People around the world celebrated early this year when GameStop’s stock suddenly hurtled higher, causing billions of dollars in losses for short sellers.
But academics and short sellers themselves say they provide an important service suited for just this moment: pushing back against stock prices that may be rising too high, too fast.
Some critics say stocks look overly expensive, with some broad measures of value close to historical highs.
Jones’ research of Wall Street in the late 1920s and early 1930s, for example, looked at a group of stocks that were particularly expensive to short, which discouraged short sellers from targeting them.
When investors short a stock, they borrow the shares from someone else and sell them.
regulators temporarily banned the shorting of financial stocks, fearing short sellers would undermine already weak trust in them and trigger a run on the system.
Nearly four years later, though, a study by a New York Fed economist and professors at Notre Dame suggested the ban did little to slow the decline in bank stocks, which fell anyway.
Then, it was nearly twice the force it is now, accounting for 2.61 per cent of all the shares in S&P 500 companies.
Instead, he said a big reason is the ultralow interest rates set by the Federal Reserve to resuscitate the economy.
Block specializes in rooting out fraud, and one of his earliest victories came with Sino-Forest, a company that was once Canada’s most valuable publicly traded forestry business.
Tesla was a favorite target for years, with short sellers betting founder Elon Musk’s visions for the electric-vehicle company were overly grandiose.
Consider Marc Regenbaum, a portfolio manager at the Neuberger Berman Long Short fund.
Doug Ramsey, chief investment officer of the Leuthold Group, says the average stock in the market recently looked more expensive than it did at the height of the 2000 dot-com bubble, based on several measures.
The average stock mutual fund that reserves some of its portfolio for shorting has returned an annualized 7.2 per cent over the last five years, less than half the return of an S&P 500 fund, according to Morningstar.
But the Fed earlier this month announced it’s paring back on its monthly purchases of bonds.
Block, the activist short seller at Muddy Waters who sometimes spars with his critics and haters on Twitter, said he’s not anticipating quitting.