As the financial crisis in the US unfolds in slow motion with regional banks at a tipping point whose stocks are plummeting, short selling has returned to the fore.
The losses in the shares of these banks may have caused a lot of pain for investors, but short sellers are betting on even more declines in both banks and other companies that are considered overvalued. In this practice, short sellers borrow shares which they sell and then buy them back at a lower price and when they return the borrowed shares they reap the difference.
Last year’s profits
Last year, short-sellers made $300 billion in profits, according to data analytics firm S3 Partners. This is a fourfold increase compared to the gains of 2018, the last year that short sellers made a profit. Stocks participating in the practice returned 30.8% last year, meaning short sellers outperformed Wall Street, which posted its biggest losses since 2008. Over the past five years , however, short sellers had an average annual negative return of 4.4%.
The big bets
The intense volatility of the markets during the last year favored this practice, but the impressive recovery presented by the stock markets at the beginning of this year left no room for pessimism. The big bets of 2022, Tesla and Coinbase, showed in the first month of the year a recovery of 44% and 74% respectively. This resulted in short sellers losing about $81 billion in bets during January this year.
But now, with the markets experiencing sharp ups and downs testing their endurance, short selling is becoming relevant again.
The stocks that have been shorted the most this year are Silvergate, the cryptocurrency bank that collapsed not long ago, at 73.4%, Carvana at 58%, Root at 56%, Bed Bath & Beyond at 48 %, Applied with 49%, Beyond Meat with 37%, Novavax with 36%, according to Statista data as of the end of February. However, interest is now focused on bleeding sectors such as banks, with speculators finding an “open door” and adding more fuel to the fire.
Silicon Valley Bank (SVB) and Signature Bank are among the 20 U.S. regional bank stocks that have been shorted the most in recent days, according to S3 Partners. Short sellers, who spoke on condition of anonymity, say they had been eyeing SVB since last year, a year ago, monitoring its financial statements, as San Francisco’s regional central bank had long raised alarm bells. .
Also, according to CNBC, short sellers have made more than $3 billion in profits from bets on shares of European and US banks and Credit Suisse since early March. Those shorts will remain open, according to market participants, until the Nasdaq exchange and US regulators decide that the shares should be delisted or are worthless.
A big concern
This sharp resurgence of short sellers, however, is of great concern to regulators on both sides of the Atlantic, as the practice could put already distressed bank stocks at risk of collapse, while credit institutions sit on huge hidden losses from their bond portfolios. The continued tightening of monetary policy has reduced the current value of bonds to the maximum, and in the US alone, the relevant authorities estimate that negative valuations at the end of 2022 have reached 620 billion dollars.
