Thank God the shorts are back! Now we have someone to blame for stocks going down.
The return of short sellers to the market is already being blamed for a sharp drop in share prices, especially in General Motors and Morgan Stanley. Never mind that we had plenty of far worse days on the markets recently, it seems everyone is all too happy to blame the shorts.
So have the shorts gone on a rampage against Morgan Stanley? We don’t doubt that short interest on Morgan Stanley has grown today. But that hardly indicates that shorts are out to destroy the company. A far more reasonable explanation was offered on CNBC this morning Jim Chanos of Kynikos Associates. He proposed that a lot of shorting of financial stocks wasn’t being done by hedge fund short sellers—many of them have exited their short positions now that the financials have dropped so far from their highs. There’s just not that much upside to staying short these stocks.
Rather than dedicated short-sellers, Chanos proposes that much of the short interest arises from investors attempting to hedge their long exposure—through bond holdings as trading counter-parties, for instance—to, say, Morgan Stanley. In short, what we’re seeing isn’t so much a “bear hunt” as a risk-management adjustment.