Short Sell Gets Short Shrift


April 20, 2002


BROOKE GLADSTONE: New York Attorney General Elliot Spitzer recently turned up a series of e-mails from the Merrill Lynch investment firm in which analysts called certainly companies quote "crap" and "a dog" even as they were praising them as hot buys to the public. This week the firm responded by agreeing to post on its web site a list of companies reviewed by Merrill Lynch that are also customers of its investment services. That was a small concession in a sweeping investigation into the sweet talk of financial analysts with conflicts of interest; their unwavering calls to buy, buy, buy were a staple on cable TV financial shows from 1999 through last year. Nielsen ratings for financial shows soared with the Stock Market so much of the media eagerly gave a soap box to these relentlessly upbeat investment analysts. These days, of course, you're more likely to see financial news stations demanding full disclosure, but On the Media's Mike Pesca discovered that one bit of information that would balance out the ersatz optimism of financial analysts still has a tough time getting on the air. Here's the long and, more specifically, the short of it.

MIKE PESCA: Pets.com was a profitless internet company which lost money on every 20-pound bag of dog food it mailed out. Henry Blodgett, now Elliott Spitzer's main whipping boy, was the stock analyst who liked this idea enough to tell millions of TV viewers to buy Pets.com stock. A certain talking sock was the company's corporate spokes-puppet. Today not even the puppet remains. But still standing are the cable stations which gave Blodgett a forum for all those bad recommendations. Today CNBC and CNN-FN have reformed themselves somewhat. They've had to -- no one's buying relentlessly bullish advice in a down market. But watch financial cable for 24 hours straight and you might not see any guest actually saying "sell." To some extent, this is a function of a Wall Street culture where analysts issue sell recommendations on less than 3 percent of all companies. But it can also be attributed to a financial news culture where high ratings go hand in hand with bull markets, and negative news faces a higher hurdle than positive news because of the impact it can have on the economy.

SUSAN LEE: Positive news people forgive if you're wrong. Negative news they don't.

MIKE PESCA: Former Columbia University economic professor and current member of the Wall Street Journal editorial board Susan Lee says that emphasizing the positive and talking mostly about buying opportunities skews the markets.

SUSAN LEE: Stock prices really only reflect optimists. You don't hear what the pessimism is. So the market price tends to be higher than it might be if you had the full range of opinion.

MIKE PESCA: Which would include more utterances of the S-word -- Sell. But rarer than a network featuring a sell recommendation is putting a short seller on the air. Short selling or shorting a stock is betting that it will go down. Jim Chanos, a famous short seller, describes his status this way.

JIM CHANOS: Generally the, the overall financial media treats short sellers as, you know, the unwanted guest to the party.

MIKE PESCA: Who'd want a guest who spits out the hors d'oeuvres, investigates the vintage of the champagne and finds fault with the flower arrangements? But that's what shorts do with arcane financial data, and when they're right they profit off of pain. When they're wrong, their losses can be monumental. Let's say you buy a thousand dollars worth of stock. The most you can lose is that thousand dollars. But if you short a stock and it rises and rises, your losses will rise and rise with it. That's why any responsible advisor will tell you that short selling is a high wire act best avoided by investors without a keen understanding of balance sheets and accounting practices. Susan Lee theorizes that high stakes force better decisions.

SUSAN LEE: I think that short sellers are, because the risks are much greater in short selling than in long positions, they are much more likely to be accurate.

MIKE PESCA: A recent example of how a short seller's insights helped correct an over-valued stock is Enron. It was Jim Chanos who noticed early on that something was amiss in Enron's books, and it was his tip that prompted Fortune Magazine to take one of the first critical looks at Enron. Before that, Chanos and his fellow short sellers couldn't get arrested in this town, "this town" being Fort Lee, New Jersey -- home of CNBC.

BRUNO COHEN: You have to be careful, because rumors can affect the valuation of stocks in real time.

MIKE PESCA: Bruno Cohen is executive vice president for businesses programming at CNBC.

BRUNO COHEN: We want to be certain that if somebody has taken a negative position on a stock, be it a short seller or an analyst or whoever, that it's a responsible position; that it's thought-out; that there's justification for it. LOU DOBBS: We're far more careful on the sell side. There's no doubt about that. And anyone who tells you otherwise is simply not being straightforward.

MIKE PESCA: CNN's Lou Dobbs. LOU DOBBS: On short sellers, we not only look at why they're saying what they're saying, but what they're saying. We analyze it very carefully, and we corroborate it. Now frankly we don't do that on the buy side, and we should pr-- be just as careful.

MIKE PESCA: So here you have a struggle between competing codes of ethics -- one fiduciary -- shorting is dangerous -- and one journalistic -- short sellers have insights that would benefit financial news consumers. But Jim Chanos says he doesn't want to go on TV. He recognizes that the medium is ill-equipped to handle the kind of information he provides.

JIM CHANOS: We prefer to talk to journalists who understand the kinds of stories that we work on. Our situations tend to be somewhat financial puzzles. They don't lend themselves easily to-- 30-second sound bites.

MIKE PESCA: Don't cry for the under-interviewed Jim Chanos. He runs hedge funds worth over a billion dollars. As for the rest of us, we can only hope that the markets will price in the information that short sellers have, even if we don't see them on TV every day. Capitalism has always been described as "an invisible hand." [MUSIC UP AND UNDER/BYE BYE BLACKBIRD] It will just have to survive the invisible talking head. For On the Media, I'm Mike Pesca.