A SVB short seller explains red flags he saw months ago
fortune.com
fortune.com
It's really pointless to find someone who just guessed correctly once and take their advice. Particulalrly if their failed predictions are never made public, or are too abtract to be verifiable.
I used to invest in gold and silver, expecting them to be stable investments. Back in mid 2008, I noticed a lot of large price swings. I made a few trades to exploit the swings before realizing the whole point of me investing in them was because I expected them to be stable. So I cashed out everything, and a few weeks later the economy (and the gold and silver prices) tanked. I don't consider myself a savy investor at all, I just got really lucky that one time.
You didn't tho. Investing in gold should be a long-term investment, and in a long term price of gold trend is still rising. It was constantly rising till 2012, then fall a little bit in 2012-2016, and is rising again.
The point is that it is very difficult, practically impossible to time the market. So the commenter was right - he got lucky that one time.
And if you were trading in the markets for many years, you would see that occasionally you would be lucky too. But unless you employed some kind of risk and money management, the other times where you would be wrong (and those times would definitely happen as well) losses would cancel out all your lucky profits.
I was lucky a couple of times too and it means nothing.
Shorts perform significantly more analysis than longs, as they have to have great timing in addition to being directionally correct.
In the article, Bleecker are not making any specific predictions, just explaining their reasoning for shorting this stock.
Their one prediction is "This is not a contained event…. I don’t know what happens."
Yellen has said she is monitoring a small number of unprofitable banks carefully.
From a market perspective, short interest in the regional bank ETF KRE has been rising steadily for a while now.
Looking at unprofitable banks with high implied volatility, the market seems to think First Republic Bank FRC is under some duress.
It is exceptionally costly to short FRC right now, but I imagine anyone with more than $250k in a single account is moving money out right now. Which is the definition of a bank run.
I disagree. Their model is similar to VCs in a way. Hedge funds don't care about the number of times they were correct vs. wrong, they care about the wins from the correct bets being more than losses from the bets that went wrong. It goes even further, if you think about what the point of hedging positions really is (which is essentially making a bet on something you actually believe the opposite of, as an insurance policy in case your main hypothesis goes wrong).
Just like with VCs, they don't expect most of their bets to work out. They just expect those bets that work out to bring in so much money, that the losses from the rest of the bets won't matter.
So yes, a hedge fund can be extremely successful and profitable, even if only 10% of their bet predictions end up being correct. It is all about what those bets are and how they are structured.
With that in mind, I am definitely still of the same take as the grandparent comment.
A traditional hedge fund is the opposite of a VC. VC's want huge gains, which means huge volatility. Traditionally hedge funds minimize volatility rather than maximize returns. Traditional hedge funds are for those who care more about wealth retention during down times than increasing wealth during uptimes.
The maximum theoretical gain from shorting is 100%. A stock can only go to zero. If only 10% of your shorts are wildly correct and go to zero, you just made 10% on that one bet.
The maximum theoretical loss from shorting is infinite. Any one of the other shorts could blow up your fund if it went up 10x. Of course, this is a hedge fund, with risk management that would either hedge the risk or exit the position before it blew up the fund.
But shorting costs money. Especially if it's a popular short or if it pays a healthy dividend. Even if your stars align, and all the other 90% of short/long pairs just went sideways, neither generating a profit nor a loss, you are unbelievably lucky if you come anywhere close to the 8% a traditional index ETF returns over the long haul, with a 10% win rate on shorts.
That's one way to look at it. A stock can only go down 100%. But shorting can make tons of money because:
a) stairs up, elevator down, it takes shorter amount of time to get the same price movement.
b) leverage, corollary of (a).
c) A stock going from 400 to 200 is a 50% move, from 200 to 400 is a 100% move, in terms of points its exactly the same so you earn the same amount.
I was trying to say that their success metric is the same: the total amount of dollars gained, not the number of bets on companies (VC) or the number of positions (hedge fund) that worked out.
VCs can be wildly successful making 999 losing bets, as long as one bet is a 100 bagger. VCs are running off imperfect information, they don't know which horse will be a winner, so they spread their bets. The more bets the better.
Short hedge funds are betting that they know more than Mr Market, one of the most efficient pricing mechanism known to man. A long fund can be no smarter than a monkey throwing darts, and it still does well. A short fund needs to be the smartest person in the room. They go deep, to find an edge that no one else but them has spotted. So they are highly concentrated, because you just can't go that deep on more than a handful of companies.
To say a short sellers insight is not worth anything because they just got lucky once is incredibly... short sighted?
Problem is, we are in a scenario of great macroeconomic uncertainty. That can make borrowing costs (needed for shorting something) quite high, because everyone and their moms want to protect themselves from market downturns.
So even if you guess correctly that some company will fail, you might still lose money if you're not lucky with timing. Many short sellers were squeezed in the last months, but we don't hear their stories on Fortune.
Many of the things happening today are contradictory, but eventually a domino falls to topple everything else. Knowing which domino does that would make you lots and lots of money, albeit maybe with some guilt as everyone else suffers.
He’s basically an investment doomposter.
That loan is the bank’s asset. It doesn’t go away when the bank collapses.
To short a company's stock, you borrow the stock — although you do use money to pay interest on the value of the borrowed shares. [0]
You don't need to look too hard to see examples of share prices doing weird things despite reality ($BBBY most recently)!
The analyses that tell you what led to a particular crash are hard to stomach as a reliable bet for the next time.
I just saw this story: https://www.morningstar.com/news/marketwatch/20230310718/20-...
("20 banks that are sitting on huge potential securities losses—as was SVB")
Would you short Ally right now? Hard to make such a bet.
A winner's reasoning could be completely unrelated to the event at hand and we'd never know the difference. A loser's reasoning is definitely wrong in some way, so we can learn something from it.
In markets the loser’s reasoning often comes down to poor timing. They see similar red flags but can’t quite catch the right time. Predicting markets is relatively straightforward, predicting when something will happen is infinitely harder :)
In reality, it's about picking a position that one can hold through various trajectories and that is profitable in most of the more likely ones. If one has assessed the actual trajectory at a lower probability than reasonable, that's still something we can learn from.
You can be right 99% of the time and still lose money because the market always rewards based on risk. Conversely you can be right 30% of the time and make billions.
With market timing you don't need to predict the instant something will happen, your time horizon really should depend on what your drawdown is. The predictions don't have to be single events, it can be a market environment. Timing a bear market when everyone is bullish, etc...
Every time you short the market you effectively open yourself to infinite loss, whether you are leveraged or not. There are effective hedging strategies in place, but unless you're doing this for a living or a very serious hobby, its tough to figure all the pieces out. That is why staying on the buy side can be pretty helpful for not losing one's shirt.
To make a silly example, if I short every company when it's CEO wears a red tie and than one of these goes down I get interviewed and can explain my great red flag I used.
No matter how ridiculous your strategy may sound, if this is how you successfully grow your fund over many years then perhaps it's a great red flag and not just survivorship bias, so let's do an interview and hear your thoughts on this topic.
https://podcasts.google.com/feed/aHR0cHM6Ly93d3cub21ueWNvbnR...
I'm not finance savvy enough to determine if this fits, but I've been wondering if some kind of event might follow
https://podcasts.google.com/feed/aHR0cHM6Ly93d3cub21ueWNvbnR...
As of Dec. 2021, SVB’s interest expense on its deposits was $62 million. By Dec. 2022, it was $862 million. By the end of this year, Wettlaufer was projecting it to be nearly $4 billion.
When Silicon Valley Bank posted its annual report at the end of last month, non-interest-bearing deposit levels were clearly deflating. And it seemed like those figures would keep falling. Wettlaufer was projecting non-interest-bearing deposits might go down to $40 billion, from $80 billion, meaning that SVB would have had to come up with $32 billion somewhere else to fill that hole.
If a person is on the verge of bankruptcy and they get a cash infusion that saves them, they have not magically become a pyramid scheme. The fact that money helps fix a massive financial problem does not indicate something is a pyramid scheme, just that they have a massive financial problem.
There is a very specific definition and it is not “ Any system that requires new clients to pay for existing clients’ outflows”
They needed new startups to bring in new cash to make up for the cash burn of their current startup customers.
This is a textbook Ponzi structure. Not criminal, just a totally irresponsible bet on interest rates staying close to 0 for another 10 years.
It's irresponsible to paint ordinary accepted business models that have been in place for hundreds of years and that work fine the vast majority of the time with a criminal brush.
If you think SVB is a regular bank practicing accepted business models I'm not sure you appreciate how unusual SVB is in terms of their customer base and interest rate exposure.
> Regular banks don't have the problem of having billions of dollars in deposits but no way to put that money to work
SVB chose a way to put that money to work, but they miscalculated what would happen to the bond market. I don't know how or why they overexposed themselves to this risk, but I'm fairly certain it wasn't some decision made without the review of numerous investing and risk experts.
SVB was not a fly-by-night operation. It was founded over 40 years ago. My first paychecks from the startup I worked for during the dot-com 1.0 era were drawn from them.
VC investment is highly sensitive to interest rates. Always has been, and everybody knows this. Instead of hedging against this risk SVB decided to double down on it and bet the bank on interest rates going back to zero. I'm sure they had a bunch of risk experts sign off on it, but we both know that doesn't mean anything. Complacency sets in after 15 years of low interest rates, and I think it's exactly because SVB did so well in the ZIRP environment that they got careless.
Isn't it true of any bank that experiences a sudden and unexpected flood of withdrawals that they need an infusion of cash to cover them? Whether they get the cash from new depositors or by liquidating investments, the cash has to come from somewhere.
I think you're mistaking a bad investment decision for a criminal act and intent, and nobody is claiming SVB of a crime at this point in time; the evidence isn't there so far. Every bank invests cash deposits in a mix of liquid and illiquid investments, and the illiquid investments often can't be liquidated quickly, if at all. (Think mortgages.) As I said, that is the business model of a bank.
That doesn't look good.
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Anyone can bet small amounts all over the roulette table and then only tell their friends about the ones that won while ignoring all the ones that lost.
Given the research involved, and a well known firm, I'm sure it wasn't pocket change.
If they wanted to show everyone how smart they were, I expected a quote something like: "We were so confident in our analysis that we invested 10x our normal short position in it!"
Sarcasm if it wasn't clear
Hopefully it's not too omnious
> In a previous Alphaville post we may have implied that Jim Cramer’s peak-inflation call was a reverse indicator for our readers. We regret the error. It was not our intention to give Cramer’s opinions any credence whatsoever.
[0] https://www.ft.com/content/3d1601e0-62b5-4cd5-b298-67f6f1f43...
it's just so over the top! if you haven't seen it before here's a recent one https://youtu.be/RKG0Qh51Vq0
He's a market manipulator, or was when he was in that hedge fund, and there's every reason to believe that he still would do this now for his own personal benefit if he could. Basically, if he's promoting a position it's probably a really good idea to strongly consider taking the opposite one, or just ignoring it (which is likely the better idea).
The fact multiple ETFs like this exist should tell you all you need to know.
How much could it be? 60-70%? That is how much the stock fell. The problem with these kind of stories is you don't hear about all the times these firms sold short and or were wrong or lost lots of money before eventually being right and would have been better off with an index fund. It's easy in hindsight to explain what was wrong with the bank or why the trade was a success.
I'm going to take a stab - the money ended up at the issuer tbill or mbs, that has been funding the profligacy of the feds with very low interest rates.
In the meantime, fed stakeholders will declare a dividend and pay themselves for the priviledge of keeping musical chairs going
So yes, the whole purpose of the fed is to ensure that we don't have a systemic, cascading bank failure (keeping musical chairs going). Banking panics and ensuing failures were a widespread problem in the 1800s and early 1900s. The Fed was established after the particularly nasty 1907 banking panic which threatened to bring down most large banks in the US and destroy the national economy. https://en.wikipedia.org/wiki/Panic_of_1907
I thought they set (or manipulate) the price of money via interest rates. And they help provide liquidity to primary dealers of US Treasury debt which helps govt ignore persistent budget deficits. They also hold USA's gold on their balance sheet and there hasn't been a full audit since ..?
Reminds me of "just don't fucking dance." https://www.youtube.com/watch?v=7eYcWpgCb7o
1. Even if the price has not moved against you, your broker can decide the stock has become more volatile, and therefore a higher collateral ratio is required.
2. Regulators can halt trading, making it at least temporarily impossible to buy back the shares and book your profit on the short sale.
Hence FTA: “You never short something thinking it will go into receivership,”
It's very similar to when you take a loan:
You borrow some money. You 'sell' the money for goods and services. You wait a while. You acquire some money again. You give the money back.
In both cases, you pay some interest while the loan is outstanding. (In both cases, you typically pay the interest with money. Instead of with small pieces of stock.)
As always Wikipedia is worth a look: https://en.wikipedia.org/wiki/Short_(finance)
Imagine you think widgets that are worth $1 today are going to be worth $0.50 tomorrow. You say to me, "Hey jpdb, can I borrow 100 widgets and give them back to you tomorrow?" I say sure and you turn around and sell those widgets. Tomorrow, we meet up and you take your $100 and buy 100 widgets for the new price of $0.50 each. You return the 100 widgets you borrowed and you now have $50 in your pocket. In this example you have "shorted" widgets.
Your profit from this trade is the stock's price when you entered the trade minus the price when you buy it back (i.e. you want to sell high and then buy low), less any financing costs from borrowing the shares.
Shoring is, financially-speaking, quite complicated and can be very opaque. It's also fundamentally different than longing (not merely the "opposite").
When you short a stock, you are basically selling a stock you don't have. Thus you get money and owe someone else a stock (in practice what happens is someone else unknowingly gives you a stock for free and then you sell it, and they get an IOU for a share of the stock later; but let's not worry too much about the mechanics). Once you have this IOU, you can hold on. The value of the liability associated with the IOU can go up or down. If it goes down, then when you discharge that liability by buying the share you owe, you will pay less than you were paid for the short, thus making a profit. If it goes up, then you will pay more and thus lose money. One risk with a short is that your liability is unbounded. In a traditional stock purchase, the worst that can happen is that you lose the money you put in. In a short sale, you can lose many multiples of the money you put in if the stock does very well. Under a few circumstances, the IOU can be called, forcing you to prove that you have the money to buy a share; for instance, if you were to short $1,000,000 in shares and the share price triples, you owe $3,000,000.
To summarize: when you buy a stock, it's because you think it will be worth more later (again, let's set aside dividends and other things). When you short a stock, it's because you think it will be worth less later.
The reason shorting is permitted is because in general, there is a belief (mistaken or not), that additional liquidity -- more trading -- benefits everyone involved in a market by reducing the spread between prices for buying and selling; additionally, shorting makes it possible to hedge your exposure to a sector (i.e. to trade off some upside in a sector with some corresponding downside and vice versa).
Eg 'in practice what happens is someone else unknowingly gives you a stock for free':
Someone else willingly and _knowingly_ loans you the stock, and _charges_ borrow costs. As a private investor you can participate in stock lending, just check with your broker. Index funds are often more than happy to loan out their shares, partially because it's one of the few ways they have to make extra money.
(Also maybe partially because it helps offset their impact on the market. If a new company makes it into the S&P 500 and all of a sudden index funds have to own 20% of that company, you might expect prices to go up in _anticipation_, ie before the index fund can buy. But if at the same time the same 20% of that company's stock becomes available for loan and thus short-selling, that might help counteract this move.)
See good old Wikipedia https://en.wikipedia.org/wiki/Short_(finance) for more.
Edit: Answered already by someone in other thread https://news.ycombinator.com/item?id=35107107
Companies are often in limbo for a long time before they officially go under.
The borrower has to keep paying borrow costs during that time. Which makes shorting companies that go down rather risky.
Lends it for a fee, right?
That's a mis-characterisation. What makes you think the counterparty lends you the stock unknowingly?
> The reason shorting is permitted is because [...]
You forgot the most important reasons:
First, why forbid voluntary transactions between people? Stock lending is an activity between consenting adults.
Second, short selling is a way to finance muckracking and investigations. Short sellers are the only people with an incentive to burst manias. They are an important mechanism for the market to regulate itself.
Silicon Valley Bank (SVB), a lender and banker to the startup industry, was closed down by California financial regulators after a bank run triggered by its announcement that it was raising over $2 billion in capital through a share sale. SVB's downfall came as a result of a rapid change in liability composition, as interest rates rose and inflows of non-interest-bearing deposits at the bank fell below outflows. Non-interest-bearing deposits fell by $45 billion in 2022, forcing the bank to replace them with higher-cost liabilities, resulting in the bank being left with an empty bag and leaving the entire startup ecosystem frozen.