Friday, July 28, 2006

The Road Less Traveled

Its time for some quiet, Friday morning reflection. Only when you are calm, at peace, will you know the good trades from the bad. Maybe some Robert Frost will put us in the right mood.

Two roads diverged in a wood, and I-
I took the one less traveled by,
And that has made all the difference.

Mmmm... pretty good trading advice, I'd say. A great example is in today's Wall Street Journal, "For Short Sellers of GM, a Trip to the Scrap Heap."As Gregory Zuckerman and Ian McDonald report, "At thebeginningg of this year, 17% of GM's outstanding shares were sold short, up 10% from five months earlier." For some perspective, I looked at the top 10 companies in the S&P 500, and none have short-interest above 2.7%.

GM is up almost 69% year-to-date, so those shorts are getting hammered. This despite the fact that their financial situation is still quite dire. So those analysts that did exhaustive research back at thebeginningg of the year and concluded that even if the turnaround is going well, the company will still be on thin ice were right in their research, but wrong on the price.

Such is the danger of taking the well-traveled road. In order for the price of GM stock to go down, people have to sell the shares. But with short interest at a whopping 17%, who is left to sell? The right trade would have been to say "Hey, things are really bad over there at GM, but at this price, with this much bad press, and with short-interest this high, anysmidgenn of good news will send the stock much much higher. And all but the mostdisastrouss news is already priced in. I'm going long."

Now, I know I'm just a dumb bond guy, but the principal applies all over the investment world. Always follow the trade less traded. It will make all the difference.