Maybe all you really need to do is find a hedge-fund thesis and shoot against it. I know that sounds cavalier, but I am looking at all of the so-called Ebola plays from last month -- a front-and-center-hedge fund-end-of-the-world hypothesis -- and I am aghast at how far these stocks have run since the crisis has ebbed. It's another case of hedge-fund groupthink gone wrong.
Almost exactly one month ago we were in the mental vice grips of the Ebola panic. It's astounding how stark it stands out when you look at the charts of most stocks, and particularly when it comes to those involved in the travel-and-leisure industries. Now, I am totally conscious of the fact that you are never out of the woods with Ebola, and I am not dismissing that we will witness more cases, perhaps many more. But, at that very moment, if you go back and look at the headlines at the exact nadir, there were three common themes to the coverage:
1. The plague is among us, and it is being distributed by all of the myriad people who were in contact with the sad and fatal case of Thomas Duncan, who died at Texas Presbyterian under less-than-ideal circumstances.
2. The U.S. government and health care system are woefully inadequate, and will not be able to contain the plague. It could run unchecked because of federal and state incompetence.
3. It's much easier to catch than anyone thinks, and can be passed on with casual contact, and it is almost always fatal.
Now we look back and we think: Shame on us.
First, Ebola is harder to catch than fear mongers had thought. We learned, after all, that 40 people had casual contact with Duncan were declared to be Ebola-free after the 21-day incubation period came and went. For the record, by the way, the stock-market rally began 22 days into when Duncan was known to be infectious -- because about the only thing we seemed to know about Ebola at the time was that, if you hadn't caught it within 21 days of contact, you wouldn't be getting it.
Second, while the U.S. protection system has a lot of holes, the governors in some key states stood up for their constituents, making the unrestricted immigration from affected countries more difficult. Their lack of political correctitude is rather amazing in this day and age, when the prevailing wisdom was that anyone who helped out in that disease warzone had the privilege to come and go as he or she pleased. Again, I don't mean to be harsh, but that was pretty much our policy until the governors of New York and New Jersey decided that this was reckless.
Third, the rest of the health care "system" seemed to have gotten the message from the beleaguered Texas hospital, and came up with processes and systems and that made a huge difference in our sense of wellbeing. That's even though most of us, I think, doubt things will work as planned if we are confronted with more than a few outbreaks at once.
Finally, and by far most important, we learned that Ebola -- while fatal where care is less than desired -- can be cured when dealt with effectively in this country. In short, it's not the death sentence we thought it was for people who catch it here, even as it is very much a death sentence, still, for those who are infected there and don't catch it early or aren't properly treated. In other words, if Duncan had been treated for Ebola when he had first checked in, this whole exercise in fear might not have happened.
However, while the nation waited to see more infections develop and, yes, go viral, it seems that every hedge fund had to take a turn buying puts on all of the usual suspects. Here I am speaking about restaurants, airlines, theme parks and cruise lines.
Some did it out of a belief the market was due for a fall, and that this was the triggering agent.
Others said it was just "insurance," as they say.
Still others, I think, actually feared the illness personally -- anyone who rode the subway or bowled with Dr. Craig Spencer sure felt that way -- and figured that everyone else would and therefore would stop congregating in places where you could catch Ebola.
I think the bets just got bigger and bigger as we learned more and more about the incompetence of the Dallas hospital and all of the mistakes that were made, including nurses that were allowed to go on flights or take cruises, even though they may well have been infected with Ebola. The strictures seemed so absurdly weak that it seemed to be just a matter of time before the Texas Presbyterian diaspora infected the whole nation.
Now, you may believe that all of these short positions were taken off at once when the 40 people who interacted with Duncan were declared Ebola-free.
But that tends not to be how it works in real life. Some funds no doubt rationalized that the "impacted" companies -- the ones that involved travel, leisure and then, later, food and shopping, sure would have terrible quarters anyway. Traffic nationally had to be way down, did it not?
Others just chose to wait it out, oddly hoping for another outbreak. I think the remnants of these ill-conceived trades are still with us, and surfaced again in yesterday's trading with still one more giant lift to the travel-leisure-restaurant complex.
They surfaced because they were so double-edged. If Ebola broke out in a true epidemic, it is true that the earnings of all of these companies could have been devastated. But if it didn't, these were the exact same companies that stood to benefit from the plummeting price of crude oil. The best thing that ever happened to their bottom lines was occurring as the worst possible thing might have been about to occur to the top line.
So all of the restaurants, which are regarded as derivative plays of more disposable income left over from lower prices at the gas pump, jumped higher and higher in the ensuing weeks. Some, such as Popeye's Louisiana Kitchen (PLKI) last week and now Jack in the Box (JACK) last night, just roared on good news.
All the airline stocks have gone off the charts, even though the load factors aren't even that clear. Fuel is just that important, though, and fares keep rising all within the confines of endless short-covering that has exacerbated every move.
But the biggest leapers? The cruise lines. Take a look at those stocks. They had been so heavily shorted that we are still dealing with the hedge-fund overhang. The runs in Carnival (CCL) andRoyal Caribbean (RCL) are staggering, just staggering, as buyers have come flying in knowing that these gigantic fuel drinkers weren't going to get hurt as badly from the revenue side as they had thought. Nothing breeds illnesses, it seems, like cruise ships. They are considered to be vast incubators. But if there is nothing to incubate, than they just became huge plays on declining fuel costs.
I think, at last -- now that these stocks have taken out their 52-week highs, for the most part -- they may have run their courses. How many hedge-fund managers could have maintained shorts on these at this point? I doubt anyone is left after this run.
The lesson, however, needs to be taught time and again: If you are a manager and you short stocks and your bet goes awry, cut it and cut it immediately. Don't bet things will go your way anyway. Don't speculate that the market might go down and you could get a quick benefit. Never just think, OK, we can ride it out. No winging.
Many shorts, and these in particular, are double-edged swords. You live by them, but you most definitely die by them, and that's what the travel-and-leisure oil-derived rally did to the vast majority of hedge funds who instituted the so-called lay-up trade of 2014.