience.<\/p>\n

And this pope, for all his good qualities, is to me a modern version of an old religious scam. In Tsarist Russia you’d have some wizened starets show up at an aristocrat’s estate in rags and preach to the ladies of the house about the evils of wealth in exchange for wine, pastries and a few nights in a feather bed.<\/p>\n

This version is a pope arriving in America with a gazillion-member entourage to reassure young professionals in New York how right they are about climate change and income inequality. He says a lot of very vague things about the wrongs of society that everyone is sure coincide with their own opinions. George Will is right when he says Francis speaks “in the intellectual tone of a fortune cookie,” saying things like, “People occasionally forgive, but nature never does.”<\/p>\n

Meanwhile Francis chugs along as the head of one of the most socially regressive organizations on earth, doing nothing to take on the Church’s indefensible stances on things like birth control, gay rights, discrimination against women, celibacy and countless other issues. He claims the moral authority to reform global capitalism, but he’s somehow not ready to tell teenagers it’s OK to masturbate, which seems bizarre.<\/p>\n

People have such impassioned political fights over the pope because everyone wants the endorsement of the guy closest to God. But what if he’s not closer to God, and is just a guy in a funny hat? Doesn’t that make all this fuss and controversy ridiculous? It seems strange that it’s the year 2015, and we still can’t say that out loud.<\/p>\n

You can read Taibbi’s full article here.<\/strong><\/a><\/p>\n

And you thought Rolling Stone was a left-wing, pinko, New York liberal rag? Look who’s on their latest cover:<\/p>\n

\"TakingTrumpSeriously\"<\/a><\/p>\n

\"HarryNewton\"<\/a>
\nHarry Newton who is rushing to get out of town before the Pope gets into town. You should see the 10 foot metal fences surrounding that part of Central Park he’s visiting. I’ve never seen anything like it. I live opposite the park. It wasn’t easy to find a skerrick of grass for Rosie last night. Poor baby. (Rosie’s the family dog.)<\/p>\n