Are There Still Shorts to be Found?

After 2 days and 900 points down, I am still some how finding shorts. The market is moving so fast it is hard to feel safe recommending new ideas.

It is difficult to guess at a bottom.

I was speaking to one friend who thought the market would calm down after the election. I don't think that will make much difference but hopefully I will be wrong.

I saw 2 articles this week, one said the economy may not be in bad shape and another that said we were at a bottom. Taking a contrary view you would have to wonder about both.

When things are on the front page of various news papers bet the other way.

So, got to look forward to the world series. That should be fun.

Is this Market Botton?

Today brought the news that Warren Buffet had invested 5 billion dollars in Goldman Sachs. He said that the government was doing the right thing with the bail out.

Then I read that Bill Gross from PIMCO said the government was doing the right thing as well.

So I guess we are now near a market bottom.

Both men are extremely smart and understand these sorts of debacles.

Let's hope that the politicians don't spend too much time trying to figure out how to mess things up. If they do the market will collapse.

Wrong Target

As I am sure many know, the government has intervened in a large way. I haven’t seen anything this large ever. $85 billion to AIG is small compared to the $900 billion they are going to help out financial institutions with.

When the government came out and said no short selling, well that was a bit too much.

People now have the wrong reason for the market decline. It isn’t short sellers, it is bad management decisions by financial companies such as Bear Stearns and Lehman Brothers. Those companies and others ended up making large over sized bets that nothing could go wrong. Almost all of it is real estate related. And plenty has gone wrong.

We haven’t seen the end to this crisis just because someone diverted the attention off of the financial problems to people who short stocks.

You will now get artificial up moves in stocks because people will believe these problems are over.

Banning short selling may be one of the worst ideas ever, even if it is only in financial stocks banning. Forcing people to short stocks legally is another matter and I hope that part of the plan works.

I wonder how much bad real estate paper is left to write down. It has to be more then the 900 billion. That will tell us when the market decline is over.

I think most of these moves by the government are politically motivated and they may not be in the best interests of the American people. Blaming short sellers is sort of retarded.

This week was extraordinarily stressful for traders and investors and me.

The Playing Field is Constantly Changing

I started writing the below text on Tuesday and then things got more exciting, the government loaned AIG 85 billion dollars for 80% of the company.

People have lots billions and billions of dollars. The market in general is now worried about the next shoe to drop. People are not sure if Goldman Sachs or Morgan Stanly might end up getting sold or going out of business.

The landscape keeps changing and lots of companies will be extinct.

Huge leverage will not be allowed anymore. There will likely be even more government regulation and many people will suffer. Many already are and it is sad.

I remember the crash of 87 and how exciting it was to be short and make money, and then I woke up the next day worried for America. As a Country we made it through that, this will be much harder

My original beginning went:

On Sunday it was clear that Monday would be an interesting day, Bank of America was buying Merrill Lynch not Lehman and Barclays also walked away from Lehman. Lehman has filed for bankruptcy.

AIG is having liquidity problems and between Lehman and AIG the market collapsed 500 points on Monday.

It seems as though people are waiting to see what will happen with the actual financial instruments not just the stock and companies that bought them. A lot of people will be losing their jobs and it is really a sad state of affairs. This will bring more financial oversight and more regulation.

Additionally the banking troubles are not over. AIG may get bailed out but the cost to share holders has still been huge. AIG is so large the ramifications of this company going bankrupt or something like it is unknown.

So, I have been asked how the insurance and mortgage fields break-down might affect what I do in the short market.

The insurance companies are part of a larger group called financials which would include the brokerage firms, banks, saving and loans and other things.

Why invest in shorts?

You can find a more detailed but still very simple explanation here, but really basic initial reasons are:

1) It is a good way to make money

2) It is a good way to hedge your longs, similar to "hedging your bets". If you have some long and some short you make it possible to make sure you make money either way the stock goes.

Both have their risks but if you do your research you can have both shorts and longs and end up with more money in the end.

How I became a short seller

I had a very interesting route to becoming a short seller.

I have never followed tradition: from not finishing high school to playing professional poker in order to supplement my income when I first started in the market.

For example, shooting pool was a big part of my high school life. While other 16-year-old kids were out drinking and messing around, I was using a different approach. I wanted to make money. This was in the ‘60’s and playing pool for 5 or 10 dollars a game wasn’t going to lead to riches. But I did learn that being a student wasn’t really something I was cut out for.

After leaving high school, I lived in Israel for 18 months on a kibbutz. I was just 17 when I left. The kibbutz had apple and orange orchards and also turkeys. I worked in the turkey area and most days started at 5 a.m. and finished at 5 p.m. All of the people I worked with there put in long hours. It always felt good to work and this was where I learned the value of hard work and putting your time in on a project. I followed this with a trip around Europe staying in youth hostels, camping out and meeting people. I still have a friend or two that I met on that trip.

Upon returning to the States, I tried going to junior college, but again higher education wasn’t for me. I ended up working in a gum factory for $2.50 an hour. I lasted about 9 months and haven’t had a real job since.

For the next few years I tried selling various things including gold and diamond jewelry. In 1978 I met a diamond and estate dealer who put me in business in the diamond and estate jewelry trade. He is still a dear friend and one of many who gave me a good starting chance in life.

In order to supplement my income from the diamonds, I started playing poker. I started in a relatively small game playing for 100 to 200 dollars. By 1980 I had graduated to a very large game for its day. The game I played in then took $3000 to get into. It was a no limit game, so every hand all your chips were at risk. Even today it could be considered a BIG game and in 1980 it really was. Often times there was $50,000 to $100,000 on the table.

Learning about value started with diamonds, learning about people started with judging poker players. You can also learn value from understanding the value of cards in your hand. Do they have it or don’t they, can you call someone with all of your chips if that will put you out of the game?

Then there was the worry of whether you could pay the rent or feed your family. There really was only one option, which was not necessarily to win, but to survive. Basic economics applied to poker. If you didn’t have any money left, you couldn’t play. It was exhilarating and quite fun.

During that time, I made my first investment in the stock market. It was 1978. And I made my first short sale, an oil company, in 1981.

I continued playing poker until about 1984 when our business was growing so fast that I just didn’t have any time. It has been interesting to see the popularity of poker and tournament play grow over the last years. I rarely play anymore, although I enjoy watching some of the tournaments on T.V.

In 1980 I left the diamond business and started doing financial public relations for small oil and gas companies. At that time I met one of my early mentors who taught me how to read balance sheets and income statements. He showed me over and over again how to do valuations and how to understand business and their economics.

During that period oil and gas were all the rage and learning asset values was part of my training. It was simple back then: reserves plus acreage minus the debt gave you the value. It was amazing how many came up at zero.

I started managing money for a few friends in 1981 and then founded Feshbach Brothers along with my brother Matt in 1982; Falcon Research was started in 1984. The bull market of ‘91 made it particularly hard to be 100% short and we lost a few too many investors to keep going. My brothers and I trained 2 dozen short side analysts, many who are still active and successful today.

I have shorted hundreds of stocks over the years; many are no longer around. My scope has included energy, entertainment, financials, retail, restaurants, fads, frauds, dumb ideas, uneconomic ideas and companies who have missed the mark entirely.

No one I worked with in the early ‘80’s dismissed me because I hadn’t finished high school, hadn’t gone to college or business school. I was extremely lucky to have had people who taught me skills that have been useful for the past 28 years.

I was also guided by these same investors to do investigatory research and to dig into companies’ businesses. Learning about businesses from the outside instead of the companies themselves keeps you balanced. Doing the research and finding the key elements to a story is fun for me.

And finding a good short is one of those things that still gets my heart rate up.