Monday, February 24, 2014

Shorting Tesla: Is Seabreeze Partners' Doug Kass a Genius? (The Key to Understanding Market Anomalies) TSLA

Quick answer: No.

Last Wednesday Mr. Kass very publicly shorted Tesla a few hours before earnings were announced. Rookie move, on a few levels.
Doug Kass: I’m Shorting Tesla
After the company reported and the stock screamed against his position he said he was taking advantage of the new higher price:
Doug Kass Doubles Down on Tesla Short 
Again, rookie move, on a few levels

Whether betting against TSLA is a good idea or not is fodder for a series of posts (or use the search blog box, keywords Tesla short)

The thing that really struck me, besides the fact that the first short was done pre-market at a very high price ($205) versus the regular trading range that day and that the second short was again done at a very high price, this time after-hours versus Thursday's trading range (he said he got it off at "$218-224" while the next day's top-tick was $215 or so), the thing that struck me was "Who did he find to lend him stock pre-market and AfterHours?"

I thought so much about that because of the fact that TSLA frequently goes on the "hard to borrow" list.
I actually wrote a post on the mechanics of borrowing stock and how odd the Seabreeze story seemed.

But, and that's a big 'ol but, rather than show gentle reader that piece of pedantry here's something on a closely related subject that may actually make you some money.

Current TSLA price $216.95 up $7.35.Kass says his average short price is $212.

From the Social Science Research Network:

The Shorting Premium and Asset Pricing Anomalies

Short-rebate fees are a strong predictor of the cross-section of stock returns, both gross and net of fees. We document a large "shorting premium"; the cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha. We show that short fees also interact strongly with the returns to seven of the most well-known and large cross-sectional anomalies. These anomalies disappear among the 80% of stocks with low short fees, but are greatly amplified among those with high fees. We propose a joint explanation for these findings wherein the shorting premium is compensation for the short-side risk borne by the small minority of investors who do most shorting. It therefore raises prices rather than lowers them. We use the CME portfolio return as a proxy for this short risk and demonstrate that a Fama-French CME factor model largely captures the returns to all seven anomalies within both high- and low-fee stocks.

1 Introduction
Asset pricing theory has long recognized that if an asset cannot be sold short then it may
become overpriced, because investors who think it is overvalued are prevented from selling
it (Miller, 1977). However, in practice U.S. equities are not typically subject to short-sales
prohibitions. Arbitrageurs can sell shares short by borrowing them in the stock loan market.
The price for doing so is a fee, or rebate, paid by the borrower to the lender (henceforth
the \shorting fee"). There are at least two reasons why the shorting fee should contain
information about the returns on the stock. The fi rst is straightforward: the fee represents a
payment stream that the stock owner can earn by lending the stock. The second is indirect:
the shorting fee embeds information about the underlying demand to short the stock, a
potentially important determinant of the stock's expected return.

In this paper, we demonstrate that shorting fees are highly predictive of the cross-section
of stock returns. Our analysis is presented in two parts. In the rst part, we show that
low short-fee stocks earn much higher returns than high short-fee stocks. This is true for
returns measured both gross and net of shorting fees. Moreover, the di fference in returns is
not explained by exposures to conventional risk factors. We call this di fference in average
returns the \shorting premium", because it represents the extra return earned by investors
who short high-fee stocks.

In the second part of the paper we show that there is a strong interaction between shorting
fees and the returns to seven well-known, large cross-sectional return anomalies. Speci fically,
we show that these anomalies e ffectively disappear, or are at least dramatically weakened,
among low-fee stocks, which represent 80% of all stocks and an even higher fraction of
total market capitalization. In contrast, the anomalies are highly ampli fied among high-fee
stocks, generating long-short portfolio returns that are very large even by the standards of the
anomaly literature. Our ndings show that shorting fees are instrumental to understanding
the structure of these anomalies' pro ts....MUCH MORE
HT: Victor Niederhofer's Daily Speculations:
Shorting Fees Are Inversely Proportional to Forward Returns? from Kora Reddy
I'm not sure which prof (Charles or Alex) was mentioning shorting the cost of certain stock at 60% ++ in one of the posts, but I found this interesting paper on the subject: "The Shorting Premium and Asset Pricing Anomalies".

Here is a two line summary of the paper:
1. The cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha

2. Top decile stocks by shorting premium (cheap to short) returned an average of 0.75% (gross) and 0.11 % (net) in the next one month, while bottom decile (expensive to short) returned -0.71% (gross) and -0.17% (net).
The rebate on Tesla has at times hit 90% and it has frequently been above 50% per annum so you see my interest in such things, eh?