Oh, Well, Never Mind


A few weeks and 500 Dow Jones points ago, I sat down for brunch with a group of my New York contemporaries: a stock and commodities broker, a handful of lawyers, a budding real-estate magnate and an editor. As these wealthy, intelligent individuals talked, a gloom shrouded every topic. The table was nearly unanimous about how bitter and pro- tracted the Gulf War would be. The editor questioned whether any of our high-tech weapons would work, doubted our generals' plans and chided our soldiers' abilities to meet the vaunted Republican Guards.

A sullen prognosis, but as bearish as the economic outlook delivered by the builder, who said he could not name a bank or a developer not in trouble or contemplating bankruptcy. Surely all involved in real estate would succumb, he insisted. The lawyers spoke eloquently about how poorly their clients were faring, particularly those with Japanese competitors.

But no one was nearly as negative as the stockbroker. His own industry was going down the tubes, so were all the industries his firm analyzed. He worried about his own ability to survive, considering the low equity volume.

Only one strategy merited attention: short-selling. People sell stocks short when they believe the market will fall. If someone sells short 1,000 shares of IBM at 130, he hopes to buy it back, or "cover," at lower prices. If IBM subsequently declines to, say 100, and the short-seller buys his 1,000 shares back, he's made $30,000 realizing his negative views.

The bearish broker spoke fervently about his big bet against Wells Fargo, the giant California bank then trading at around 45. "They've got so many bad loans they aren't even owning up to half of them," he stated knowingly.

The New York developer laughed -- he knew banks better: "Citicorp at 12 is a lay-up short," he said.

The editor admitted he wanted to short all of the crummy weapons makers, but he had to stick to his knitting. He was shorting a thousand shares of Time Warner, the media conglomerate, at 79. He ticked off all the negatives: big debt, layoffs, trouble starting up new magazines and fewer ad pages. His way to play the coming war? "Short Disney at 92: With all the Arab terrorism that lies ahead, and with a long ground war on television every night, who is going to want to go see Mickey Mouse?"

My stomach tightened. "We're dead," I whispered to my wife. "We gotta cover everything, every last short. If we don't they're gonna carry us out of here."

Unlike everyone else at brunch, my wife and I trade stocks for a living. As professionals, we have to profit off good and bad stock markets. By nature, we short constantly, because markets fluctuate. Shorting is dangerous business. When you buy stocks you can only lose what you've spent. When you short, you can lose much, much more, particularly if the stocks double or triple after you sell them.

Going into this brunch our firm was shorting Time Warner, Disney, Wells Fargo, a half-dozen Northeast banks, and just about every real-estate and brokerage stock in the country. All these positions, put on at much higher prices than were bandied at the brunch, were very profitable. But when intelligent but amateurish speculators are swapping tales of short-selling favorites, look out above, for the pain of a short going against you is unequaled in the investing firmament.

That meal was 30 points ago for Wells Fargo and Disney, and 40 points for Time Warner. The New York banks have all jumped between 20 and 30 percent, and everyone knows how high the stock market traveled. We're still in business, but only because we covered by buying up stock wherever we had shorted. Had we actually gone long on everything that got trashed that day, we'd have made so much money we could have retired.

Since then I've read hundreds of articles about why the stock market skyrocketed: The Federal Reserve eased aggressively, the war went better than expected, inflation subsided -- oh, all the usual standards.

I know better: The market went up because everybody got negative at the bottom -- everyone from The New Republic with its fashionable "abyss" cover story to my brunch companions patting themselves on the backs for strategies that would lose them thousands of dollars in just a few days' time. Others spotted this as just another trend, and started buying at the bottom. Unfortunately for the bears, the system simply refused to collapse.

And the weapons worked. The banks didn't all fail, the Fed's strategy of lowering interest rates started to succeed. And even the lowly dollar, poor-mouthed for so long, finally bottomed, a function of the stunning reversal in America's trade fortunes. The stock market made quick frauds of all who had lost faith in things American. Things simply aren't that bad out there.

James J. Cramer is president of Cramer & Co., a New York investment management firm. This article first appeared in The New Republic.

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