Iron Mike Sharpe died. To many of you, this is tragic news. To more, you probably have no idea who he was or why you should care. Or how he would be relevant on a business news website.
Iron Mike Sharpe was a professional wrestler. A pretty bad one, really, but professionally so. He was a champion a few times over the early decades but really came into prominence in the late 80’s/early 90’s as a guy who knew how to draw boos from the crowd while letting good guys beat him up. He called himself Canada’s Greatest Athlete, which was enough in itself to draw a hefty amount of crowd heat, depending where he was plying his trade.
Pro wrestling needs that skillset – the guy who is professionally adept at losing, and in a way that doesn’t get boring to viewers and maybe even gets them booing him extra hard so that the guy beating him can progress to the championship level.
Iron Mike’s schtick was that he was a big dumb, growling, roaring Canadian bear with a protective forearm brace that would, when needed, host a foreign object that he could use on an opponent’s noggin. The catch was, of course, whenever he’d bring that brace into play, it would inevitably be used on his own head by a champion in the making.
This routine played out again and again for years and it never got old, because Sharpe, like the Washington Generals in the Harlem Globetrotter age, or the LA Clippers in just about every year of the NBA’s existence, or any tough guy paid to make sure nobody bopped Wayne Gretzky on the head, or any minor leaguer with no chance to get to the majors, was necessary to drive the story forward.
You need guys to lose so that other guys can win. You need someone to miss the throw so the wide receiver can score a touchdown. You need someone to get boarded so the tough guy can open the way for speed demon to notch the game-winning goal. Someone needs to win. Someone else needs to come second. Someone else needs to come last.
The markets run on the same deal. Every time you buy low, you’re locking in someone else’s loss. Every time you sell high, someone else is locking in your win, possibly at their own expense.
That ecosystem works well, like most of our capitalistic society, because it’s a wash. We trade hours of our life for money, we use that money to buy something that someone else traded hours of their life to produce. Growth, in the meantime, comes from someone losing out in that equation – or from the size of the market growing over time.
The system breaks down, however, when the market reverses. When we start panicking, when we sell more than we buy, when someone has an advantage over someone else and makes it not worth taking part.
The North American public markets right now are nearing that place where things reverse, and I blame the short sellers.
Sure, there are a lot of reasons for economic downturn fears right now. Europe! China! Commodities! Elections! Falling dollars! The cost of a barrel is literally now more than the cost of a barrel of oil.
But let’s be honest, the short sale is a straight up market killer.
In theory it shouldn’t be. If you can bet on the way up, being able to bet on the way down just increases liquidity, right? But that only holds if the market is pure – if there’s the same chance on something going up as there is on it going down.
Shorting a stock – basically being able to sell a stock you don’t own yet on the condition that you’ll eventually buy it and settle the debt – has grown in popularity the last few years, especially in Canada, where mining deals can fly upwards from pennies and then turn the other way on bad results.
But shorting isn’t a pure trade, being as it is often fueled (nowadays) by stock bashing, rather than results or news. Negativity hits home more than positivity, and the short sellers know this.
Of course, the shorters point to ‘pumpers’ and say the same thing happens on the way up, with those invested in the stock at pennies getting their promo campaigns rolling and stock flying upwards as a result. And they’re not wrong.
But promo campaigns will only move a stock so far. Eventually, reality hits and the tires deflate.
But a well-produced ‘short and distort’? Man, that can be brutal.
Consider this: Let’s say Blackberry (
TSX:BB,
Forum) has a nice little day and goes up 10%. Good work, Blackberry! Then let’s say I short $50k of it.
Tomorrow, it’s likely to shrink back 5% or so, because that’s what happens after a 10% spike and folks start taking profits. My short builds on that a little – let’s say now we’re down 7%.
Then I hit the messageboards and start saying, from a fake account of course, that I’ve heard from sales people at the company that sales at Blackberry are way down this month. Nobody’s going to believe me because I’m just some clueless rube nobody has ever heard of before, but they’ll believe a second person (from another fake account I created) who says they’ve heard that too. A third person might be overkill, but maybe my third account says he’s heard there are job cuts coming. Maybe a fourth says he’s heard there’s been some fraud in the last numbers released by the company and bad news is coming.
‘We’ only need three of you to dump 10k of stock each and now you’re at 10% down on the day, which is where the stop loss triggers kick in and a bunch of folks busy at work, not watching their accounts, start auto-selling their stake.
At 12% down on the day and all those negative posts on the messageboards, now you’ve got the on-the-fence crowd starting to get nervous, and guys at brokerage desks are getting calls from clients asking what’s up.
Let’s say the CEO is on a plane to London to talk to some banks, so he’s not around to give a quote to reporters who are noticing the movement and writing stories, quoting the bullboard chatter as being the reason for it.
Now let’s say I use a Seeking Alpha account to publish a 2000-word piece I wrote in advance of all this, which lays all those negative chirps out in a professional looking fashion with charts and grand statements of impending hell.
Now we’re 20% down and even those who don’t believe the negativity are getting out of their position because, why take the train ride down? You can always get in later… if the stories are false..
Right about now, the company management team are seeing all this and freaking out. And IIROC is calling for them to explain what’s going on. So they put out a news release that says, basically, we have no idea why people are selling our stock. Nothing has changed. This is madness.
But then the class action lawyers start in, pumping out news releases on the company ticker symbol that say they’re investigating claims of fraud at the company. And when one of those notices goes out, there’s a dozen more within the hour, which crowds out any GOOD news completely.
Now we’re in freefall; the existing stop losses are all triggering, long holders are either abandoning ship or hanging on because their investment is worth pennies, and the company has no option but to announce an independent audit to prove all of this is false. Which, obviously, sends another few hundred thousand shares out to the market for sale.
What you’re looking at here is basically a blueprint for destroying a company, all so a couple of unethical traders can earn $50k at the top of the deal, and pay $10k for the privilege at the other end.
Enjoy your Mustang, don’t think too hard about the 200 people who just lost their RRSP.
This is how markets get hammered and investors get soaked and companies that are decent become companies that work years to reclaim what they’ve lost.
It’s also, more or less, what happened to Nobilis Health (
TSX:NHC,
Forum) last year.
Nobilis posted its best financial results over last quarter, generating $139.2 million in revenue and $6m in net income. It’s a surgical centre roll-up and has been acquiring nicely, but it was hit with a whisper campaign that included a
big Seeking Alpha piece that accused the company of fraud and got the class action lawyers circling.
An audit
cleared the company completely and noted all the allegations were without merit.
But the damage was done, and $300 million was wiped from the market cap.
Nobilis is going after the people allegedly behind the short, in
UK-based Anson Funds and analyst Sonny Puri, and it’s doing so with vigor in the civil courts. But how much will that action cost? Will they ever recover a cent? And how do you unsmear poop on a wall?
Those who read will see Nobilis has no smoke, nor fire. But most don’t read. They see a massive drop in share price and they move on. It will take YEARS for Nobilis to clear this incident off their reputation, because every potential investor will see that big chart drop-off and say ‘why’d that happen?’, and then they’ll see the lawyer notes and… ack.
You need losers in a strong market. You need your Iron Mike Sharpe’s who put in an honest effort and come up short and do so with dignity and watch competitors fly past them to glory. And you need the added liquidity that an ethical short sale can bring.
But when it’s so easy to kill a company with nothing more than a few anonymous news pieces, when it’s profitable to do so, and when (let’s face it) no regulator is looking out for the companies in question by making short data very public, naming the short sellers, and holding them to account if they actually, legitimately, purposefully damage a company and the shareholders behind it, the market is suddenly geared not for growth but for epic, devastating, backwards rolling implosion.
When I write something positive about a company, I put my name to it. If I write something negative about a company, likewise. Whether history shows me to be right or wrong, I wear it, so I can’t engage in slimy whisper campaigns, nor slimy pump campaigns. I’ve never said a word about a company I don’t 100% believe, and my track record, readership, and continued employment reflects that.
But all too often I see great companies deflecting amateur-hour shorters, and weak hands getting weaker, and stock prices falling, and real investors losing, rather than a market in which fundamentals actually get rewarded.
Two years ago, a 10% jump in share price meant something. Today, if a company goes up 40% in a week, management will tell you they’re living in dread as the shorters line up to drive that stock backwards and investors rush for the exits to lock in their profits lest they get caught in the stampede.
The North American markets, right now, are geared backwards. It’s just far easier to short and profit than invest and profit. It’s too easy to be in and out of a stock in an hour. It’s now, more than ever, about game theory than business theory.
And as we near the time when tax loss selling is locked in, and those same sellers can get back into their favorite companies, it’s going to be more important than ever before to not just know what sort of company you’re investing in, but also who is trying to kill it.
--Chris Parry https://www.twitter.com/chrisparry FULL DISCLOSURE: Never shorted a stock in my life. F’reals. I bet on trifectas, not lay down misre