Shorts and Shorting, Discussion and Q & A

[ModE98]

In the last month, shorts on CIM have gone up from near 20M to 30M. This is a large jump. Is this a true red flag warning signal or just the bets of some that the price will go down? Under such a change, would it be more prudent to sell and follow the crowd and hope to reposition laster after a drop? Perhaps it is a signal that most now feel interest rates will rise soon and the high divi stocks may come under pressure. What do you think? Opinions on how to play any "short signals" appreciated.

[livinincali]

I don't know if retail investors can short a stock under $5 although the rules may have been changed. Just from a general perspective I wouldn't start a short on something that is less than $5. For now CIM is still in an uptrend but it it is showing that same kind of negative divergences we've seen on other stocks before they take a plunge. Here's my scenarios with CIM.

1) If you are already long and have profits now might be a good place to take them
2) If you're in cash and looking to establish a position on CIM just keep waiting for more clarity. Upside is likely waning but it's too early to short this stock.

[yclept]

I dropped CIM in Mid December. It's about the same price now as it was when I sold it (but I've missed a dividend that came after my sell, so I would have been money ahead to have kept it). I don't know what all the shorts are doing, this is not the type of stock I'd want to have to pay dividends for while waiting for it to fall, but the fact that the dividend was the end of December and thus isn't due again for awhile might explain part of the jump in shares short from last month to this month. By the same token, it may also imply that a lot of them will buy-to-cover before the next x/d date. I sold it because the payout ratio had gone over 100%, a condition that can't go on forever. I figured they were going to have to cut the dividend at some point and dividend cuts in big dividend payers often have drastic downward results on the stock price since a lot of the owners own it primarily to collect the dividend.
Finally, I expect interest rates to rise over the next year (and beyond). This is going to leave these real estate loan holders with a portfolio of loans that is losing value as the rates rise (just as bond prices drop as rates rise to compete with the current interest rate). I just figured there were other places to put money than CIM that offered better risk/reward, so I took the money and ran! I have another (AGNC) that I currently have up for sale at a price I think it can hit prior to the next x/d date. Same type of business with a similar high dividend, except AGNC hasn't yet exceeded 100% on the payout ratio. I just think this business model has been flourishing in the economic conditions that have existed the last couple of years, and that that underlying set of conditions is beginning to change. As I see it, there won't be much these companies can do to protect their earnings and the value of the instruments they own in a changed environment. I'm not inclined to short them. I don't know when they will fall, and I don't know how fast, and I most certainly don't want to short anything that would require me to pay a nearly 20% yearly dividend in the meanwhile (AGNC).

EDIT: Oh, and finally, these stocks all have horrible debt/equity ratios. I know leverage is a big part of how they make their money, and works fine so long as things are going their way. But it (leverage) is a two-edged sword, and cuts just as deeply when the business model goes the other way and swings back against them. I understand a lot of the arguments in favor of working with other people's money, but logic aside, I just don't like debt. I don't like it in my own life (and thus seldom use margin), and I don't like it in the instruments in which I invest. It's probably stupid of me, but I sleep like a baby, which for me is of at least equal importance as squeezing maximum return from investments.