Short Selling

A friend says: To sell short, you are borrowing something from the owner, then selling it with promise to repay. Most short sellers have gotten wiped out last three years. Short selling has basically been banned by the fed, while ostensibly keeping it legal. Banning short selling is just an admission that you have a fake market, a one way market. It’s not true price discovery. that’s why fed and sec (us govt) very careful not to officially ban it as that would cause a panic counterintuitively like when the sec, imposed bans on short sales of certain finanical stocks in 2008, it cause greater panic. Rarely does short selling succeed unless company is a fraud or indeed worthless. Shorts aren’t fighting mom and pop, but self serving company boards, and promoters who want to unload as much stock as possible to broader market to enrich themselves. Elon Musk has a dim view of short selling, because the short sellers correctly appraised his business as being insolvent, and non profitable, but free market allows others to value it on future hopes etc. they just pointed out how weak fundamentals were and shorted it and got destroyed in doing so. So, they are a form of vigilante cops. The ultimate price vigilantes. They are market participants, not dumb corrupt bureaucrats. If your stock price doesn’t have capacity to offset short selling , than its not a true price, its fake. Short selling is brutally hard, because by and large all forces conspire against you, the govt, the exchanges, the public, the company putting out bullshit press, jim cramer nonsense cheering it on etc.

Its practitioners are compensated only that they take on risk. Melvin ran into a lazy trade because they take on leverage to the long side. so if they have 10B in assets they will assume 15B in stock positions making them 150 pct LONG. Because market is mostly unshortable w fed policy, and they want to have short exposure to hedge their levered long 15B, they maintain short of GME and AMC and other garbage along w tons of puts to ostensibly be neural of their 150pct LONG, to have 5B hedge short so now they are seemingly now only 100pct long.
although they have taken on 20B in positions
its like going 1B short and 1B long and saying you zero risk exposure , when you really have 2B in exposure.
so just to have some short exposure to offset their long exposure and there are no good shorts they pile into the super cheap/obvious ones along with a bunch of other funds doing similar thing.
Things could have been much worse for melvin if regular market sold off too, then they would have lost money on their Shorts and their longs. putting their losses probably from 50pct to 100pct.. So they got lucky. Long short funds blow up when their really no correlation between their short bets and their long bets and BOTH go against them.
It’s like betting on a team w great offense to win a game against another great offense, so you leverage the bet by betting on team you like to win plus the OVER on the over under. Then you team loses to the other team in 10-7. SO you lose both bets.

About Luke Ford

I've written five books (see Amazon.com). My work has been followed by the New York Times, the Los Angeles Times, and 60 Minutes. I teach Alexander Technique in Beverly Hills (Alexander90210.com).
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