Ackman’s short not so sweet

Proinsias O’Mahony's view of the markets

Short selling can be a dangerous game, as hedge fund giant Bill Ackman (above) is discovering.

Last December, Ackman – a seemingly unpopular man on Wall Street – announced a mam- moth $1 billion bet against multilevel marketing firm Herbalife.

However, such a move can be risky, as others can bet against you and drive the stock higher, creating a short squeeze.

Another hedge fund billion- aire, Daniel Loeb, defended Herbalife and took a large long position. Loeb was followed by Carl Icahn. Last week, George Soros was reported to have taken a large stake. Another activist, Bob Chapman, is also betting on Herbalife.


Herbalife is up 50 per cent since June, and has more than doubled in 2013. Ackman’s move may well be correct, but timing is everything with short bets, as losses are potentially unlimited.

Levered investors cautioned
US investors have "rarely been more levered than they are today", says Deutsche Bank analyst Daniel Bergin, increasing the odds of a mass pullout from stocks.

US margin debt – when traders borrow money from brokerages to buy stock – hit an all-time high of $384 billion in April, before a slight dip. At the same time, total investor net worth is at its lowest since 2000, meaning investors are increasingly levered. When markets drop, levered investors must inject more cash or sell to pay off their loans, he cautions, “sometimes leading to mass pullouts or crashes”.

The margin spike reminds Bergin of 2000 and 2007, even if the figures do not necessarily mean a market peak is imminent.

But the "underlying basis on which prices trade is most fragile", he says.

Bar set low on earnings
US earnings season is well under way and results appear impressive – 65 per cent of companies are beating estimates, the highest figure in ten quarters. Revenue beats – at 56 per cent – are lower, but that figure is better than three of the last four quarters.

Some caveats, however.

The bar had been set low, with analysts slashing estimates. Companies are beating estimates by just 3.2 per cent – the second-lowest reading in four years, and less than half the average since 2009. Only four of 10 sectors are beating estimates.

Finally, revenues are just 1.2 per cent higher than last year, and guidance is lower.

Still, while the overall market has enjoyed decent gains, investors are paying attention. The previous quarter saw almost all stocks rise, even if they missed estimates. Now, investors are discriminating – companies that beat estimates are outperforming the index by 2.3 per cent in the days after reporting, while those that disappoint are underperforming by 5 per cent.

Warning against value of Facebook stock
Facebook last week reclaimed its $38 IPO price following positive earnings – more than double last year's $17.58 low. However, finance professor and renowned valuation expert Aswath Damodaran – a Facebook shareholder – reckons it's run too far, too fast.

Damodaran warned against Facebook before its IPO, calculating the stock was worth just $25. By August 2012, Facebook had more than halved. On his blog, Damoda- ran argued that markets had overreacted, that Facebook’s fundamentals hadn’t changed – his models then indicated a valuation of $24. He bought at $18, on the very day Facebook made its low.

Now markets are overreacting on the upside, says Damodaran. His fair value estimation – $27.65 – has changed little, despite the huge price swings, and he plans to sell.

Damodaran is a value investor, not a trader, but says “buy and hold” makes “little sense with growth companies, where markets often overshoot and undershoot”.

Despite selling, Damodaran will still follow the stock, which may eventually fall back below fair value. “Bipolar markets are sometimes an intrinsic value investor’s best friend.”

Numbers keep adding up SAC's Cohen
Steve Cohen of SAC Capital is being charged with "failing to supervise" two executives and "prevent them from insider trading under his watch".
Some numbers:
$9 billion – Cohen's net worth.
30 – The percentage annual returns at SAC over the last two decades.
3 and 50 – The annual management fee and percentage of profits charged by SAC.
14 – The number of times the word "edge" is used in the indictment of Cohen.
6 – The number of SAC former employees who have already pleaded guilty to charges.
$616 million – How much SAC paid to settle charges of insider trading (mainly in Elan) in March.
$215 million – Cohen's splurge following the Elan settlement ($155 million on a Picasso painting, $60 million on a Hamptons mansion).