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Jim Cramer: Spoiled Shorts and the 2013 Rally

NEW YORK (Real Money) -- How much did short-sellers have to do with the incredible moves higher that we saw in 2013? How much of last year's positive action came simply because the predicted earnings downside didn't pan out? I've been gripped by this issue because, if you peruse the charts for the last year, I think you will be befuddled about why whole cohorts roared, especially given that there was no real impetus for the moves. In fact, in many cases these stocks seemed to go up entirely because things didn't go as badly as people thought. That's the sign -- that of spoiled shorts -- that can lead to this kind of behavior.

Let's take the curious case of Norfolk Southern (NSC). Here's a railroad that had become a very reliable short holding because of the prospects of coal dropping precipitously quarter after quarter after quarter. Sometime near the end of the summer, however, the stock started creeping up. Right then and there, if I were looking for a short, I would have been laying it out. I would have bet that nothing had changed, and that the stock would just get hammered again after the next earnings report, as had been the case much of the time.

You could almost make out the footprints of the shorts as the stock inched from $73 to $79.

Then the rail reported the quarter and, lo and behold, coal had only dropped 2%. More important, coal had at last become a small enough factor that it didn't kibosh the quarter. Next thing you knew, $80 went to $90.

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I am convinced that the only thing that really happened at Norfolk Southern was that the coal decline, which had gotten out of hand, was finally manageable, courtesy of some very strong chemicals and metals numbers and a hefty dose of pre-quarter estimate cuts. Norfolk Southern was simply a spoiled short from then on in.

Or take the insurers -- ones like Genworth (GNW) or Radian (RDN) or Principal Financial (PFG) or Lincoln National (LNC). It wasn't that long ago when these companies were perceived to be on the ropes. Lincoln and Principal were supposed to be on the hook for bad investments that could cause the potential for gigantic write-offs. I remember hearing that both of these were toast.

Genworth and Radian, I believe, actually were toast because of all of the private mortgage-insurance obligations they had written as home prices had relentlessly declined.

What did the shorts not get right on these? Perhaps it's that the Federal Reserve's policies had precisely the impact that the Fed had wanted. Those policies aimed to make it so that the Principal and Lincoln annuities and investments would come back to life, and the plummeting home prices -- which were decimating Genworth and Radian -- were to reverse course and roar back.

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