Friday, January 18, 2008

Citi Analyst Embraces Naked Shorting Conspiracy Theory

One of the recurring motifs of this blog is how inept and shady CEOs use naked short selling conspiracy theories to excuse their own inability to generate profits. Today another excuse-monger comes to the fore, a Citigroup analyst named Heather L. Hunt.

Hunt has been one of the most unabashed bulls on muni bond insurers MBIA and AMBAC. In mid-December, she called a selloff in MBIA stock (which had just fallen to about 20), a "buying opportunity."

Hunt was proven dead wrong. The stock since has fallen to below 9, and in a report released today, she backed off from her previous bullishness--a little bit. She cut Ambac and MBIA to "hold" from "buy," saying, Reuters notes, that "it was difficult to maintain her top rating amid worsening credit market conditions, despite extraordinarily low valuations. 'Valuations suggest financial distress but financials do not,' she said."

OK, so far so good. Just some typical self-serving blather from an analyst who was proven wrong. Hey, that is why erasers are on the end of pencils.

But in her report (not online), she continues as follows:
Short interest is quite high — We would note that both Ambac and MBIA shares have failed to meet threshold tests on the New York Stock Exchange. This suggests there may be “naked short selling,” whereby short sellers are unable to find shares to borrow in their short sale. This could be placing artificial downward pressure on the shares. In the article at the following link, the Houston Law review cites the example of While more than 90% of the shares were held by insiders, massive volumes of stock were sold short, driving down the stock. Yet these owners had not lent their shares. We do not know if “naked short selling” is occurring with Ambac and MBIA shares, but if it were, it might help explain the significant volume and downward pressure.
She then goes on to link to an article by a lawyer who filed junk lawsuits on behalf of Overstock and other small, excuse-hungry companies. Not a single one of those and similar lawsuits have gone anywhere in the four years since they started to clog the court system.

Yes, it could be that naked shorting has hurt the bond insurers. Or it could be, and almost certainly is, that all the negative factors that Hunt has downplayed-- the ones that have cost money to anyone who took her advice -- explain why these stocks have plopped into the toilet.

Short interest is indeed high, but that has nothing to do with the "threshold test" to which she refers, or the phantom menace of "naked short selling." You would think that a Citigroup analyst would know the difference.

The "threshold test" refers to extensive "fails to deliver" shares in particular securities -- a major source of angst among naked shorting conspiracy theorists. Just today, the SEC succumbed to pressure from naked shorting activists by releasing still more data on that subject, resulting in an expression of joy from's loopy CEO Patrick Byrne.

In issuing the new data, however, the SEC said explicitly that the data is meaningless for the purpose for which it is usually used -- as evidence of naked shorting.
Please note that fails-to-deliver can occur for a number of reasons on both long and short sales. Therefore, fails-to-deliver are not necessarily the result of short selling, and are not evidence of abusive short selling or “naked” short selling. [emphasis added]
In other words, all the naked shorting conspiracy theories and scare-mongering, promulgated by Byrne and Richard Altomare and a motley assortment of Internet crackpots -- and now a Citigroup analyst -- are sheer hooey. All are based on grossly exaggerating the significance of fails-to-deliver data. Unfortunately, the SEC does not have the guts to come out and say that.

Still, that's about as blunt as the SEC ever gets. What I can't quite understand, then, is why the SEC is going to such trouble in the first place. There's nothing wrong with the feds releasing data, no matter how meaningless it may be, but if the data is meaningless, and it is releasing the data for political reasons, it should say in boldface and explicitly, "this data is meaningless."

Otherwise, one risks misleading hapless investors, and stupid or irresponsible Wall Street analysts.

UPDATE: Here's Herb Greenberg's take on this latest recruit to the Baloney Brigade. Floyd Norris points out that Hunt's employer is one of the targets of an anti-naked shorting junk lawsuit.

A hilarious message board post tonight ridicules Overstock's tenuous grasp on reality:

Let me understand the stupidity of this worthless company.

While the stock hits a new low......While investors show no confidence in the management of this company or it's ability to compete in its market....they issues a press realease commending the SEC???

They will soon be commending the quick action of the bankruptcy courts....

The stock has gone from 39.00 to 10.00 and they commend the SEC. THANK YOU overstock. My confidence in your business plan and shady accounting has been restored. WHAT AN EMBARRASSMENT peter and OSTK has become.

© 2007 Gary Weiss. All rights reserved.

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