How to short the market

Here are a variety of links, please note this not investment advice from me and I am not myself short the market.  Still, 85% of my Twitter feed seems to be short the market, in fact radically short, so I thought I should blog (descriptively, not prescriptively) on this topic at least once and report what they are doing.

I am worried about the impact of the stronger dollar, here is Adam Tooze on that topic.


As an additional cautionary note, shorting stocks is a *very high risk* approach to investing. Anyone considering it should become very familiar with the phrase "short squeeze, which are capable of producing effectively infinite losses.

Amen, brother. Oh, and make sure you visit Ironman's website.

When the market crashes, and it will, your broker won't take your calls and you will be out of luck. If you are 21-45, no worries it will rise again. If you are 45-60 you should be 20%-50% in stocks and the rest in something that will either survive or thrive in a recession. If you are over 65 you should be out spending it all like I am.

Just as the crash of 2008 was caused by policies put into place 10 to 20 years earlier the policies of the last 8 years are a poison pill and will come back to bite us. Maybe January 2017, maybe in the next 6-12 months, maybe a year or two down the road. Maybe Trump can really pull off a recovery from our long recession. Either way it will crash and when it does you won't be able to get out in time and you will wonder why you didn't diversify more.

Just buy puts, like all the people in my Twitter feed are doing.

Of course, if the ship hits that iceberg, who on-board the sinking ship will perform his obligations. Sinking ships have fat tails.

I love the blue color. And TC no blue collar, but a high roller, he got game. "If you kant afford to lose it..."

The market is up 6% since Trump's election, so people are getting paid a healthy premium to bet against him.

I have some far out of the money puts on one company that I think would go down a lot if the market crashes.

Buying a close to the money put seems to be pointless.

Cowen may not favor short the market, but it's clear he favors irony. Who can forget the chorus singing the need for certainty and confidence but a few years ago, now the same chorus is singing the need for uncertainty and unpredictability and abjuring complacency. We are about to set sail in a sea of icebergs and Cowen worries about a strong dollar. It's time to kick over the table, let the chips fall where they may, the cream rise to the top, the deadwood perish, and irony rule.

I was wrong, Cowen does not favor irony:

With apologies to Mr. Cowen, this isn't about the Koch brothers; rather, a stronger dollar triggered by the destination-based corporate tax reform supported by some Republicans in Congress.

I don't think TC has changed his tune that much; I recall his earlier blogs and he's always been a conservative fellow. I counseled him by email to embrace Trump winning, but he declined (ditto for saying Karjakin may upset Carlsen for the chess championship, and that turned out to be bad advice as Carlsen barely won, as TC predicted). As for Koch, the Economist had a flattering article on his in last week's leader, and he's a stern taskmaster who wants performance despite his low-key image: many a libertarian has found their funding cut off when Koch et al don't see progress, as outlined in B. Doherty's book "Radicals for Capitalism" where the early TC makes a cameo... as an up-and-coming Austrian!

The article I link is not about the Koch brothers, it's about the destination-based corporate tax reform and it's potential (certainty?) to strengthen the dollar and therefore hurt exports. Unfortunately, "Koch brothers" appears in the link, most likely to increase page views but misleading anyone who doesn't actually read the article. As for Cowen and the Koch brothers, my view is that Cowen is no more a puppet of the Koch brothers than I am a leprechaun.

If you can borrow the shares from your broker for any reasonable fee, probably the best way to short the overall market is to short any of the 2x or 3x levered long ETFs. Those ETFs pay various fees and trading costs such that they are guaranteed to underperform the market. Some examples: The problem is getting a locate.

The worst way to short the market is to buy index puts. index puts are structurally overpriced, with some natural demand but no natural suppliers. Longer-dated index puts are less overpriced than short-dated index puts, but still expensive.

Instead of index puts, in my opinion one should buy some individual stock puts, which are not structurally overpriced. The best candidates are relatively high-beta, low idiosyncratic volatility underlying stocks with ongoing share-repurchase programs and high pricing multiples. The share repurchase program is relevant because the corporate treasurers often write puts on their own stock as a part of the share-repurchase program.

Transaction costs will eat up your profits? As you say in your apparent Wall Street slang: "The problem is getting a locate".

I'm not a highroller, but the one time I did fancy shorting a stock was just before the 1997 Asian financial crisis if memory serves. I shorted Wells Fargo, since I had a funny feeling that banks were over-valued (I don't know why, I had done no real market research). Well Asia imploded, I was in the money with my WFC puts for a few days, decided to ride my profits when, strangely, the puts momentum began to slow a short time later, and... I ended up losing money. I was told by those in the know that despite the decline in financial markets, for those managers that have to park money into banks stocks, WFC at that time was considered the best run bank so it became a 'haven' for bank stock money, hence it did not implode. Plus perhaps their exposure in Asia was small. Caveat emptor when shorting stocks at the retail level.

"because the corporate treasurers often write puts on their own stock as a part of the share-repurchase program."

This makes an enormous amount of sense to me that they would do so but I have never heard of anyone actually doing it. Can you give examples of companies that do this?

the problem with people handing out financial investment advice ---> if they really know what they are talking about..... why are they not sipping martinis with super-models on their luxury yacht in Tahiti, rather than wasting their time communicating with us hoi polloi?

But TC is wealthy. He makes 200-300k in base, and probably 50k from blogging, and, crucially, he's a chess master.

...that doesn't sound wealthy by Wall St investor standards.
And how much of that do you figure the government tax man lets him keep?

How much is a child’s future success determined by innate intelligence? Economist James Heckman says it’s not what people think. He likes to ask educated non-scientists -- especially politicians and policy makers -- how much of the difference between people’s incomes can be tied to IQ. Most guess around 25 percent, even 50 percent, he says. But the data suggest a much smaller influence: about 1 or 2 percent.

Some people want to be famous/influential.

Some people just like giving things away.

OK, if there are indeed some people who really know how to reliably make money in financial investing & do freely share that vital knowledge publicly ---- how come we don't see a lot more wealthy people in our society ??

Is financial investing (at least on Wall St) a zero-sum game ?

For one, if a strategy is good, it will become bad once a lot of people start doing it. Just the nature of the beast. If it turns out buying utility stocks every February and selling every December, once people notice this it will alter the price and it won't be profitable any more.

*December is profitable,

"how come we don’t see a lot more wealthy people in our society "

Because most wealthy people have the good sense to keep a low profile.

Public financial advisers aren't any different than horse race touts. Both milieus are complicated, opaque environments whose outcomes can't be reliably predicted, but there's a limit on the number of horses in a given race and its results are posted shortly after completion with no changes in payoff in the future. Shorting the market is a pseudo-sophisticated form of high-stakes gambling. At one time European high rollers indulged in baccarat, roulette and various card games because stock exchanges had yet to be invented. (See Thackeray's "Barry Lyndon".) Since any schlep can now buy chips in a casino, the upper classes need ever more complex financial games to prove their superiority to the unwashed masses.

I think that's Tyler's point, though: the doom and gloomers are not putting their money where their mouth is. If they really believed their own rhetoric, they ought to attempt to profit from those twits who are bullish on a Trump Administration cutting taxes, regulations, making America great again, etc.

Tweeting about it is a simple way to signal Trump hatred and cleverness. Did such signalers really need six weeks to figure this out?

Some of the Obama growth will continue into the next two quarters, and by the end of that multinationals will be able to repatriate profits without paying taxes so they can even out their earnings and award management with bonuses. Some of the Trump plays have already been played, such as health insurers and companies benefiting from changes to net neutrality. Companies you would want to avoid during a Trump administration are companies with strong American brand identity...companies whose consumer brand is associated with the US, such as Coke, McDonalds and Nike. If we act belligerent that will kick over into foreigners wanting to disassociate with American brands.

I'm not so sure that this advice is sound right now. We don't know what the Trump/Congress economic plan is really going to look like and it's until they actually have to govern, everything is conjecture. I will say that the appointment of Peter Navarro is disconcerting and maybe worth a short in itself. If the US $ keeps appreciating anything Trump does to try to improve exports is pretty much not going to work.

FWIW, I've not been a buyer of equities for about 12 months now, waiting to see how things turn out. There are not many values out there right now and I've always been a long term investor, seldom selling anything unless there is a real compelling reason. That being said, I've put stop loss orders in on almost all the holdings so that if things do start to go south, I can get out. Of course I'll have to deal with capital gains taxes which at this point would be quite significant.

"We don’t know what the Trump/Congress economic plan is really going to look like and it’s until they actually have to govern, everything is conjecture. "

We know that:
1) the debt ceiling hits around March
2) Trump has promised to deport ten million illegal residents
3) Trump shows every indication of starting a trade war in the first month he is in office.

There is going to be excitement

A wise man once said "betting is a tax on bullshit"

Of course no one is actually shorting the Trump rally

Other than the perma-bears who were already short.

What they are saying on twitter is simply positioning for for the upcoming battles, or signaling, or a coping strategy, or who knows.

My thoughts also. Saying on Twitter (Twitter!) that you are shorting the market is just signaling. Trying to raise your status by saying you're "putting your money where your mouth is" with all the negative Trump talk.

What if I just have a bunch of cash sitting around and feel disinclined to invest further in S&P 500 index funds, which is what I usually invest in? My sense is that we are heading to Japan-style stagnation at best, and a crash at worst, maybe over the long term once Wall Street gets adequately levered up again. I also think inflation will stay low-ish. Am I crazy to do what I'm doing, which is just keep about 40-50% of my savings in cash?

Crazy enough, unless your total savings is on the order of your expected annual income.

This is an underappreciated point. Optimal asset allocation depends on total net worth, and for higher net worth people might involve something like this to insure lifestyle standards under a variety of market disruptions. Common rules of thumb often suggest the opposite--wealthier people can take on more risk.

The argument will quickly shift to "OK, Trump is good for the stock market and business, but the rally isn't helping the poor, middle class, minorities etc.

There will be plenty of studies to that effect.


Stories about how about how SUV's are drowning polar bears and your water is laced with cancer will pop up again, too.

"The argument will quickly shift to" ... Trump inherited a great economy from Obama, so none of the credit accrues to Trump and any improvement in metrics was already baked in when Obama left.

>85% of my Twitter feed seems to be short the market,

If they are really net short (and not just virtue-signalling), I'd rather know how to best profit off the inevitable short squeeze.

Here's how you profit off short squeezes in SPY.

Step 1. Wait for the conditions for a short squeeze in SPY.
Step 2. You skipped Step 1, go back and do it properly.

"Buying the market is the smart way to invest unless you disagree with me politically, in which case you must bet your beliefs or are a hypocrite."


Maybe 85% of your Twitter feed are professional investors. Otherwise, they're dopes.

'Market-timing' (moving in and out of the market opportunistically) is itself a mug's game for non-pros. At most, people should be nudging their portfolio 5-15% in one direction or another to reflect short-term hunches.

Shorting the market goes way beyond this even.

Absolutely. In the summer of 1999, I thought the market was overvalued and moved 100% of my profitsharing/401k accounts into the GIC fund. The market continued to go up for another 7-8 months. I then realized that I might have to get back in at a higher level and thus lose even more money if/when the market dropped. Eventually I did get back in, lost money (on paper), but recovered all of it and more over the next few years. I learned an important lesson, which came in handy during the 2007-2009 market fall.

I read Victor Niederhoffer's "Education of A Speculator" and realized I did not have the stomach for it. I have a personal investment policy statement and adhere to it, only making incremental moves in allocation. There's no certainty in life or investment, but a man's gotta know his limitations.

That must be the entire population of professional investors who tweet their advice.

Great point - anyone who actually knows what he's doing would have no reason to tweet out his strategy. Virtue signallers, however...

I tried three times to recast that sentence to make it gender neutral, and every time it either sounded horribly clunky or made it painfully obvious that I was going out of my way to be gender neutral. So I gave up. (this, btw, is also virtue signalling).

MR readers, are you wondering how to short the market? Google "how to short the market".

People should familiarize themselves with the Keynesian formula for economic growth, and the history of U.S. dollar bull markets, before panicking over the world's largest consumer and trade deficit nation, and issuer of reserve currency, shifting in favor of domestic production and away from imported consumption.

Incredibly, the post directly before this is a dire warning against fund managers who take on too much risk.

I hope this is Tyrone.

Are those tweets coming from: real people, adds or bots?

The topic gets interesting. Some quants write HFT code to trade based on news feeds , including twitter. What if some trader buys twitter ads or bot accounts to spread information that will generate a nice profit? How would regulators face this scenario?

Profiting from FAKE NEWS! Oh my!

I don't think that's a new idea.

Laugh all you want but people keep robbing banks at gunpoint still today. The Ponzi scheme got the name from this guy in the 1920s, people will keep falling for it.

Novelty is an overrated idea.

I agree, novelty is an overrated idea.

I'm thinking that novelty is an overrated idea.

Axa, have you considered that novelty is overrated?

I don't know about any of that, but I think novelty is rated higher than it should be.

"Novelty is an overrated idea."

There is no crime that a four year old has not thought of.

It would fall under the same category of "market manipulation" with pump-and-dump schemes and things like that.

That Adam Tooze post was really educational. And as Jeff R. correctly points out, people "shorting the market" are another example of that failing academic class with no skin in the game.

Another "short" opportunity was, and may still be, long-term, fixed rate debt instruments.

The market rate on 10 year, US Treasury bonds was 1.33% on July 6, 2016. Yesterday, the market rate had risen (fair/market value drops) 122 basis points to 2.55%. Similarly, on August 18, 2016, the 30-year, fixed rate mortgage market average rate was 3.43%. This morning, TV reported the fixed-rate mortgage at 4.30%.

The Fed is signaling three rate increases. There may be more shorting profits ahead.

There is another name for virtue signalers. They are also called humans. Just about everyone wants most other people to think well of them. That can not explain stock market bets or attitudes.

Stock market bets or attitudes can have many origins. Mostly that there is a sucker born every minute and 2 out to get them. Lots of people think they know lots of stuff about the stock market and what it will do next and why. But no one really knows much, except that it seems to go up in the long run but can have some huge declines in particular periods of time.

Stock market advice is almost always worth far less than you paid for it-- especially when you got it for free.

The stronger dollar will undo whatever Trump thinks he is going to accomplish on trade.

This post is now the top search result.

Didn't Tyler do an interview a couple years back with Luigi Zingales and conclude that the Euro was, for the most part, doomed? And he's not taking a short position?

Or is timing a Euro Earnhardt too difficult? I think it's something to consider for 2017... Given Brexit and Trump, perhaps a Le Pen running France and/or AFD in Germany isn't too long a stretch.

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