Too short…or not too short?
Wednesday, 23 October 2019
By Bernd Struben
- Short selling bitcoin’s 2017 bubble
If you’ve glanced at the financial news headlines this week you likely noted the ‘short attack’ on WiseTech Global Ltd [ASX:WTC].
Maybe you even own stock in the $8.7 billion logistics and software company. Or maybe you’ve joined in the short selling.
You could have done quite well with either strategy…depending on your timing, of course.
In case you’re unfamiliar, short selling means you gain when a stock’s share price falls.
The strategy works something like this…
If you believe a company, like WiseTech perhaps, is overvalued you can ‘borrow’ shares from a broker for a small fee. You then turn around and sell these shares and pocket the cash.
Now you sit back and wait to see if you were right. If the stock falls say, 20% in value, you can buy back the shares and return them to your broker. You then pocket a 20% gain…minus the broker’s fees.
On the flip side, if the stock gains 20% you’ll need to buy it back at a higher cost. Meaning you lose 20%…plus the broker’s fees.
But — a word of caution — your losses on short selling are potentially unlimited.
When you’re going ‘long’ on a stock — meaning you buy it with the expectation it will go up — the worst case scenario is you lose 100% of your investment. The share price, after all, can’t go below zero.
However, there’s no real limit on how much the share price could gain. If you buy shares at $1.00 and the stock soars to $10.00, you’ll be out 10 times your investment.
Getting back to WiseTech, the stoush over the stock’s proper valuation is coming off as a case of he-said-she-said.
More, right after the markets…
Overnight, the Dow Jones Industrial Average closed down 39.54 points, or 0.15%.
The S&P 500 closed down 10.73 points, or 0.36%.
In Europe the Euro Stoxx 50 index closed up 4.74 points, or 0.13%. Meanwhile, the FTSE 100 gained 0.68% and Germany’s DAX closed up 6.73 points, or 0.05%.
In Asian markets Japan’s Nikkei 225 closed down 6.73 points, or 0.03%. China’s CSI 300 is down 0.38%.
In Australia, the S&P/ASX 200 is down 12.68 points, or 0.19%.
West Texas Intermediate crude oil is US$54.16 per barrel. Brent crude is US$59.70 per barrel.
Turning to gold, the yellow metal is trading for US$1,489.03 (AU$2,170.28) per troy ounce. Silver is US$17.56 (AU$25.59) per troy ounce.
One bitcoin is worth US$7,967.51.
The Aussie dollar is worth 68.61 US cents.
Now back to WiseTech…
Making the case for shorting the stock is J Capital Research co-founder and research director Anne Stevenson-Yang.
According to The Australian Financial Review (AFR) Anne:
‘[H]as written two scathing reports that caused $2 billion to be wiped off the logistics software company’s market valuation in the past week.
‘She told The Australian Financial Review her research into the company led her to believe WiseTech was “raising money in order to buy revenue”.
‘“Imagine spending six times revenue for a company that’s not growing? Nobody does that… You can pay a multiple of sales if it’s profitable and growing fast. I think what WiseTech shows is the valuation is what enables it to raise money…As that collapses you’re going to find the supposed growth collapses.”’
The first ‘scathing report’ came out last Thursday. You can see the fallout from that report in the five-day chart below:
Source: Google Finance
Click to enlarge
By 12:30am Thursday, the stock had shed 9.7%.
Now if the chart appears to be missing some days…it is.
That’s because WiseTech entered a trading halt on Thursday after the first report hit the markets. The stock entered a second trading halt on Monday following the publication of the second report, upliftingly titled ‘The Closer You Look the Uglier It Gets’.
The second report saw the share price tumble another 12.3% before trading was halted.
That covers the ‘she-said’ bit. Now for the ‘he-said’…
This morning, WiseTech CEO Richard White returned fire.
From the :
‘WiseTech Global has refuted all the claims in US hedge fund researcher J Capital’s second scathing report, saying the claims could mislead and manipulate the market…
‘“Regardless of the noise and market disruption of these short-seller, self-serving and misleading claims, we will continue to strive to ensure our shareholders are informed about the fundamental performance of our business,” Mr White said [in a statement to the Australian Securities Exchange].’
For today, at least, investors appear to be taking Richard at his word. At time of writing the share price is up 9.4% for the day. That puts the stock up an impressive 68.3% year-to-date.
WiseTech is sticking with its 2020 financial year guidance, which they released in August. That forecasts revenue growth of 26–32% and growth in earnings before interest, tax, depreciation and amortisation (EBITDA) of 34–42%.
Nice figures…if they can achieve them.
But with an eye-popping price-to-earnings (PE) ratio of 163 times, anything short of their forecast expectations could make the past few days’ sell-off pale in comparison.
Invest with care.
Short selling bitcoin’s 2017 bubble
Now some investors find shorting stocks distasteful. That’s fine. It’s not for everyone.
But Christopher Giancarlo, former chairman of US Commodity Futures Trading Commission (CFTC), nicely summed up the rationale for needing a means to short stocks…and cryptocurrencies…in an interview with CoinDesk.
Without shorting he said,
‘If you do believe it’s a ridiculous price but you don’t own, there’s no way to express that view. If you don’t have that derivative, then all you’ve got are believers [and] it’s a believers’ market.’
Now the derivative he’s talking about here are bitcoin futures. Until they came into play there was no way to short bitcoin. And by the tail end of 2017 there were plenty of traders eager to bet against its skyrocketing trajectory.
Christopher says the Trump administration’s decision to allow futures products on bitcoin was a deliberate free market move to deflate the bitcoin bubble.
‘“One of the untold stories of the past few years is that the CFTC, the Treasury, the SEC and the [National Economic Council] director at the time, Gary Cohn, believed that the launch of bitcoin futures would have the impact of popping the bitcoin bubble. And it worked.” …
‘Bitcoin futures listed by the Chicago Mercantile Exchange (CME) and the CBOE Futures Exchange (CFE) were announced by the CFTC on Dec. 1, 2017 and went live on Dec. 18. Bitcoin’s price peaked at nearly $20,000 one day earlier, on Dec. 17, before falling dramatically in subsequent weeks.’
A year later, on 16 December 2018, bitcoin finally bottomed at just under US$3,200.
It then went on to defy naysayers taking bets against it to rebound all the way to US$12,600 on 10 July this year. It’s been mostly downhill since then. At last glance one bitcoin was trading for US$7,967.
Is that undervalued…overvalued…or a fair price?
Ask any 10 crypto traders and you’ll get 10 different replies.
But with the ability to go short on bitcoin, we at least know the price isn’t simply propped up by believers.
That’s it for today.
And if you want the insider’s scoop on all things crypto and bitcoin, you can get that from Sam Volkering here.