How shorting can lead to ugly results

Shorts take much more homework than longs. They must be discovered early, and they require ingenuity.

By Jim Cramer Jun 6, 2014 11:55AM

Market analyze on a digital monitor © woraput/Getty ImagesHey, short sellers, how about some originality? The Street on MSN Money


How could more than 20 percent of Joy Global (JOY) be sold short? Do you think we haven't all read the coal articles? Do you think that would be a big secret, a huge surprise that would be overlooked by the longs? Do you think that after natural gas goes almost to $5 there wouldn't be more coal used? Did you forget that you can use electric shovels for tar sands work and that Canada is abuzz with tar sands work? Did you not see that 16 out of 23 analysts have holds or sells on it for precisely the reasons you are short so they aren't going to downgrade on a bad number? Didn't you think someone would break ranks, like Bank of America Merrill did, and go hold to buy? Could you really be that devoid of imagination?


I was astounded Thursday to see how short people were in this high-quality machinery company that has secular challenges, for sure, but is in a global industry where the rest of the world can't afford to be as anti-coal as we can. They don't have cheap natural gas. They are decommissioning nuclear plants left and right because of Fukushima. And wind, as much as it is loved, is, even on its best days, not a factor almost anywhere in the world. Especially when it's cloudy or still out.


I point out this mistaken short because it is emblematic of so many shorts I see. Thesis shorts, whether it be telco antenna stories that were all the rage not that long ago or housing-related businesses like Sherwin Williams (SHW) and Whirlpool (WHR) or the Clorox (CLX), Kimberly-Clark (KMB) and Brown-Forman (BF-B) shorts, a troika I always hear overvaluation calls on, are just plain too obvious. Sure, housing has its ups and downs. But the consolidation in the housing-related plays is palpably positive. There simply aren't enough high-dividend plays to go around, so what's the point of betting against two of the best packaged-goods stories around? Liquor plays are too few and far between. They just don't work, other than a few points.


Or how about the shorts in the disk drive companies or semiconductor companies -- think Micron (MU) -- when there's no new capacity on the books. Or the short of Caterpillar (CAT) based on China after United Rentals (URI) tells you the U.S. has returned to earth-moving growth. Just because the media calls you brilliant doesn't make you brilliant. Yet that's how I feel about those who have been blasting those stocks.


And now, shorts, you have to look out for the more established software-as-a-service plays and legitimate biotechs. They all got gang-tackled after they had broken and the head-and-shoulders patterns were everywhere. Now, though, the percentage of stock short, coupled with the end of massive insider selling -- at least for the moment -- has made stocks like FireEye (FEYE) and Zillow (Z) and even Workday (WDAY) and Concur (CNQR) difficult, as well as Biogen (BIIB), Celgene (CELG) and Gilead (GILD). They had been terrific free-fire zones, but now they are just valuation shorts, which are shorts of the worst kind.


What should short sellers be looking for? Simple: secular decline shorts where there are accounting risks. Or competitive nightmare shorts where price cutting is endemic, making the numbers too hard to make. Or stocks that are flying high, not low, even as the businesses aren't all that well rung -- think the bad retailers.


Shorting when people are negative, shorting where everyone else is shorting, can lead to remarkably bad results. Shorts take much more homework than longs. Shorts must be discovered early. Shorts require persistence.


But most importantly, shorts involve originality. Owing to the powerful logic of a bull market, they require ingenuity. Anything short of that and you might as well have a Joy on your hands.


And there will be no joy in shortville today.


Jim Cramer headshot


Jim Cramer's Action Alerts Plus: Check out this charitable trust portfolio to see the stocks Cramer thinks could be winners. The portfolio is long CELG.




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47Comments
Jun 6, 2014 3:03PM
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Somebody give V_L a Valium or a Xanax.  This week has been a tough one for the poor guy.
Jun 6, 2014 1:46PM
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this hack called a market top on may 7 so i wouldn't take him seriously as he obviously doesn't know much............he will however, keep calling tops until he gets it right, and then you will hear him crowing that he called the top
Jun 6, 2014 4:39PM
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Retarded marine
  
More than 25,000,000 Americans out of work

Those that are up 107% can pay the unemployed out of their windfall profits !   YOU FIRST MR. 1%
Jun 6, 2014 12:06PM
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I love short plays, but the last thing I'd short is stocks.  Doing so pretty much puts you in the position of fighting the Fed - not a good spot to be in.  There are much greener pastures in commodities and currency markets.  If you insist on shorting stocks, throw any macro models you have out the window and hedge with options.  We're in uncharted waters, so pick and choose your spots carefully...
Jun 6, 2014 7:16PM
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We're looking at a DOW in an "Over Valued" dollar.


Once the dollar and the inflationary value it holds reaches

the boiling point that the Fed can't control,

Wall Street will see a "True Market Value" arise

in its aftermath...


The companies with their buy back plans have increased their

stock prices artificially and as doing so have an artificial bank role

at their disposal or the DOW would have tapered off years ago..



Jun 6, 2014 6:13PM
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Oops.  Another GM vehicle recall just announced.  Didn't see that coming.

Jun 6, 2014 12:49PM
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"How shorting can lead to ugly results. Shorts take much more homework than longs. They must be discovered early, and they require ingenuity."


Jimmy, most Shorts have been Targeted by Central Bankers for Well over a Decade. Unless you are part of the Corrupt Cartel which is Big Banks and the Global Feds, you don't even attempt to short a Market continually pumped up by Crack-Dollars.


Yet we always see folks trying to short. It's literally insane to Fight against 3 Central Banks that have printed Fake Money to the Tune of $10Trillion and Counting, just to Prop up Stock Markets and enrich the already Wealthy. So why even bother trying to short anything, up to this point in the Game, it's been a Fool's errand.



Jun 6, 2014 12:27PM
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I say just tape their mouths shut.

 

 

Jun 6, 2014 4:49PM
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Jaisuz.

 

XOM closes at $101.60.

COP closes at $80.84.

CVX closes at $124.19

 

Invest in gas.  You can't go wrong.

 

Think I'll get a gold bracelet and have it engraved:  "I Love Gasoline"

 

DOW at 17,000 Monday?  Who woulda thunk it.

 

I'm Ice Cold Sangria and I approve this message.

Jun 6, 2014 9:47PM
Jun 6, 2014 11:46PM
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Today I saw a president Obama wind up masturbator toy on Ebay.It said just what we need ,another **** in the White House.
Jun 6, 2014 9:19PM
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Jim, you forgot to mention that shorting required much more manipulation such as daily drumbeat of spreading innuendos and falsehoods such as those who worked for you and TheStreet.com.
Jun 6, 2014 12:18PM
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aren't they just gambling that we'll have a crash or correction in general? 

 

they may loose..  they may win..

Jun 6, 2014 3:55PM
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To quote Bart Simpson or Randy Newman...
Jun 6, 2014 5:09PM
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if this has been real investment there would not have been any shorts or longs or puts or options or excessive insiders stocks bonus. but of course you're so smart you should know that.
Jun 6, 2014 4:01PM
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Harrison J Soetoro
Was kind of a bad trade, I'll give you that.  Qatar has been an ally of you guys for a while, let you launch attacks against Iraq from their county when others wouldn't.  Obama is relying on Qatar to keep it's word and to keep those 5 in Qatar.  Guessing by the end of the month we might hear that they were all arrested by Qatar officials for some BS reason and USA can say, hey we kept our end it wasn't us.  Or the second they land in afghan they get incinerated by drones, either is fine. 
Jun 6, 2014 12:27PM
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Why shorting is the quickest way to make and lose lots of money.  You can lose a ton of money in this market and this is why.  Right now the market is supposedly worth 8 trillion.  All sounds real sweet huh?  And we are hearing this number thrown around to try and get you to feel comfortable about buying or staying in.  The rub is the market is only worth what the last share sold for.  If everyone sold is there anyone dumb enough to think these sellers would end up with 8 trillion? Depending upon the speed and volume if everyone sold at one time the market would probably sell for a fraction of it's advertised worth, perhaps as little as 1 trillion.   The only real value of stocks is the hard value of the company assets and its' dividend stream.  There is a ton of hot air called "forward expectations" being sold for a promise right now.  Just a tad bit of a change in sentiment can and will at some point in time reduce this market value exponentially and don't believe anything Jim or anyone else tries and convince you of.  We are teetering right now as forward expectations are very very "overbought" in my opinion.   And this "overboughtness" is the target of those of us that understand the risk of shorting. I love lots of hot air as it gives me the confidence to short and realize massively more profits than merely sitting back and watching this market become more and more full of hot air.  JMHO
Jun 6, 2014 12:54PM
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"Shorts require persistence."

What they require most, and implosion in what has become the Biggest Debt Bubble in World History.
Jun 6, 2014 4:06PM
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Hook'em Horns.....Looks like us Bulls are In Charge today, and it's even Friday...woooohoooo


Any positive over 50 is a good day today, PROBABLY new records on DOW or S&P...??

NOTHING really to report after the close....NOW, you have all seen it...


I know a couple of Guys on here, really Happy about COP holding through $80...

Some real nice moves in GOLD and SILVER today, maybe inflation scares, or something..??

And a few others, doing very well going into the weekend....Enjoy it, I may have to go to a Casino.

Or just drink some good stuff on the deck...??

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