Short-Sellers: Turkeys or Eagles?


ValueWalk reported this week that long-time bear and short-seller, Hugh Hendry, founder of Eclectica Asset Management, said he was done with being short when the trends were just not in his favor at all.

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“In his presentation at the Harrington Cooper’s 2013 conference, Hugh Hendry said that the price wars between China and the U.S. are turning into an endless feedback loop. At one end, the U.S. pumps up QE to increase dollar denominated trade, in retaliation, China fuels investment which forces the U.S. to adopt a dovish fiscal policy again, and the cycle goes on. Hugh Hendry said that at times like this, following the trend is really all you can do.”

Quoting Mr. Hendry, based on an article by Dan Jones of Investment Week…

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“I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years’ time. I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.”

I have heard of this frustration from another famed short-seller, Whitney Tilson, who months ago said something like “You need to have your head examined to do this.”

As an important aside, the one thing that really stands out to me about Hendry’s thoughts is the comment on US-China trade wars. I constantly challenge anybody who throws around all-knowing phrases about the stock market being fueled primarily by QE, as if weekly Fed bond-buying dollars somehow trickle right into stocks. How do they know? Where’s their proof?

Hendry’s macro dynamic explains things in a way that makes much more sense. Yes, QE props up the economy and all asset classes with cheap money, but the dynamic of that support is more complicated than this week’s POMO schedule.

Patient Capital

I want to share a couple of sober paragraphs from an investment manager out of Canada called Patient Capital. This was in their recent letter to investors…

Animal spirits have returned to the financial markets. Driven by interest rates at near zero levels and relentless monetary stimulus by central bankers around the world, investors looking for return and yield have stampeded into all sorts of financial instruments. Prices across almost all asset classes have been bid up to unsustainable levels.

Based on long term historical valuations we are quite comfortable stating that the potential return across virtually every asset class over the next five years will be very disappointing from today’s prices and in many cases likely to be negative. Most investment managers have no place to hide because they are forced to follow very narrow mandates. When the day of reckoning arrives there will be very large capital losses.

Okay, my questions for today are the following:

1) Short-sellers may be this year’s turkeys, but are they also the vital “birds of prey” of the financial ecosystem, eliminating the weak and sickly?

2) Is the fact that we are getting this capitulation from top eagles any confirmation that the bull run is topping (in the contrarian sense)?

3) Has the traditional December-January running of the bulls come early and could the rest of the year be about harvesting profits?

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