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Tirado do Herald Tribune do fim-de-semana.

Tapping the power of negative thinking
Sharon Reier IHT


When Cassandra talks, investors should listen

In Greek mythology, Cassandra was the Trojan beauty on whom the gods bestowed the gift of prophecy - and the curse that no one would believe her. She predicted the catastrophic events that resulted from the Trojan horse, but no one took her seriously.
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In some ways that is the investment establishment's attitude toward short sellers in today's treacherous stock market. Short sellers borrow shares of companies from financial institutions and sell them with the expectation that the share price will fall, thereby permitting the seller to buy them back for replacement at a lower price and profit from the difference. In other words, their stock in trade is pessimism and finding disasters ready to happen.
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Chief executives who like high stock prices and investment bankers who make money from initial public offerings regard short sellers as unsavory characters and blame them for trashing their shares and profiting from misery. To try to stop short sellers, the Japanese Financial Services Agency has been discouraging insurers and other institutions from lending shares. The regulatory body's move has had limited success, however, since lending shares is a good way for these institutions to make money.
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Selling short is not a practice for sissies. Benjamin Graham, who wrote "The Intelligent Investor" and taught investment to Warren Buffett at Columbia Business School, had the following comment about short sellers: "Selling short a too-popular and therefore overvalued issue is apt to be a test not only of one's courage and stamina, but also of the depth of one's pocketbook. The principle is sound, its application is not impossible, but it is distinctly not an easy art to master."
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That is because selling a stock short implies, theoretically at least, that if the market moves against the short seller, the potential loss is infinite. For investors who buy a stock, the downside risk is limited to the purchase price, while the upside potential is infinite. It is just the opposite for a short seller. His upside is limited, while his downside is not.
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That gives the short seller a reason to do plenty of analysis. "You can't just go short and forget," said Veryan Allen, former manager at AGS, a Tokyo-based hedge fund, who now runs his own hedge fund consultancy. "A short position must be watched every day and sometimes several times intraday."
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The growing popularity of hedge funds means that there is an increase in short positions in the stock market. Many hedge funds use a combination of longs and shorts to insure against large losses when markets fall. There are also event-driven funds that may short a stock for a few days because of an expectation of bad news.
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Then there are funds that specialize in short selling - mutual funds like the Grizzly Short Fund and the Prudent Bear Fund for individuals or Kynikos Associates for institutions. Investors who have a pessimistic view of the market or who have a significant long position and want to balance it may put some money in a fund that goes short.
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These days, there is plenty of it. On the Nasdaq, short interest, or the number of short-selling positions, rose to 4.3 billion shares by mid-March, the last data available. This is nearly the level reached last summer, before the index's 10 percent drop in September. In March, there were large increases in short positions in such household and near-household names as Intel Corp., Yahoo Inc., Expedia Inc., Dell Computer Corp. and USA Interactive Inc. Short interest on the New York Stock Exchange is now more than 7.9 billion shares, back to levels seen in November.
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With so many on the short side and the markets down so far, is there still room to invest on the downside?
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The answer seems to be: selectively. David Tice, the portfolio manager at Prudent Bear Fund, is short a fistful of tech stocks and the tech stock index because, despite the massacre on Nasdaq, he thinks certain tech stocks are still overvalued.
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Tice will not divulge individual stocks he is shorting, but his thinking is clear. "Cisco is selling at five times sales, Intel at four and a half times sales; Oracle sells at six times sales," he said. "These companies could easily sell at two times sales." By comparison, Procter Gamble Co., a defensive consumer staples stock that investors prize during recessionary times, is selling at just 2.3 times sales - even though it currently is within $5 of its three-year high.
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Tice's pessimism is tied to his long-term view of how the stock market bubble of the late 1990s will unwind. "A typical bear market gives back about five years of prior return, and the big bear market gives back seven and a half years of return," Tice said. Take seven and a half years' stock-price growth away from the end of 1999, and Tice thinks the Dow Jones industrial average could wind up at little more than 3,000.
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Particularly vulnerable, Tice said, are consumer finance companies and housing stocks. "Housing has been another bubble," he said. "Our policymakers have resorted to rolling bubbles where there have been areas of extraordinarily accommodative credit."
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Tice's is an extreme viewpoint. Although hedge fund managers tend to keep their moves under wraps, several said off the record that there were fewer good opportunities to short. Allen said that too many people were already on the short side in major markets such as London, Frankfurt, New York and Tokyo. "You should never short when everyone is selling," he said. "The things to short are things that have been going up a lot, not the things that have been going down."
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With many investors rushing headlong into bonds, Allen finds that market a more interesting prospect on the short side. "If we were to get some good positive news, even if it is only temporary good news, the bond market could go down quite a lot," he said. He suggested that the Japanese bond market - the largest in the world - is a good short because "a 0.68 percent bond yield is not enough when Japan is rated the same as Botswana and Poland."
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As for the U.S. bond market, he said that potential optimism after the war should help the U.S. stock market and that much money that has been parked in bonds may flow to stocks on temporary enthusiasm, raising rates and lowering prices. He has bought puts, as options to sell stocks are known, on both markets.
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Allen is also pessimistic about some emerging-market bonds, which have been performing extremely well and are now perceived as low-risk. "Take Russia," he said. "You are not getting much more than 8 percent yield in Russia, which I don't think is sufficient premium for the risk. Russia at 20 percent interest rates might be interesting.
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"Everyone knows some bonds default. The idea should be that you get enough yield to compensate for losses. Not so many years ago you got U.S. Treasurys at 8 percent and emerging markets at between 20 percent and 30 percent. That was worth taking the risk of default." It has only been about five years, Allen pointed out, since Russia defaulted on its debt.
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Of course, shorting the Russian bond market is easier said than done. A sophisticated investor could get a large brokerage or private bank to write a put option on Russian debt. Another way is to short certain American depositary receipts of Russian companies that correlate with the Russian economy. Allen suggested Russian telecommunications stocks listed on the New York Stock Exchange.
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An even more difficult short could be the Pakistani market, which has nearly quadrupled since its low after the Asia crisis.