Short sellers' bad bets helped drive 2013 rally

Bad news wasn't quite bad enough last year. This caused many of the short sellers' bets to backfire.

By Jim Cramer Jan 7, 2014 12:20PM

Stock graph © Fry Design Ltd/Getty ImagesHow much did short sellers have to do with the incredible moves higher that we saw in 2013? How much of last year's positive action came simply because the predicted earnings downside didn't pan out? I've been gripped by this issue because, if you peruse the charts for the last year, I think you will be befuddled about why whole cohorts roared, especially given that there was no real impetus for the moves. In fact, in many cases these stocks seemed to go up entirely because things didn't go as badly as people thought. That's the sign -- that of spoiled shorts -- that can lead to this kind of behavior.


Let's take the curious case of Norfolk Southern (NSC). Here's a railroad that had become a very reliable short holding because of the prospects of coal dropping precipitously quarter after quarter after quarter. Sometime near the end of the summer, however, the stock started creeping up. Right then and there, if I were looking for a short, I would have been laying it out. I would have bet that nothing had changed, and that the stock would just get hammered again after the next earnings report, as had been the case much of the time.


You could almost make out the footprints of the shorts as the stock inched from $73 to $79. The Street on MSN Money


Then the rail reported the quarter and, lo and behold, coal had only dropped 2 percent. More important, coal had at last become a small enough factor that it didn't kibosh the quarter. Next thing you knew, $80 went to $90.


I am convinced that the only thing that really happened at Norfolk Southern was that the coal decline, which had gotten out of hand, was finally manageable, courtesy of some very strong chemicals and metals numbers and a hefty dose of pre-quarter estimate cuts. Norfolk Southern was simply a spoiled short from then on in.


Or take the insurers -- ones like Genworth (GNW) or Radian (RDN) or Principal Financial (PFG) or Lincoln National (LNC). It wasn't that long ago when these companies were perceived to be on the ropes. Lincoln and Principal were supposed to be on the hook for bad investments that could cause the potential for gigantic write-offs. I remember hearing that both of these were toast.


Genworth and Radian, I believe, actually were toast because of all of the private mortgage-insurance obligations they had written as home prices had relentlessly declined.


What did the shorts not get right on these? Perhaps it's that the Federal Reserve's policies had precisely the impact that the Fed had wanted. Those policies aimed to make it so that the Principal and Lincoln annuities and investments would come back to life, and the plummeting home prices -- which were decimating Genworth and Radian -- were to reverse course and roar back.


The success of the Fed is mind-boggling on these scores, particularly given that you heard over and over again that the various bond-buying programs weren't working. I wonder how many shorts got caught believing the ideologues who complained endlessly about the central bank's lack of efficacy. These shorts ran into a Ben Bernanke buzz saw, because one of the Fed chief's unstated goals was to save the likes of Principal and Lincoln and Genworth and Radian from going under. The shorts targeted the exact same thing that Bernanke targeted, and Bernanke won.


Then there were the short sellers I regard as having been too skeptical. All of the defense-stock short positions came under this category. These were simply intellectual shorts gone wrong. It was such an easy way to lose money, in retrospect. Even if we didn't see it coming, all of these companies had a real bead on the sequester, and they took action well ahead the ax man. Not only that, but these stocks had never been expensive to begin with, and the companies have always been huge cash generators. Shares simply failed to come down. In many ways, that was enough.


We saw many situations like these, in which the skepticism got out of control. The airlines, for example, had always been reliable short positions. Whenever their heads lifted, it was important to lay down as much short firepower as possible. But when these failed to disappoint, and when the Justice Department then gave the OK to the U.S. Airways-American Airlines (AAL) merger, there wasn't a short leg to stand on.


There are so many examples of this kind of behavior. The newspaper stocks had been reliable shorts until this year, when consolidations and vanity buyers stepped in and the remaining players simply turned up and stayed up. I remember recommending New York Times (NYT) and being laughed at by shorts who thought I had lost my mind. Nope, they lost their shirts. The refiners were supposed to be hammered because of a narrowing of the spread between West Texas Intermediate and Brent. Didn't happen. The disk-drive stocks were supposed to be bashed by giant new foundries pumping out drives. Nope. They weren't built. Hewlett-Packard (HPQ) was supposed to be destroyed by the anti-personal-computer tidal wave. Amazon (AMZN) was supposed to crunch Best Buy (BBY). Neither happened, and the stocks just couldn't stop rallying.


When we look back at 2013, we can say that it was the beginning of the economic expansion that was behind so much of the rally -- or that it was the Federal Reserve's low rates. But perhaps all that really happened was that the hedge funds that shorted for a living, and which had done so well even with the rallies off the bottom, capitulated. The result was a rally of insane proportions for many sectors, based on nothing more than a lack of degradation or minor reversals of fortune.

Jim Cramer


At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the securities mentioned.


Jim Cramer's Action Alerts Plus: Check out this charitable trust portfolio and uncover the stocks Cramer thinks could be winners.

More from TheStreet:

Jan 7, 2014 12:52PM
Short sellers, HFT platforms, Manipulators, Day traders and Scumbags do not make for a Healthy Market any more than folks buying Stocks on RECORD Margin are using Fake Fiat Crack-Dollars. Having a one sided viewpoint, That's a foolish if not mostly a purely selfish way of thinking. It's what we come to expect considering Too Big To Fail and Too Big to Jail.

The Feds are manipulating the Markets along with countless others on both sides. But I see some only think it's healthy when it mostly benefits them. That's not reality, that's Alice in Wonderland Koolaid.

Manipulation on the upside eventually will catch up on the downside, regardless of any shorts. Making something happen via Artificial pump priming always has consequences. Usually very bad ones.
Jan 7, 2014 1:33PM

Yea Fatty you've made it to the top of the mountain. 

Jan 7, 2014 2:04PM

So what if some of the posters here are not Wall Street day traders masquerading as investors? Some one has to stand up for Main Street. The whole effort so far has been through QE and has only aided Wall Street.......... that did not fix the vast issues on Main Street.


The shorts failed not because of bad logic but just because of the Fed.

Jan 7, 2014 1:44PM
Cramer's theory is predicated on one important variable - the quantity of shorts.  Were there really that many bets against the market in 2013?  Of course there are individual examples - Ackman shorting Herbalife, etc....  But overall, just based on volume alone, I'm not convinced that there were enough traders shorting these stocks to account for this rally.  And if there were, I'd like to know who they are and why they've been so foolish as to engage in hand-to-hand combat with Bernanke and the boys.  If anyone ever actually admits that they spent most of 2013 shorting stocks, run away from them and their advice as fast as possible.  There was plenty of money to be made in 2013 shorting things other than stocks - the USD, gold and silver, oil, corn, etc...
Jan 7, 2014 5:21PM
I only hope he is on ObummerCare.... only the best doctors for Little Beav. LMAO
Jan 7, 2014 1:36PM
Give yourself a couple more thumbs up Fatty. 
Jan 7, 2014 2:31PM
Brent has met his Fate,    The Same As I
Jan 7, 2014 2:15PM
Does anyone here really believe they can bring good jobs back to the USA without having a negative impact on Wall Street? Wall Street is why they don't.
Jan 7, 2014 2:56PM
an impudent, cunning, or boldly flirtatious girl or young woman.
Jan 7, 2014 2:40PM
Why did he not talk about the free ride from the Feds going in debt over $4trillion to help Wall street and the banks with near free interest rates? The bubble the Fed is making will end soon.
Jan 7, 2014 2:46PM

What fueled the markets this last year? 85 billion a month- don't fight it- accept it. 'Surf' that wave- 'slice' it, 'rip' it, & ride it all the way in to a great start for 2014.

And when the taper begins? ahh- I see some very viable shorts on the horizon. It's not manipulation- It's capitalizing on opportunity - Retog (you do it too when you can) !



Gee Cramer the past five years of market gain have only come because of QE1,QE2 and QE3


The Fed will have to increase QE3 to $140 billion a month this year in order to keep the stock market from collapse.



Jan 7, 2014 1:09PM
Faceplant and Twit will end up in single digits before it is all said and done.  Their seemingly unbelievable rise is totally based on shorts getting constantly jammed by certain m.m.s.  I'm not whining just saying that this is the way it is.  Stand in front of any Bull, real or fabricated, and you will get hurt.  Just Sayin.
Jan 7, 2014 1:34PM
ANYTHING FAT CAT DOESN'T KNOW. Is good for America. What he does know, isn't.  
Jan 7, 2014 1:42PM
Yesterday on Fast Money, Ronnie Moas of Standpoint Research blacklisted Apple for Morality reasons. This guy from what I have gathered has made a good bit of Money  via the Stock Market Enterprise. He stated because of his so-called political stance, a client paying him $50,000 per year dropped him. He also stated regardless he expects to continue to land on his feet and be very successful. Mellisa Lee accused him of having some Nervous breakdown while the other two hosts on Fast Money gave the Man big time Respect.

I know this might come as a shock to some but you can invest in Markets while expressing your political viewpoints. Folks hating Obama didn't stop them from taking advantage of Cash of Clunkers. Same for the Stock Markets.

We can't pass on Debt to our Kids to infinity. What is that old saying, for every Action there is a equal and opposite reaction. The Feds have $4Trillion on their Balance sheet and growing. The Scam Banks have $500-700Trillion in Toxic Derivatives on their books. Euro-zone is still at 12% unemployment with Japan about to jack up it's sales tax from 5% to 8%. China is both a economical and environmental disaster waiting to implode. Yet just because for a SHORT time frame, we have done well with Stocks, we should just ignore that. That's a recipe for Epic Fail, every freaking time.

Jan 7, 2014 8:46PM
  You got that right Crazy. If some of these countries had to protect them selves they would have better understanding what the cost is, spend less time knocking us, have less money for their socialist agenda and we would more for ours. I'm not sure we can afford to support our socialist agenda and theirs too any longer anyway. Good investing!
Jan 8, 2014 7:41PM
I read the ARTICLE   LOST

Jan 7, 2014 1:29PM
Trying to cover your scent? Not gonna work. You still smell like a Hypocrite Liberal. This dumba$$ entitlement mentality you people come off with is like a woman who thinks she is more attractive than she is.  Makes my stomach ache from LMAO
Jan 7, 2014 1:21PM
Well... they are called-- business "platforms" now. Time to sink all ships with the crews tied-down on the decks? I think so. 
Jan 7, 2014 5:33PM

Well good luck to Brent, Patriot, Minx, Barry, DLH, NTU, Crazies, and the rest...

I'm not even going to wish you anything Bad, Fatty...

Markets looked pretty good today, if anyone bothered to check...

I've got cold weather things to do, plus feed more to my birdies.

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