I will start today's column with a simple idea that I repeat it every year: The stock market should be closed in honor of Veteran's Day. It closes for Memorial Day, but the market should honor the service and sacrifice of all veterans. It's the least we can do.
Over the weekend, I was flipping through Barron's and my attention was drawn to the short-interest tables. I usually just scan this list to see if any of my current holdings are on it but I decided to drill a little deeper this week to see if there were any potential takeaways in the data. In my experience, the shorts are usually right until they aren't. When a stock is beaten down to the point where shorts begin to buy back, you can get quite a pop if good news is released that causes the stock to move higher.
One of the first things that caught my eye was that short-sellers were betting against the gold miners in a big way. I was fascinated to see that two stocks being bought by smart investors have large short positions. Allied Nevada Gold (ANV) and NovaGold Resources (NG) are both decent-sized holding for Seth Klarman, John Paulson and other astute value types. I am not a fan of owning gold as an investment, but gold mining is just another business and should be evaluated accordingly.
The outlook for miners is strong. Gold production has not risen anywhere near as fast as the metal price in the past decade and we are seeing older, less-productive mines go offline. Newer, more-efficient mining operations should be able to extract the metal at a more favorable cost. Gold demand should continue to rise as well. The combination of jeweler and industrial demand, along with investment demand, should strengthen as the global economy improves. At some point, we could see a strong short-covering rally in these stocks. Anytime I find myself on the other side of a trade with Klarman, I check and recheck my premise and my math.
I also noticed that larger short positions are building in the larger regional banks. Huntington Bancshares (HBAN) has been a favorite of several contributors on Real Money for the past two years. Short interest took a huge leap in the past month, going to more than 21 million shares from 13 million. Short interest in my favorite large regional, KeyCorp (KEY), went to more than 14.2 million shares from 6.2 million. Clearly, the continued tightening of net interest margins and looming regulatory costs have some betting these stocks will move down going into 2013. I own both stocks and I have no interest to sell here, but the shorts could be right in the short term. If we go off the fiscal cliff in January, we could see selling in the regional banks names. It is worth considering selling calls or buying puts to hedge these names for the next few months.
I also noticed that there are huge bets being made against big tech names. Microsoft (MSFT), Intel (INTC), Facebook (FB), Cisco (CSCO) and other large-cap tech names are being sold heavily. This is probably a bet that the economy is not going to experience strong recovery anytime soon and that there is a real danger of going over that financial precipice. Tech needs spending at both the consumer and corporate level to thrive and, so far, that is not happening. Any further economic weakness due to political action, or inaction, could further depress these companies' earnings and stock price.
Of the tech stocks I own, Corning (GLW) and Micron (MU) have significant short positions. Both stocks are priced for the end of the world, and any good news could lead to significant rallies in the shares. Both are cheap enough that if shorts push them lower in the months ahead, I will look at it as another opportunity to scale into the shares.
Reading the short-interest tables has provided me with valuable information, and I will add this page to my regular weekend reading.
