Tech stocks drove off the cliff in 2000. Real estate went poof in 2007. Financial stocks melted down in 2008. So what’s the next bubble to burst? Short selling.
As we look back on three major market busts in a single decade, we have begun to idolize the shorts. Michael Lewis’ book, “The Big Short,” does exactly that. The New York Times just did so as well, lauding a shorts fund manager named Hugh Hendry, who says he wishes he could “short Obama.”
Practically everyone involved in capital markets now admires David Einhorn, who, in early 2008, warned that Lehman Brothers was dangerously leveraged. He was excoriated for saying so, and got the last laugh when his short-sales of the firm became lucrative.
Because shorts of the recent past look smart – and some became wealthy — it’s suddenly trendy to bet on decline. Investors now jumping into short selling — gambling that worrisome trends will continue — are making a move they should have made several years ago. This is exactly how bubbles form! Lots of people, recall, jumped into high-tech Internet stocks a couple years later than they should have, gambling on the notion that positive NASDAQ trends would continue.
According to figures compiled for this column by Lipper senior analyst Tom Roseen, from June to September of 2008, as the Dow and S&P were spiraling downward, a net of $10.7 billion flowed out of dedicated short bias funds. With a big fall in progress on Wall Street, that was the time to take profits on short positions. Since then, Roseen finds, a net of $26.9 billion has flowed into short funds.