Greenberg: Fleckenstein to Restart Short Fund

NEW YORK (TheStreet) -- From the looks of this market, you might think Bill Fleckenstein needs to have his head examined for what he's about to do: Restart his short-selling fund, which he shut four years ago.

As it turns out, he's one of several ex-short-sellers I've talked to in recent weeks who have said they think the time is right to return.

So far, Fleckenstein, who made his name shorting mostly tech companies, but who quit in 2009 to start an opportunistic long-only fund, is the first to go public with his plans.

"For four years and counting, there was no reason to think about shorting," he told me. "I survived from 2000 to 2009, even when the market was going up, because I made what the Fed was doing a key variable."

When that variable changed, he figured "it would be impossible to make money on the short side. I knew the Fed and the other central bankers would print a tremendous amount of money and it would be impossible to be short until the time the bond market takes away the printing presses -- I mean, forces them to stop."

Which, he believes, is where we are right now.

He cites the dynamic between the widespread belief that the Fed would slowly turn off the low-interest rate, bond-buying, quantitative easing cash spigot by so-called "tapering" -- and the stubbornly steadfast yields on 10-year Treasuries.

On tapering fears, he points out, yields leaped from 1.6% to 3%. But the Fed didn't taper and rates backed off, but just down to 2.7%. That's a far cry from pretapering-talk levels.

Fleckenstein believes this is a sign the bond market, which usually tracks the Fed, is shrugging it off -- something that hasn't happened, he says, since the Volcker years. "People say, "How can that happen? I say, the markets can do anything."

If he's right, Fleckenstein says, the bond market's dominance over the Fed will become evident over the next few months.

"I could be off by a year, I don't know," he says. "I may have to sit in cash for a year. I know the bond market will have to stop the Fed. Money printing was the problem and more of it won't fix anything. But you can't win that argument as a short until such time that the bond market stops it."

Fleckenstein expects to launch his fund, dubbed RTM 2.0, early next year. (RTM = revert to the mean.) He'll team with Wes Golby, who once ran a small-cap tech fund.

He plans to short only liquid names, and as in the past, focus on tech. "I like tech for three reasons," he says. "They're prone to excess valuation. Most are bad businesses over the long term and the best thing is that suppliers and customers tend to be public, which is a great read for when the wheels come off."

And come off, for some, they surely will.

Reality Check

Shorts have been steamrolled in recent years, like no time they can recall, with the nuttiness of this market making mincemeat of anybody who dares to be anything but bullish.

With the notable exception of short-selling king Jim Chanos of Kynikos Associates and Real Money's Doug Kass, who runs Seabreeze Partners -- and a few others who remain publicity shy -- short-biased investors (or those who admit to being among them) are few and far between.

Sure, Bill Ackman of Pershing Square is more known as a short because of his Herbalilfe ( HLF) position, but he is generally mostly long. Ditto for David Einhorn of Greenlight Capital, who has not been quiet about his short on Green Mountain ( GMCR).

Periods like this, when the buzzwords for easy money are "short squeeze," have generally been proven to be inflection points, of sorts, for the market. This time will likely not be different. (Nothing, after all, goes up in a straight line.)

Which makes the timing of Fleckenstein's decision to return that much more interesting.

-- Written by Herb Greenberg in San Diego

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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