Shorting a meme stock
Found in some Reddit chat stream
Sad way to lose big
Showing posts with label shorting. Show all posts
Showing posts with label shorting. Show all posts
Thursday, February 18, 2021
Wednesday, January 27, 2016
Thursday, January 21, 2016
Ultimate Lessons From JP Morgan Healthcare Conference 2016
The end of the JP Morgan Healthcare Conference invites reflection on lessons for investing. The legions of investors populating the Union Square hotels - almost all white, male, and wearing pale blue neckties - will face challenges finding value in the health care sector's long bull market. Bears have already come out of hibernation in the larger US stock market's first two weeks of 2016. They wait to pounce on the health care sector.
Investors could have thrown a dart at the universe of stocks and funds in the large-cap health care sector after 2010 and come away winners. The bull case made sense up until mid-2015. Consider the price trajectory of one very broad health care ETF, iShares Nasdaq Biotechnology ETF (ticker IBB).
Here we see the 5-year price chart for IBB from Yahoo Finance as of January 19, 2016. Its valuation peaked in July 2015. Note that Amgen (ticker AMGN) is one of the top ten holdings. That one stock is off its 52-week high by about 17% even though Motley Fool reports that Amgen had phenomenal things to say about itself at the JP Morgan Healthcare Conference. Of course, a sector's performance is more than the financial health (pun intended) of one of its widely-held leaders.
The health care sector's long-term performance is very much dependent on the Affordable Care Act (ACA). FactCheck noted in 2014 that the ACA may be contributing to a moderation in the growth rate of per-capita health care spending. The per-capita growth since at least the 1990s has driven the profitability of drug makers and insurers, so any moderation means the sector's companies must seek more customers (i.e., plan enrollees) to sustain their earnings growth. The Economist noted in 2015 that more people are enrolled in health insurance plans even as costs per patient decline. The tradeoff of more customers for less costly coverage was always the grand bargain that the health care sector expected from the ACA to maintain its financial success.
Several CBO reports note that federal health spending continues to grow. We can find one cause for this hidden in FactCheck's 2012 discussion of cuts to growth in Medicare spending. The estimated $716B in growth savings designed to prolong the Medicare trust fund's life covers the issuance of Treasury bonds the trust fund will own. The Treasury's borrowing through such bond issuance will subsidize the ACA health plan exchanges for years. The CBO's March 2015 baseline update on the ACA's fiscal effects shows just how expensive those subsidies will become. The estimated net cost of ACA coverage, including exchange subsidies, totals over $1.2T by 2025. That total more than overtakes the original estimate of $716B Medicare savings. The ACA's effects on health care affordability are an unsustainable burden on the federal government's finances.
The ACA exchanges themselves are facing financial trouble. Premiums from healthier people are not offsetting the tax credits for poorer and sicker people. Twelve of the ACA cooperative health plans have now closed. Insolvent entities cannot continue to operate, and their closure means the surviving eleven co-ops will face more financial stress as sicker people enter their risk pools. The ACA risk corridors are underfunded. Insurers' premiums did not keep up with cost increases for those risk corridors, so either a federal bailout replenishes them or insurers raise their premiums even more. Insurers participating in ACA exchanges are facing unprofitable growth. The ACA's rules and structures force every participant in the health care sector's revenue chain - individual plan subscribers, insurers, and government transfer payment programs - to participate in an increasingly insolvent regime. The financial implications of a collapse in support for the health care sector's revenues would be disastrous for investors.
Watching The Big Short before the JP Morgan conference began offered an indirect lesson in the warning signs of an overheated sector. Only a handful of major investors anticipated the housing market's crash through 2008 by watching how adjustable-rate mortgage rates destroyed the value of pooled securities. The canary in the coal mine to watch is always whether a payment stream is sufficient to support asset valuations. Health care payments are a convoluted jumble of insurance premiums and government reimbursements. Collapsing intermediaries will obstruct such payment streams and endanger the valuation of any security tied to the health care sector. Investors will eventually have an opportunity to make their own big short in health care, much like the home mortgage big short. Analysts can someday decide which short is bigger.
Full disclosure: No positions in any securities mentioned.
Investors could have thrown a dart at the universe of stocks and funds in the large-cap health care sector after 2010 and come away winners. The bull case made sense up until mid-2015. Consider the price trajectory of one very broad health care ETF, iShares Nasdaq Biotechnology ETF (ticker IBB).
 |
| iShares Nasdaq Biotechnology ETF (IBB) from Yahoo Finance |
Here we see the 5-year price chart for IBB from Yahoo Finance as of January 19, 2016. Its valuation peaked in July 2015. Note that Amgen (ticker AMGN) is one of the top ten holdings. That one stock is off its 52-week high by about 17% even though Motley Fool reports that Amgen had phenomenal things to say about itself at the JP Morgan Healthcare Conference. Of course, a sector's performance is more than the financial health (pun intended) of one of its widely-held leaders.
The health care sector's long-term performance is very much dependent on the Affordable Care Act (ACA). FactCheck noted in 2014 that the ACA may be contributing to a moderation in the growth rate of per-capita health care spending. The per-capita growth since at least the 1990s has driven the profitability of drug makers and insurers, so any moderation means the sector's companies must seek more customers (i.e., plan enrollees) to sustain their earnings growth. The Economist noted in 2015 that more people are enrolled in health insurance plans even as costs per patient decline. The tradeoff of more customers for less costly coverage was always the grand bargain that the health care sector expected from the ACA to maintain its financial success.
Several CBO reports note that federal health spending continues to grow. We can find one cause for this hidden in FactCheck's 2012 discussion of cuts to growth in Medicare spending. The estimated $716B in growth savings designed to prolong the Medicare trust fund's life covers the issuance of Treasury bonds the trust fund will own. The Treasury's borrowing through such bond issuance will subsidize the ACA health plan exchanges for years. The CBO's March 2015 baseline update on the ACA's fiscal effects shows just how expensive those subsidies will become. The estimated net cost of ACA coverage, including exchange subsidies, totals over $1.2T by 2025. That total more than overtakes the original estimate of $716B Medicare savings. The ACA's effects on health care affordability are an unsustainable burden on the federal government's finances.
The ACA exchanges themselves are facing financial trouble. Premiums from healthier people are not offsetting the tax credits for poorer and sicker people. Twelve of the ACA cooperative health plans have now closed. Insolvent entities cannot continue to operate, and their closure means the surviving eleven co-ops will face more financial stress as sicker people enter their risk pools. The ACA risk corridors are underfunded. Insurers' premiums did not keep up with cost increases for those risk corridors, so either a federal bailout replenishes them or insurers raise their premiums even more. Insurers participating in ACA exchanges are facing unprofitable growth. The ACA's rules and structures force every participant in the health care sector's revenue chain - individual plan subscribers, insurers, and government transfer payment programs - to participate in an increasingly insolvent regime. The financial implications of a collapse in support for the health care sector's revenues would be disastrous for investors.
Watching The Big Short before the JP Morgan conference began offered an indirect lesson in the warning signs of an overheated sector. Only a handful of major investors anticipated the housing market's crash through 2008 by watching how adjustable-rate mortgage rates destroyed the value of pooled securities. The canary in the coal mine to watch is always whether a payment stream is sufficient to support asset valuations. Health care payments are a convoluted jumble of insurance premiums and government reimbursements. Collapsing intermediaries will obstruct such payment streams and endanger the valuation of any security tied to the health care sector. Investors will eventually have an opportunity to make their own big short in health care, much like the home mortgage big short. Analysts can someday decide which short is bigger.
Full disclosure: No positions in any securities mentioned.
Sunday, May 13, 2012
What If China Shorts Dollars?
I've been pondering Chinese forex policy lately. News that China will allow its banks to short U.S. dollars is more than just a safety valve in the event of a run on the dollar. It allows banks to hedge any long positions they have in U.S. Treasuries. Placing limits on short positions is smart but basing those limits on annual turnover is not. Safe limits would be based on the net notional value of currency positions marked to market daily, complying with Basel rules on capital. Western banks are pretty good at getting around capital adequacy rules, so perhaps China is just taking a less subtle approach.
Don't expect to see a whole bunch of Chinese banks piling into dollar shorts all at once. Greece's potential exit from the euro makes that currency look increasingly weak and the dollar look relatively strong. That means the U.S. federal government can continue to finance its ginormous budget deficits cheaply and Chinese banks can breathe easier about the value of their Treasuries. Wait a few months after the euro breaks apart. The British pound and the dollar will then be in the spotlight.
Full disclosure: No short positions in the U.S. dollar or long positions in other currencies at this time.
Friday, December 16, 2011
YRCW Unloads Truckload Unit While Truckload Demand Rises
YRC Worldwide continues to compound its material weaknesses. This Teamster-dominated company is selling off a truckload unit to focus on what it claims to do best - LTL. The problem with this move is that YRCW simply hasn't been doing LTL very well at all. The company's financial results speak for themselves.
The company's Dec. 2 reverse split briefly raised the share price to avoid a delisting action. That share price has dropped by over 24% since then because the company lost almost three times as much money in Q3 of this year as it did in Q2. That Q3 loss is twice as large as the loss in the same quarter in 2010.
Divesting a truckload unit is exceedingly dumb given strong demand for truckload volumes in recent weeks. Maybe handling truckload freight really is too difficult for Teamsters. It would require them to drive non-stop for long hauls, whereas frequent LTL stops for load reconfiguration give them opportunities for more coffee and donut breaks while on the clock.
This company's string of losses and odd strategic decisions continues unabated. The reverse split has delivered bearish investors a unique opportunity to profit by temporarily raising the price out of penny stock territory. This may prove to be a fleeting window to sell short outright or buy put options in anticipation of further share price declines. That's not investment advice in any way; rather, it's a disclosure of strategic options under consideration here at Alfidi Capital.
Full disclosure: No position in YRCW at this time, but seriously considering opening a short position within the next three business days. Watch this space for a final decision.
The company's Dec. 2 reverse split briefly raised the share price to avoid a delisting action. That share price has dropped by over 24% since then because the company lost almost three times as much money in Q3 of this year as it did in Q2. That Q3 loss is twice as large as the loss in the same quarter in 2010.
Divesting a truckload unit is exceedingly dumb given strong demand for truckload volumes in recent weeks. Maybe handling truckload freight really is too difficult for Teamsters. It would require them to drive non-stop for long hauls, whereas frequent LTL stops for load reconfiguration give them opportunities for more coffee and donut breaks while on the clock.
This company's string of losses and odd strategic decisions continues unabated. The reverse split has delivered bearish investors a unique opportunity to profit by temporarily raising the price out of penny stock territory. This may prove to be a fleeting window to sell short outright or buy put options in anticipation of further share price declines. That's not investment advice in any way; rather, it's a disclosure of strategic options under consideration here at Alfidi Capital.
Full disclosure: No position in YRCW at this time, but seriously considering opening a short position within the next three business days. Watch this space for a final decision.
Thursday, June 30, 2011
Too Hard To Short A Levitating Bond Market
I respect Jim Rogers for his contrarian bent and his focus on finding value in Asia and commodities. I do differ with his penchant for trying to make market timing calls. He wants to short U.S. Treasuries. Oooooookaaaaay. The difficulty in working a big short bet into an investment strategy is that no matter how sound the thesis may be, it can take forever to play out given unpredictable events.
The U.S. bond market is strong thanks to ZIRP and QE, nothing else. Those things are the result of political decisions that can be reversed in an afternoon. Taking a short position in an artificially manipulated environment is an easy way to lose one's shorts in the short term even if the reasons for the trade are proven sound in the long term.
This week's European action is telling. I had thought Greek politics were too intractable to pass austerity programs, but lo and behold they did pass some and they'll probably get their bailout after all. I would have been on the losing side if I had bet against a resolution to this crisis. Some hedge funds undoubtedly did bid up the CDS spreads on Greek debt. We'll see which ones made that call by the end of the summer if some funds have to close shop.
Shorting an entire market is hard. Shorting an individual stock, with far fewer unknowns, is a bit easier but no less nerve-wracking if you're unprepared to lose big.
The U.S. bond market is strong thanks to ZIRP and QE, nothing else. Those things are the result of political decisions that can be reversed in an afternoon. Taking a short position in an artificially manipulated environment is an easy way to lose one's shorts in the short term even if the reasons for the trade are proven sound in the long term.
This week's European action is telling. I had thought Greek politics were too intractable to pass austerity programs, but lo and behold they did pass some and they'll probably get their bailout after all. I would have been on the losing side if I had bet against a resolution to this crisis. Some hedge funds undoubtedly did bid up the CDS spreads on Greek debt. We'll see which ones made that call by the end of the summer if some funds have to close shop.
Shorting an entire market is hard. Shorting an individual stock, with far fewer unknowns, is a bit easier but no less nerve-wracking if you're unprepared to lose big.
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