Von Aldo
When Bad News Is Good News . . . Learning to Love the Shorts

When Bad News Is Good News . . . Learning to Love the Shorts

pellegrini.jpgPoliticians, retail investors, executives of publicly held companies, nearly everyone it seems hates shorts sellers these days. But they always have. Napoleon called short sellers of France's sovereign debt traitors; legendary Magellan skipper Peter Lynch likened shorting to investing with criminal intent; and even our own Securities and Exchange Commission was born out of a witch hunt against shorts, who were thought to be responsible for the Great Crash. (They weren't and the government actually came to that realization, finding that, among other things, it was lack of disclosure and fair dealing that were among the causes and the SEC was born.)

But here is a short you might find interesting, even likeable in his geeky way. This is the story of former Paulson & Co. analyst Paolo Pellegrini, the man who researched Paulson's hunch in 2006 that the housing market had swelled into a bubble. Pellegrini, who had joined Paulson in 2003 after a string of professional failures, is credited with showing (with meticulously researched historical house price data) John Paulson (who is now being unfairly vilified, in my opinion) just how overvalued U.S. residential real estate really was. Pellegrini was right and he now says the U.S., a debtor nation, is in big trouble, with the Federal Reserve printing money. He says the dollar will be devalued and he's going short long-dated Treasuries and going long commodities; he figures there will be more wealth creation in Asia than in developing countries. While this scenario is widely held (and therefore makes me want to investigate betting against it; that's the contrarian in me), I'd be hard pressed to take a bet against this guy. And you might want to read Pellegrini's testimony to Congress last week; it sure puts a huge dent in the prosecution's case against Goldman Sachs.

This is from Commodity Trading Alert blog:

Pellegrini and his colleagues zeroed in on numbers from the Office of Federal Housing Enterprise Oversight’s home price index from 1975 to 2000. He drew a regression line through the data points that showed prices would have to fall 30 percent to 35 percent just to get back to the historical trend.

“After hearing a lot of arguments for and against the presence of the bubble, we had a simple and clear insight of our own to go by,” Pellegrini says.

He recalls that Paulson broke into a smile when he showed him the proof that houses were overpriced. “John doesn’t smile,” Pellegrini says. “It felt great.”

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