People who hate short-sellers are finally getting some satisfaction. As stock prices have soared, short sellers have taken a beating.
"We're getting run over," says one. Says another: "It's brutal."
Some of the most popular issues among the short sellers -- McDonnell Douglas, Wells Fargo, and Marriott Corp. -- have staged strong recoveries, though several retrenched some yesterday.
Driving up many of the stocks was the forced covering, or purchasing, of shares by those who received margin calls.
Short sellers borrow shares, then immediately sell them in hopes of purchasing them back later at a lower price for a profit. When they initiate that position, they open a margin account, in which they put up cash, as collateral, equal to half the market value of the stock they borrow and sell. Rising stock prices increase the amount of money they must have in that margin account. If they're already margined to the limit, they may have to start buying the stocks they're short to close their positions. That, in turn, can drive prices even higher.
There's no Dow Jones index to show how bad the bloodbath is. About the only measure is word from Palo Alto, Calif.-based Feshbach Bros., the country's largest short selling fund. Joe Feshbach will only say that his firm's decline has reached the "double digits" since the first of the year. The Dow, meanwhile, is up about 6 percent.
There were even rumors that Feshbach was in financial trouble; he says that they're not true. "This is a major cycle compressed into a few weeks," he quips.
Some investors actually specialize in investing in stocks that are heavily shorted, in hopes of a "short squeeze," such as the one now occurring.
One broker told me that when stock prices first started rising one of his clients called him and said, "Tell me the Feshbach's five biggest positions." Another marvels at how one of his most conservative clients, who usually buys solid blue chips, called him seeking information on International Rectifier. When the broker asked why he was interested, the client responded: "Because it has a big short interest."
The shorts I contacted say that they're using the higher prices as an opportunity to short more stock, since the fundamentals that caused them to short the stock in the first place haven't changed.
But others think the party might be over for those who sold stock they didn't own, and that the current market could drive some short-sellers out of business.
"It was free money for a year," says one savvy trader, whose instincts are often right, and who often shorts stocks. He covered his shorts two weeks ago when the rally "felt" different. "We're in the midst of an upside blow-off," he says. "Who knows how long it will last?"
STAMPEDE: The current rally will be a real test for technical indicators -- the ones that measure historical economic and market activity -- since many analysts have cited that as a reason for turning wildly bullish in recent days.
One of the most important predictors for a bull market is when there is a 10-day period in which cumulative stock market advances are more than twice all of the declines during that period.
"It's an indicator that tells you there's a real upside explosion," says Bill Berg, director of research for Paulson Investment Co. in Portland, Ore. "It's particularly powerful when it's combined with easing monetary conditions. When you get those two moves happening together" -- which has been the case for the past two days -- "It's usually the beginning of a strong and sustained bull market, and it happens very seldom." Including the recent action, it has happened only five times in the past two decades, each before a major run-up. And each time, the market has been higher three, 12 and 18 months later.