Carson Block Says He's Certain China Will Face Day of Reckoning

[weijian]

hi Duskerdawn,
Thanks for giving everyone here a more balanced view of Carson Block. I dont think it is the intention of most VBs to have a cynical view of him. I think most of us are simply amused at the "simplicity" of the bloomberg article instead - trying to create headlines when there is none worthy?

Short sellers have a different psychological makeup to most others and this is what makes them stand out. Specifically, Carson Block has mentioned that he only makes the wager when he believes he has an informational edge over the person at the other side of the trade. Alot of things for us to learn from, as OPMIs.

[HitandRun]

I am going to first state that I do not think everyone should flame Carson Block entirely. 
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In principle I do agree with you but I would also like to point out that there is something nefarious about the modus operandi of certain short sellers who are being very public about their intentions:

1. For any highly leveraged business (including banks), if a short seller is able to create panic among creditors, the business will almost certainly go belly-up if creditors no longer intend to extend any credit.

2. Even there is nothing fundamentally wrong with a business, if a short seller can create temporary panic among investors, the short seller would have achieved his purpose of making a profit.

Unfortunately, the law is not so clear about such unethical behaviour (especially in the US where it is based) and Muddy Waters (if I am not wrong) has cleverly structured its holdings such that very little assets are at risk should it face possible litigation.

[weijian]

For those who are able to spare 1.5hours listening and likes to learn things from multiple angles...

Apparently on a "net-net" basis since he started out in 2010, Carson Block says his shorts just kinda "broken even"?

The Short Seller

In this interview, Carson explains the business of short selling; the difference between fundamental shorting and his business of shorting and exposing frauds; how he spots these fraudulent companies; where to find frauds; and why it takes Muddy Waters 3 months to launch a short campaign. We discuss the economics of a short fund, why short selling is so much more difficult than long only  investing and why Europe is a more difficult area to operate.

https://behindthebalancesheet.com/podcas...episode-15

[Behappyalways]

Not easy to be a short seller for the odds are stacked against you... But they are the ones who have the best fundamentals out there so I tend to pay more attention to them when they talk....

Olam is a good example where Carlson Block is right but lost money in it I think...

Carson Block Says The Stress Of Being A Short-Seller Forced Him To Give A Presentation In Adult Diapers Once
https://www.zerohedge.com/markets/carson...apers-once

http://investideas.net/forum/viewtopic.php?f=42&t=10300

[weijian]

Short sellers are kind of like VCs. Out of all the candidates they look at, probably only a few are shortlisted. Then out of the shortlist which were eventually shorted, probably only a few are outsized winners, with the majority making either small losses or profits. Unfortunately, that is where the similarity ends as VCs have no ceiling in their winners but short sellers have a 100% gain ceiling. In Nassim Taleb's words, if VCs do asymmetric bets in their business model, are short sellers assuming asymmetric risks in their business model?

Since GFC2008, many of us have been conditioned to believe that black swans (or outliers) are the norm. When short sellers like Carson Block get their short selling exactly right because it turns out to be a fraud later on, it reinforces the sexy-ness of short selling (especially for value investors since both focuses on fundamentals) and how "black swans are the norm". Since Carson Block started around ~2010 and managed to hit this post GFC2008 outlier perception, I suspect that there is a tinge of halo effect helping his reputation.

[specuvestor]

Inflation is not helping short sellers either. They might also be a victim of own success through recalls ie when stock comes down lenders recall their stock which short sellers have to buy back just to watch the stock go lower when the lenders themselves sell. Especially in Asia only good stocks can be borrowed as institutions hold it; lousy stocks is hard to borrow.

Short selling sounds sexy but very asymmetric. They don't even get 100% return cause when stock is suspended it will be a borrowing rate or cover position nightmare... hence sometimes stock dead cat bounce when it is going to suspend as short sellers scramble to cover.

The other problem, perception or real, with short sellers is that they create fear on trust and hence creditworthiness which even a perfectly good company with leveraged business model cannot survive. Corollary is that an unlevered company is not afraid of short sellers.

[weijian]

Short selling sounds sexy but very asymmetric. They don't even get 100% return cause when stock is suspended it will be a borrowing rate or cover position nightmare... hence sometimes stock dead cat bounce when it is going to suspend as short sellers scramble to cover.

I wondered if this is the case for what happened to Best World when it finally returned from suspension, ie.  the price shooting up on the 1st day of trading can be attributed to shortists covering their shorts after paying the borrowing costs for last few years...

Carson Block's epiphany may not be too late after functioning for the last 10 years as an exclusive short seller. Maybe converting to a long-short net hedge fund is the best...

The other problem, perception or real, with short sellers is that they create fear on trust and hence creditworthiness which even a perfectly good company with leveraged business model cannot survive. Corollary is that an unlevered company is not afraid of short sellers.

The MW-Olam saga actually suggests that while on aggregate, Olam with a leveraged business model is affected but eventually if the company is really good, a white knight (in this case, Temasek) will step in. In the grand scheme of things for Olam shareholders, it might not be a bad thing because we could argue Olam is more "anti fragile" now (Again, we see such unintended consequences coming out as 2nd order effects)

[CY09]

Short selling sounds sexy but very asymmetric. They don't even get 100% return cause when stock is suspended it will be a borrowing rate or cover position nightmare... hence sometimes stock dead cat bounce when it is going to suspend as short sellers scramble to cover.

I wondered if this is the case for what happened to Best World when it finally returned from suspension, ie.  the price shooting up on the 1st day of trading can be attributed to shortists covering their shorts after paying the borrowing costs for last few years...

Carson Block's epiphany may not be too late after functioning for the last 10 years as an exclusive short seller. Maybe converting to a long-short net hedge fund is the best...

The other problem, perception or real, with short sellers is that they create fear on trust and hence creditworthiness which even a perfectly good company with leveraged business model cannot survive. Corollary is that an unlevered company is not afraid of short sellers.

The MW-Olam saga actually suggests that while on aggregate, Olam with a leveraged business model is affected but eventually if the company is really good, a white knight (in this case, Temasek) will step in. In the grand scheme of things for Olam shareholders, it might not be a bad thing because we could argue Olam is more "anti fragile" now (Again, we see such unintended consequences coming out as 2nd order effects)

I wondered if this is the case for what happened to Best World when it finally returned from suspension, ie.  the price shooting up on the 1st day of trading can be attributed to shortists covering their shorts after paying the borrowing costs for last few years--> To weijian, unfortunately no. Short sellers (who loaned via CDP) were able to cover their shorts at 1.36 when Best World had the EAO. This made a few investors angry. It was mentioned in the Best World Thread, hence the action by corporates may offer respite to short sellers of Singapore stocks

[weijian]

I wondered if this is the case for what happened to Best World when it finally returned from suspension, ie.  the price shooting up on the 1st day of trading can be attributed to shortists covering their shorts after paying the borrowing costs for last few years--> To weijian, unfortunately no. Short sellers (who loaned via CDP) were able to cover their shorts at 1.36 when Best World had the EAO. This made a few investors angry. It was mentioned in the Best World Thread, hence the action by corporates may offer respite to short sellers of Singapore stocks

CY09,
Thanks for the clarification. But to further clarify, the EAO is only a % of what you have at the point of declaration, isn't it? So are short sellers able to fully cover their full position?

[CY09]

Hi Weijian,

Here is the article: https://nextinsight.net/story-archive-ma...-borrowers

Hence for those who are under the share lending program, their shares are considered sold at "1.36" if the borrowers, who borrowed under SBL, are unable to returned the loaned securities. There were a few shareholders who protested against it but this is the danger of not reading the fine prints of the share lending program (SBL)