Friday, June 21, 2019

The Hidden Risks In Shorting Dogs

One of the scariest concerns when shorting non-frauds in a bull market is that the very things that make a company a laggard and seemingly offer a tempting short—or the short leg of a pair trade—are things that attract the private equity vultures. This is why, for 2 1/2 years when talking about the mess that American packaged foods had become, we would obliquely, and sometimes not so obliquely warn:
March 7, 2017
M&A In European Food
I'm not sure that consumer packaged goods is the area to be in, at least not in the U.S. and not based on names like Kellogg or General Mills.
For a quarter-century those manufacturers ratcheted prices as though they were tobacco companies but people find it easier to give up their Cheerios than their cigarettes.
The managements milked that approach for pretty much all it was worth so, as operating entities, they aren't all that attractive but someone will decide the only thing left to do is to asset strip or dividend recap the life out of the former cash cows.
Top o'the market to ya.... 
 K Kellogg Company weekly Stock Chart
General Mills
GIS General Mills, Inc. weekly Stock Chart
Kraft Heinz
KHC The Kraft Heinz Company weekly Stock Chart

And what brought this all to mind?

Sotheby's via Slope of Hope:

Dealing with Disaster
Before I begin, I wanted to mention at the outset that we’re planning on taking the site down tonight for 20 minutes (hopefully!) as an important step in speeding up everything. The speed improvement won’t be done for about another week or so, but at 1:00 a.m. EST we’re going to be shutting things down, so please know this is planned. Now, on with the post…….
When I started the trading day on Monday morning, I was puzzled and startled by a rather large loss, because the ES and NQ were only up a little bit. It only took a moment or two for my eyes to land on the culprit:

The chart you see above is Sotheby’s (symbol BID), the multi-century old company which, surprise surprise, is going to now be taken private. And the purchase price was much, much higher than Friday’s close. Indeed, BID closes up nearly 60% by the end of trading Monday.

This was obviously a wonderful surprise to some, and a terrible surprise for others. There’s bound to be one or two loonies out there who had short-dated calls on this thing who couldn’t believe their eyes at the opening bell. Conversely, surely there must have been one or two lunatics who had sold calls naked against this thing, creating for themselves ruinous losses.

For myself, I was short BID, so obviously this news sucked. But here’s the important point: it wasn’t a disaster. And why? Because this was 1 out of 54 positions....MORE
Slope of Hope home

We really, really recommend against shorting in a bull market with one exception:
If you find an out and out fraud get your shorts on let us know what it is and then maybe drop the gendarmes a line. And make sure your counsel is conversant with Raymond L. Dirks v. Securities and Exchange Commission.