2006: No Abundance of Short Scores

The average dedicated short hedge fund has had a miserable year.
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Editor's note: This column by Doug Kass is a special bonus for readers. It first appeared on Street Insight on Nov. 7 at 9:12 a.m. To sign up for Street Insight, where you can read Kass' commentary in real time, please click here.

Over a drink with those who think young
I got the sad news
While having lunch, Billy walked in
Told me goodbye.
He wanted his ring back, for he told me
There'd be no wedding this year.
Billy broke my heart at Walgreen's
And then I cried all the way to Sears

.

-- "Billy Broke My Heart at Walgreens (and I Cried All the Way to Sears)", Ruby Wright (1965)

Chris Laudani

points out why short-sellers should be ebullient by highlighting a few isolated short-selling opportunities this year in tech and retail -- and some possible winners for 2007.

I respectfully disagree with his merrymaking, as the average dedicated short hedge fund has had a miserable year, with losses close to 10%.

As to the shorting opportunities for next year, his opinion of it being the season for shorting -- like mine -- is pure conjecture.

Back to his analysis of short opportunities presented in the past year, there is a bit of confirmational bias in his column. One can always pick out short winners, but in the main, 2006 was not populated by an abundance of short scores.

Moreover, one should weigh the positive contribution from those short winners against the possible negative impact of short positions that were even more popular among the short cabal. For example, Chris mentioned

Chico's FAS

(CHS) - Get Report

, which was indeed a great short. However, only 10 million shares of Chico's were short over the course of 2006, representing a short position valued at about $220 million.

By contrast, the same 10 million shares of

Sears Holdings

(SHLD)

were short throughout 2006 (but Sears sells for $170/share against Chico's $21/share), representing $1.75 billion, or eight times the value of Chico's short position. And, as you know, shorts have cried all the way to Sears!

At time of publication, Kass and/or his funds had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Doug Kass is general partner for two investment partnerships, Seabreeze Partners L.P. and Seabreeze Partners Short L.P. Until 1996, he was senior portfolio manager at Omega Advisors, a $4 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody. Kass received his bachelor's from Alfred University, and received a master's of business administration in finance from the University of Pennsylvania's Wharton School in 1972. He co-authored "Citibank: The Ralph Nader Report" with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC's "Squawk Box." Kass appreciates your feedback;

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