Short Sellers Are Increasing Bets Against Developing-nation Stocks By The Most Since March 2007.

PR Log (Press Release) – Apr 23, 2009 – Short interest in the iShares MSCI Emerging Markets Index fund, which tracks equities in 23 developing nations, climbed 51 percent in March, the biggest jump in two years, according to New York Stock Exchange data compiled by Bloomberg. Wagers against Rio de Janeiro-based oil company Petroleo Brasileiro SA’s U.S.-traded shares were the highest since August 2005. Those against display maker AU Optronics Corp. of Hsinchu, Taiwan surged to an eight-month high, the data show.

“The growth in short sales, where investors borrow stock and sell it on the expectation prices will fall, marks a shift from the last three rebounds in emerging-market stocks. In those cases traders closed out their bets. The MSCI gauge, up 32 percent from its 2009 low on March 2, may drop 10 percent in coming weeks as falling earnings damp investor optimism,” Douglas Morgan, CEO at Hoffman Meyer Associates in Seattle said.
“We aren’t out of the woods,” said Morgan.

The MSCI index is down 3 percent from a six-month high on April 16, rising 0.3 percent yesterday to 629.23. The iShares fund mimics the performance of the MSCI index and can be bought and sold like a stock.

Traders who increased short positions in the iShares fund during the 40 percent rally in emerging-market stocks from August 2007 to October 2007 proved prescient.
The MSCI gauge peaked at a record 1,338.49 on Oct. 29, 2007, and tumbled 66 percent through Oct. 27 last year, the worst bear market in the index’s 20-year history. The retreat was spurred by a collapse in U.S. consumer spending and a freeze in credit markets that sent the global economy into its first recession since World War II.

MSCI’s emerging-market index climbed as much as 34 percent from October 2008 to January as short sellers ended 52 percent of their bets against the iShares fund on speculation that the worst of the economic contraction was over. As the index kept climbing in March, posting its best month since 1993, short interest surged to 96.1 million shares, or 11 percent of the fund’s total shares outstanding, the NYSE data show.

Bets against American depositary receipts of Petrobras increased 61 percent in March to 34.1 million, or 1.4 percent of the shares available for trading, according to Bloomberg data. Wagers against AU Optronics, the world’s third-largest maker of liquid-crystal displays, climbed 26 percent to 13.1 million, or 1.5 percent of the traded shares, Bloomberg data show. The company gained 17 percent during the month, while Petrobras advanced 9.9 percent.

Short interest in all stocks traded on the NYSE rose 11 percent last month to 4.23 percent of shares outstanding. The NYSE releases short interest data to mid-April at the end of this week.

Equity prices climbed too fast after March 1 given the outlook for earnings, said Martin Herbon, who manages a Latin America hedge fund for Geneva-based Union Capital Group SA.

Emerging-market profits may drop 26 percent this year, according to Citigroup Inc. Taiwan companies may post a 29 percent slide in net income, the steepest decline among developing countries in Asia, and Brazilian earnings may fall 37 percent, the most in Latin America, the New York-based bank said in an April 15 research note.

“We’re looking for clear signs of bottoming in global growth before turning positive on emerging-market equities,” the Hoffman Meyer Associates CEO said.

Hoffman Meyer Associates is Seattle's leading merger and acquisition, business brokerage firm. As a mergers & acquisition firm, our principals have completed scores of transactions of privately and publicly held companies during the past 25 years.
Over the years, our firm has developed strong relationships with companies and individuals that are ancillary to the mergers & acquisition process including banks, mezzanine lenders, asset lenders, transaction attorneys, certified public accountants, and financial planners. We are also affiliate members of leading merger & acquisition, business valuation, accounting and brokerage associations.