What Happened: Block believes the market needs short sellers now more than ever due to the increasing number of companies manipulating their financials. Yet, the current speculative frenzy makes it difficult for short sellers to operate effectively, he said in an interview with Bloomberg.
“There are more companies playing more games. A lot of them are in the gray zone; you don’t know whether it’s over the line or not,” Block said.
“So they’re not gonna get prosecuted in this environment.”
“The market needs short sellers more than ever, given the amount of games that are being played. But if the long side doesn’t care, then, you know, this can continue until it doesn’t.”
Block’s views are in line with those of renowned investor Jim Chanos who, in the previous month, described the current market scenario as “the golden age of fraud.” Chanos, famed for foreseeing Enron’s collapse, shut down his hedge funds last year, attributing it to a transformed marketplace that is unfavorable for short sellers.
Another notable investor, David Einhorn, has also voiced his dissatisfaction with the current market trends, observing that investors are increasingly overlooking a company’s fundamental worth. Despite Greenlight Capital, his firm, recording a 22.1% increase last year, Einhorn admitted to substantial losses on four short positions.
Block further emphasized that short sellers, who detect fraudulent or failing companies, have been advantageous to regulatory bodies like the U.S. Securities and Exchange Commission. However, these traders are encountering opposition from regulators and “populist” investors, he added.
Block cited Musk as an example, who has repeatedly denounced short positions on its stock, thereby driving Tesla’s stock upwards.
Why It Matters: The struggle of short sellers in the current market environment is well-documented. For instance, recently, Musk took advantage of a lawsuit against short-seller Jim Chanos to taunt him.
Furthermore, Gary Black, The Future Fund Managing Partner, issued a stern warning to those betting against Tesla, stating that anyone shorting Tesla’s stock needs to have their head examined.
Ross Gerber shifted his stance from being a critic of Musk and Tesla to expressing bullish views on the company. He criticized short sellers for their “stupid” decisions and emphasized Tesla’s long-term potential.
Even Jim Cramer compared Musk to Muhammad Ali and suggested not to bet against Musk.
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