A surprise rally this year has hit short sellers hard. Losses total nearly $17 billion already in 2023:
From a report out this morning in Bloomberg:
Ten of the most-shorted stocks this year delivered almost $17 billion in combined mark-to-market losses for bears through Thursday, according to data-analytics firm S3 Partners. Tesla, which has surged 67% so far in 2023, leads the group by dealing a $7.2 billion blow to traders shorting the stock. The electric-car maker is followed by Nvidia Corp., Apple, Meta, Amazon.com Inc. and Microsoft Corp.
Heavily shorted meme stocks have also delivered painful lessons to short sellers.
AMC Entertainment Holdings is up 38% this year. GameStop Corp has jumped 17%.
What we’re seeing is an overall risk-on attitude. All the assets we hated in 2022, from crypto to meme stocks to tech, are surging in 2023.
Hedge funds shorting meme stocks are in an especially weak position.
The cost to borrow shares like AMC and GameStop is stratospheric, sometimes passing 100% per year. With fees like that, the stock either craters ASAP or you lose a fortune.
Add that to intense retail interest, and you have a recipe for disaster.
I don’t know where markets are headed. But I do know that paying double or triple digit interest rates to short a volatile stock is reckless.
And what of the bigger names, like Nvidia or Microsoft? Well, it so happens those two companies are some of the most likely to benefit from major advances in AI.
Nvidia makes GPU’s, the chips AI relies on. Microsoft owns a huge piece of OpenAI, one of the best companies in the space.
If AI fever begins to power markets, short sellers in those names will be running for cover.
In general, short selling is a poor strategy. Your upside is capped at 100%, your downside is unlimited, and you’re swimming against the generally rising tide of markets.
I prefer to buy great businesses for the long term.
What do you think is next for short sellers? Leave a comment and let me know!
More on markets:
SEC Refuses to Address Massive Fraud in Markets
Major Hedge Fund Down 54% — Survival in Doubt
Citadel’s Illegal Trades — The Tip of the Iceberg?
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Photo: Prominent Tesla short seller Jim Chanos. “Jim Chanos and Stephen Roach at Asia Society New York” by Asia Society is licensed under CC BY-NC-ND 2.0.
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