RESISTING SHORT TEMPTATIONS
by Ghassan Abdallah, Ph.D.
December 17, 2007

Since this article is an attempt to dissuade good folks from shorting stocks, I want to make one thing very clear. I am not Bullish on U.S. and global equity indexes but quite the opposite. The world’s largest economy, the United States, is stagnant and is heading towards the first consumer led recession in 16 years. In China, the world’s fastest growing economy, the Central Bank is combating inflation with higher interest rates and other measures aimed at tightening credit. Furthermore all indications are that a major market top in China has already taken place---a variety of Chinese stocks climbing 200% in one day during the month of October was a sure sign of a major market blow off top.

BETTER OFF IN A CASINO

With the market highs already in place, why am I dissuading readers from selling the market short? After all, the ways to play the market on the downside have never been so diverse. You can buy puts on your favorite idea, you can short the highest PE, most overvalued economically sensitive AMZN of your choice, you can go long the short exchange traded fund (ETF) that you desire, or for additional leverage you can use ultra short ETFs on any market or sector from China to the other emerging markets, to the NASDAQ 100 (NDX).

The choices and temptations to profit from the market downturn are so great but the perils are even greater. Assuming the market has topped the question then becomes how low will it go? The truth is no one knows for certain. Will it decline 10% 20% or go all the way back and revisit the October 2002 lows? When will it move down? Today, tomorrow, next month, or next year? How will it go down? Will it move down violently for a few days and then snap back and move sideways for a few weeks or a few months and then resume the downward trend? Will it frustrate the bulls and the bears and move neither up nor down? You can say “it does not matter, I will wait it out,” but since most are highly leveraged waiting it out is not an option--- you are better off at the poker table.

HEY MR PROFESSIONAL SAY HELO TO HANK, BENNY, AND ABU DABI

Amateurs should not short has always been the mantra, and now since the government has gotten into the business of catering to Wall Street, to that I would like to add professionals should not short either.

Here is a short list of obstacles your short position faces. This list is not backward looking and likely to manifest itself repeatedly throughout 2008.

1-An unexpected cut in the Fed fund rate.

2-Rumors of an unexpected cut in the Fed fund rate.

3-Tthe Fed, disappointed by the market reaction to its cut in the Fed fund rate in the afternoon, announcing a new auction term facility in the morning.

4- A Hank Paulson-like Mortgage Accord , allowing homeowners to pick the interest rate of their choice.

5- Other government bail out plans—you’ve got to love politicians.

6- An Arab oil Sheik throwing a few billion dollars at a soon to be insolvent financial company.

Now all these measures in the long term will not change the natural economic cycle but in the short term they will frustrate and cause an enormous amount of emotional and mental distress to the most seasoned short seller. The fact that the markets are heading lower is a certainty, however the trajectory is not known. That is why it is strongly advisable to stay on the sidelines and preserve capital for in the next couple of years there will be some great opportunities for long term investments that will offer a far better risk reward ratio.

Contact Information
Ghassan Abdallah, Ph.D.
832-767-3807
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