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The Most Shorted Stocks: Past, Present and the Market Implications

December 29, 2009 | About:

This is an interesting segment from Fox Business aired on Dec. 28, 2009 where John Tabacco from locatestock.com talked about the top five most shorted stocks. The following is a summary of the interview along with some of my thoughts.

The Biggest Shorts - Past & Present

According to locatestock.com, the top short of the decade, and you guessed it, is Lehman Brothers.

But did you know...

  • Other biggest shorts for the decade include TARP and bailout recipients: Fannie Mae (FNM), Freddie Mac (FRE) and CitiGroup Inc. (NYSE:C).
  • Overstock.com (OSTK), at number five, had 140% of its entire outstanding shares shorted at one point of time; giving rise to one very impassioned advocate against naked shorts - Patrick M. Byrne.
  • Some big players base their short strategy on fundamentals, and sometimes will increase positions over time, or hold their short positions long (more than a year).
The new champion, according to Tabacco, is MSCI Emerging Markets Index Fund (EEM) - the most popular short by volume requested.

Dollar's Gain Is Commodities Loss

The rising short interest in MSCI Emerging Markets Index Fund (EEM) suggests a continued flight into the perceived safer U.S. market. This trend could further prop up the Dollar, and will likely have a negative impact on commodities, with natural gas probably being the only exception, as the flaming fuel is generally non-dollar reactive.

Dollar & Stocks May Rally Together

However, equities might stand a better chance since the inverse correlation seen between the Dollar and stocks remains broken, as discussed in my article just before Christmas. In fact, this view is reinforced by Dr. Marc Faber, who told Bloomberg yesterday:

"U.S. stocks and the dollar may keep rallying together, reversing a relationship that existed from March to November."

Faber also said that Dollar may appreciate 5-10% against the euro in the "near term" as bearish betting on the greenback becomes too crowded while equities advance.

The Three Amigos?

Shares of Fannie Mae (FNM) and Freddie Mac (FRE) soared to their highest since October on Monday after the Treasury Dept. signed over the checkbook by removing caps on federal support. Meanwhile, some analysts see Citigroup Inc. (NYSE:C), with both explicit and implied government support, as "The Can’t Lose Trade Of 2010."

So, here is Question of the Day:

Would you buy Fannie, Freddie, Citi, and why?

Hint #1: The pay packages the Treasury announced last Thursday for Fannie and Freddie chief executives consisted exclusively of cash compensation; no shares were offered.

Hint #2: The Treasury Department had to shelve its plans to sell $5 billion of Citigroup Inc. (NYSE:C) common stock in a public offering just two weeks ago.

Hint #3: CitiGroup, Inc. (NYSE:C) has boldly gone for a zero valuation allowance since 2006 in its deferred-tax asset; whereas JPMorgan Chase & Co. (JPM) had a $1.3 billion, or 10%, allowance in its $13 billion net deferred-tax asset as of last Dec. 31.

Video Source: YouTube

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 4.8/5 (9 votes)


David Pinsen
David Pinsen - 7 years ago    Report SPAM
Overstock.com comes up on Short Screen's screener as one of the 60 most-distressed companies with a share price at or about $12.
Vooch - 7 years ago    Report SPAM
My personal research on Regulation SHO (heavily-shorted) stocks, shows the group, underperforms the market when playing a long (contrarian) strategy.

- Vooch

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