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Selling the idea of selling
Bloomberg today featured an interesting article on analyst recommendations "Every Stock was a 'Buy' to this analyst team, then shares tanked''. As the title implies, it's about a brokerage in HK which only issued "buy'' calls on all the stocks that it covered from April 2016-May 2016, a total of 173. Gains were forecast within weeks and on average, target prices were 25 per cent higher. "The picks ended up being so wrong during last year's rout of Chinese and Hong Kong stocks that shorting every one would have resulted in gains of about 6 per cent after just 4 weeks and almost 13 per cent if all were held through last week'' reported Bloomberg. Perhaps just as interesting is that the article quotes a director from the firm saying that their house style is not to issue "sell'' calls, only "buys'' and that theirs are mainly trading ideas based on market sentiment, news and momentum, rather than valuations, earnings potential or fundamentals.Although the director admitted that his firm posted poor performance last year, he was quoted saying "It was difficult to make good calls in such a falling market''. The first thing that springs to mind is that if momentum turns negative, then wouldn't be appropriate to recommend going short? I understand analysts are intrinsically loathe to call a "sell'' on stocks because of the negative goodwill this would generate with the management of the firm whose shares are being shorted, but if one's business model calls for very short-term trading ideas, then perhaps client interests should take precedence over one's relationship with the corporate sector.I wonder if the firm ever did this - after all, why confine one's short-term, trading recommendations to only "buy'' calls?
I also wonder whether there is scope for any of the houses here to employ a similar business model where recommendations are wholly short-term and not necessarily based on fundamentals.This is because the way markets have behaved over the past few years, lurching from one central bank bailout to the next whle narrowing avoiding recession along the way, it leads me to believe that short-term trading is the best means to survival. And if this calls for short selling as well as buying, then so be it. They are after all, two sides of the same coin.
Although analysts here like those in HK share the same (arguably understandable) reluctance to anatgonise companies they cover with "sell'' calls, I have to say there has been a noticeable willingness among local brokers to issue negative reports if they see fit. This is commendable as it suggests greater objectivity in the reporting but more importantly, since "sells'' are now commonplace, then it might be an idea to go one step further and advise clients how to best to profit from a projected downturn by going short.
There are different ways to do this - scrip borrowing is one, buying put warrants is another. Another is to use Contracts for Differences or CFDs. Brokers could analyse the appropriate structured put warrants on the stock if there are any and give their views on which ones might be suitable. CFDs are also risky but perhaps a little easier to understand. Of course, the qualifier would be that only sophisticated customers should be given such advice since warrants and CFDs are complex, derivative instruments. But the more people who are educated on how to insure their portfolios with puts or CFDs, the better.
The ultimate aim has to be to break out of the entrenched mindset that one has to buy in order to make money.
Instead of buying low and selling high, reversing the sequence can be just as profitable.