Monday, April 24, 2006

Short Sellers Get Short Strawed
The Ugly Child Only A Mother Could Love

When the peerless 60 Minutes TV show picks your group as subject matter, you know it cannot be pleasant. The 60 Minutes team in the States did a scathing overview on short sellers and its negative effects on companies and prices. Some companies have resorted to suing short selling funds for the negative publicity and driving down share prices. Online retailer Overstock.com and drugmaker Biovail have both filed lawsuits against analysts and short sellers for allegedly conspiring to push down their company's share prices. Analysts get drawn into the flak as being in cahoots with the short selling hedge funds.

That kind of defensive strategy by management is not laudable. Management fearing short sellers (or that their stock options may get deeper underwater) should just go and produce the numbers to deflect criticism, and not waste resources to do so much PR. There will always be analysts who will call a buy or sell, at any point in time. To try and sue contrarian analysts, who might be in the minority is useless. Unless the management has solid evidence that the analyst has been citing false data or making silly conclusions based on misguided assumptions. Otherwise, management should leave them kids alone.

As for collusion, well, it happens more often than we care to admit. Not just fund managers with analysts, but also journalists. This is an area where the SEC or regulatory bodies should play their role. Back in 2002, Gotham Partners, a hedge fund started by Bill Ackman, published a critical report about bond issuer MBIA Inc. Gotham also disclosed that it was short the company's stock on the first page. MBIA's management was livid and pressed New York Attorney General cum-sheriff Eliot Spitzer to investigate for possible market manipulation. Nothing came of the investigations. Surprisingly, in a major turnaround, last year Spitzer and the SEC lauched a probe into MBIA instead on the very specific issues that were raised by Gotham's report. Sucker punched!

Management should not fear short sellers. To me, short selling is a clarifying solution, like rain on a muggy day, a clean-blue flush around the toilet bowl, it clears the crap out. If there is nothing negative for the short sellers to hold onto, why would they want to short sell in the first place? Short selling funds can be a nuisance to management, so too can aggravated minority shareholders, they are part and parcel of corporate management - deal with it already! Short sellers takes overpricing and bubbles out of stocks and industry. It pricks holes in bubbles before they get too big. It wakes up management to act more diligently to enhance shareholders' returns. Of course there are cases where short selling funds use their position to veto certain corporate actions, thus putting the company at "ransom" - that's the kind we need to wipe out. Everything else is fair go!

Good short sellers and analysts are messengers of mismanagement, discrepencies and under/over-valuation of companies. You cannot restrict them in what they can or cannot do. Companies and management are increasingly under a larger microscope, and that is what management resents - but its good for shareholders, hence short sellers are here to stay.

In Biovail case, the company said that hedge fund SAC Capital Advisors conspired with research firm Gradient Analytics to write and circulate unflattering reports. A Banc of America Securities analyst was also named in the suit because of negative reports he wrote on Biovail. Overstock.com case is similar but involved hedge fund Rocker Partners and Gradient Analytics (again). Lets' look at this objectively, both companies are not solid companies to start with - Overstock.com has not had profits since 1999 while Biovail has been facing increasing competition from generics for one of its key drugs. So, a sell report is not surprising at all. As to whether there was conspiracy... that is hard to prove because generally if a company's fundamentals are bad, whats the odds of more than a few pros coming to similar conclusions to sell the stock. Even if there was real conspiracy, it would be very difficult to convict unless there is real evidence in print or voice.

Management at Biovail and Overstock.com are like mothers who complain why no guys want to date their ugly daughters. Don't yell at the shallow guys, do something about your daughters' looks!

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