Monday, July 19, 2010
Greenlight: Shorting Moody's Was A Good Idea
I'd like to thank the good folks at Dealbreaker for bringing to my attention a "Dear Partner" letter from Greenlight Capital, reviewing the unlamented but departed second quarter of 2010.
Greenlight has made some gains for its investors, though they are as the letter acknowledges far from spectacular. There are three partnerships involved, and the year-to-date returns on the three are 1.6 %, 2.2%, and 0.8%.
Greenlight professes to have "no idea" what will happen in the economy in the second half, and to be maintaining "a conservative and defensive portfolio, with a small net long position throughout."
What were their two best plays during the second quarter? They own some gold, and it has appreciated nicely. That's first. The second, and only other "significant" winner, was a short position on Moody's Investors Service (MCO).
Moody's took a hit, the letter explains, because the "proposed financial reform bill raises the rating agency legal liability more than the bulls expected." Of course, the bill itself didn't pass in time for the effects of its passage to be felt in the second quarter numbers. So, filling in the blanks a bit ... we can infer that as the likelihood of passage of the Moody's-impairing provisions became obvious, the stock price fell in anticipation of the legislation, and Greenlight locked in its profit from this short position during the quarter.
I've included a one-year stock chart of Moody's. The stock's price has hit its recent peak near the end of the first quarter. It was $30.26 on March 22. It went on a long slide at that point, bottoming out at $18.89 on May 31. So, yes, shorting was a good idea.
As it happens, it is the courts that decide what does or doesn't violate the first amendment, not the Congress. So insofar as the amendment has provided Moodys with a defense in the past, it might continue to do so. In that case, we may someday judge that the market over-corrected.
"Buy on the rumor, sell on the fact" -- may in this case translate, "sell on the threatened legislation, buy on its passage."
Usual disclaimer: THIS IS NOT INVESTMENT ADVICE! Don't buy or sell any damned thing because any blogger says so. Emphatically including me.
Still, Moody's may have an intriguing future.