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.

Safety in Numbers

A man who identifies himself as the general counsel for basketball great Shaquille O'Neal has sent a "cease and desist" letter to a fellow resident of this not-really-a-place we call the econoblogosphere.

The lawyer is Dennis A. Roach and the recipient of his nastygram isTim Sykes.

I'm not a big fan of Sykes' blog. He's a self-promoting penny-stocks guru who was featured in a program called Wall Street Warriors back in the day. He came to my attention only because they had some fun with him over at Dealbreaker which, as you known I follow religiously.

Anyway, this isn't about fandom. Its about an effort to censor an internet blowhard. We can't let that happen. So, let me be plain: Sykes has been saying unflattering things about a stock called NXT Nutritionals Holdings Inc., with stock symbol NXTH. Shaq has become a spokesman for NXTH, and thus has put himself in the line of fire.

Sykes has said things like this:

By the end of 2012, regulatory filings show, NXTH must give O’Neal 3 million shares of company stock in exchange for his publicity services. He was scheduled to receive the first 1 million shares back in November, filings show, and can start selling them at the beginning of February. At that point, he will be free to sell up to 20,000 NXTH shares a day (but no more than 100,000 shares a month) if he chooses to do so.

Clearly, NXTH could face some intense selling pressure – potentially crushing ordinary shareholders – if private investors like O’Neal start dumping their stock next month.

C’mon Shaq, aren’t you rich enough? Don’t you have any better financial advisors than your current ones who got you into bed with such snakes?

That is what has produced the cease-and-desist letter. Well ... now those same words are on this blog too. Let us see if I have the honor of receiving such a letter. There is safety in numbers.

Props to Gary Weiss for his blog entry on point here.