M4 BARRON’S September 16, 2019
era and today. One is the massive amount of
pessimism today versus the optimism of
nearly 20 years ago. Then there’s the fact
that the cost of capital, as signaled by the
level of real rates, is far lower today than it
was in 2000, says Michael Arone, chief in-
vestment strategist at State Street Global
Advisors. That fact makes companies with
fast growth but no profits attractive to inves-
tors today, he says, and is the reason that
value stocks will continue to lag behind as
long as real interest rates remain near zero.
Given that the Federal Reserve is getting
ready to cut rates again on Sept. 18, that
doesn’t look likely to change. “The compari-
son to 2000 is unfair,” Arone says. “In a zero
cost-of-capital environment, companies oper-
ating at a loss can grow to incredible size.”
The sheer number of those companies
could be pointing to problems ahead. Nearly
15% of the fastest-growing companies by
sales in the S&P Global Broad Market index
are money losers, says Jason Williams, a
portfolio manager at Lazard Asset Manage-
ment, while more than 80% of initial public
offerings coming to market are also profit-
less, equaling the peak of the dot-com bubble.
That doesn’t mean the market has topped,
he says, but it does make him worry. “Of
course, no one can ring the bell,” Williams
says. “All you can do is signpost it.”
Remember: Chasing road runners can be
hazardous to your health.
Squeezing the Shorts
There’s little worse than getting caught on
the wrong side of a bet that had been work-
ing—especially when that bet is a short.
Betting that a stock will fall by borrow-
ing its shares and selling them in the open
market is a beautiful thing when it works.
On the trading floor, we used to say that a
stock can get too expensive to buy, but
never too cheap to sell.
Be that as it may, a short trade is terri-
fying when it goes against you. That’s espe-
cially true in a classic short squeeze, when
everyone who has bet against the stock is
trying to buy it back at the same time. That
can cause the stock to quickly shoot up in
price—beyond what fundamentals would
suggest. Theoretically, a short seller’s losses
are potentially infinite. A stock that inves-
tors own can only go to zero.
We bring this up because a lot of great
short trades suddenly don’t look so great
right now. This past week’s reversal of some
of the market’s most popular themes saw
many of the biggest losers become big win-
ners. And many of them were also popular
shorts.Newell Brands(NWL), a popular
stock to bet against with 10.5% of its float
shorted, was down 7.2% in 2019 before gain-
ing 7.1% this past week.
And though some of the moves have
been large, they could get even larger,
writes J.P. Morgan strategist Shawn Quigg,
if short sellers need to buy back their bor-
rowed shares to cover mounting losses.
“We find this rotation particularly pro-
nounced in those heavily shorted value
stocks where performance anxiety may now
be driving forced short covering,” Quigg ex-
plains. He recommends buying call options
onUnitedAirlinesHoldings(UAL),Cen-
turyLink(CTL), and Newell Brands to play
the potential short squeeze.
We feel more comfortable when these
trades match our fundamental views, and
that happens to be the case with United. Its
stock has been range bound for much of the
past year, as investors fretted about its abil-
ity to weather the impact of higher oil
prices and potentially slowing growth. More
recently, United has had to deal with the
side effects from the grounding ofBoeing’s
(BA) 737 MAX jet—and worries about over-
capacity once the airplane flies again.
VITALSIGNS
Friday's Week's Week's
Close Change %Chg.DJIndustrials 27219.52 + 422.06 + 1.58
DJTransportation 10813.62 + 510.70 + 4.96
DJUtilities 846.99 – 1.31 – 0.15
DJ65Stocks 9056.67 + 186.90 + 2.11
DJUSMarket 746.74 + 7.69 + 1.04
NYSEComp. 13124.34 + 190.96 + 1.48
NYSEAmerComp. 2536.55 + 74.19 + 3.01
S&P500 3007.39 + 28.68 + 0.96
S&PMidCap 1963.16 + 51.65 + 2.70
S&PSmallCap 975.95 + 45.84 + 4.93
Nasdaq 8176.71 + 73.64 + 0.91
ValueLine(arith.) 6329.18 + 247.98 + 4.08
Russell2000 1578.14 + 72.97 + 4.85
DJUSTSMFloat 30823.92 + 354.02 + 1.16
LastWeekWeekEarlierNYSEAdvances 1,852 2,158
Declines 1,218 880
Unchanged 38 61
NewHighs 283 412
NewLows 35 136
AvDailyVol(mil) 3,952.0 3,431.1
Dollar
(Finexspotindex) 97.86 98.39T-Bond
(CBTnearbyfutures) 157-200 164-160CrudeOil
(NYMlightsweetcrude) 54.85 56.52InflationKR–CRB
(FuturesPriceIndex) 174.79 172.62Gold
(CMXnearbyfutures) 1490.90 1506.20To see the full comparison visit:
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