The Big Short Was Only One Reason 2015 Was The Year of the Bears

2015 & the Big Short

Money managers are having trouble picking winners. But they sure can pick losers.

Take Whitney Tilson, who makes money by betting on stock declines -- or short selling. Just last week he closed out his bet against Lumber Liquidators Holdings Inc., riding it from about $100 to less than $20. He’d helped trigger the stock collapse when he publicized suspicions in 2013 about the company’s wood flooring.

QuickTake Short Selling

Then there was this autumn’s takedown of Valeant Pharmaceuticals International Inc. by Andrew Left and his Citron Research. Valeant, which had been a punching bag for both politicians and Bronte Capital’s John Hempton, plunged when Left compared it to Enron. That earned him most of the credit for the drug firm’s downward spiral.

Short sellers aren’t exactly household names -- even Bill Ackman is relatively unknown outside of the financial world -- but in the markets, bears like Tilson are grabbing attention like never before as the six-year bull market shows signs of losing steam. What’s more, anyone with a Twitter account can be an armchair analyst, anonymously trashing any stock out there. And often vilified as market outlaws, short sellers are for perhaps the first time being portrayed as the good guys in the film “The Big Short.”

While stock pickers are losing the fight for clients, some successes by short sellers have made the strategy more popular. Short selling is where a bearish trader borrows and sells stock, betting it will fall. Data firm Activist Shorts tracked 171 public short campaigns this year, up from 145 in 2014. And short interest in the U.S. recently reached the highest since the financial crisis.

The year is ending up much rosier for shorts than how it started. After a couple of rough years during the U.S. bull market, the first half was looking similarly bad -- mergers boomed and credit was cheap, while activist investors helped prop up shares of underperformers.

“Things changed at the beginning of July,” said Amir Madden of GAM Holding AG, which oversees about $127 billion. Worries about a slowdown in China spooked the market, and commodity prices tumbled. Billions were wiped off global stocks. Suddenly, things started to go short sellers’ way -- getting a big break with a spike in volatility as the summer slump wore on. “Managers that were short individual names as opposed to indices started to distinguish themselves as strong performers.”

Left capitalized on his Valeant-fueled notoriety in November. His criticism of drugmaker Mallinckrodt Plc sent those shares down. The pharma successes got the most attention, but Citron has published at least 55 short campaigns. In an interview, Left joked that becoming an overnight sensation took only 14 years of short selling.

Tilson, too, rode from success to success. When he released a report in November questioning the quality of furniture retailer Wayfair Inc.’s flooring, that stock tumbled, too. There have been wrong-way bets, but overall he says the year has been a “spectacularly” good one, adding to a record that includes shorting Lehman Brothers just months before the bank’s collapse in 2008.

Carson Block is another short who says he’s having a great 2015 -- in April his firm Muddy Waters came out with a skeptical report of Noble Group Ltd.’s cash flow, and he capped the year last week with a call questioning the finances of France’s Casino Guichard-Perrachon SA that sent its shares plunging. Bull markets and near-zero interest rates have helped prop up equities for years, and he says now is the time for shorts to pounce.

“The leverage that companies took on in the last few years is now coming back to haunt them,” Block said.“It takes activists to say, ‘Hey, this is not right. This growth isn’t really what investors think it is.’ For now, it’s just activists rather than organic blow-ups, but you’ll start to see organic blow-ups not too far behind.”

Until then, it’s the shorts who reign. Take Tilson, who noticed something odd last month. He sent an e-mail to about 200 clients and friends praising a fellow short’s take on Florida home insurer Universal Insurance Holdings Inc. The message didn’t include a list detailing alleged corporate wrongs, but from the moment he pressed send, the stock started falling. It plunged 17 percent that day. He had done it again, but without even trying.

“Sending around a little e-mail and seeing the stock drop,” Tilson said. “It surprised me. The frequency of short campaigns is up a lot, and the impact is up a lot.”

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