Kyle Bass's Texas Feud Spotlights Short-Selling Tactics; COVID-19 analysis of the Dakotas and New Mexico; Pandemic may be declining in Europe; Our backwards approach to lockdowns
1) I've been writing frequently about activist short-sellers, in part because I think they're healthy for our markets, and because I want to warn my readers about stocks that could blow up in their faces.
I also have a great deal of respect for these folks. What they do is extremely hard and dangerous, not only because of the inherent risk in short selling, but also because – in speaking out and sharing their research and conclusions publicly – they risk being pilloried in the media, investigated by regulators, and attacked by the companies they're targeting.
This BNN Bloomberg article is an in-depth look at one such case, when Kyle Bass of Hayman Capital went after a Texas real estate investment trust called United Development Funding ("UDF") – and, as a result, became involved in a lawsuit filed by UDF and is under investigation from the local Texas U.S. Securities and Exchange Commission ("SEC") office: Kyle Bass's Texas Feud Spotlights Short-Selling Tactics. Excerpt:
Best known for shorting subprime mortgages ahead of the financial crisis, a Powerball-type win that brought him fame and fortune, Bass had come to believe that UDF was a crooked company hiding losses amid fraudulent transactions with developers. His fund, Hayman Capital Management, had spent months building a short position that would pay off if UDF's shares tanked...
Bass made about $30 million on his bet, a person familiar with the returns says. But now, five years later, he's embroiled in a lawsuit filed by UDF accusing him of defamation and interference with its business. And the same SEC office in Fort Worth that Bass reached out to is investigating whether he and his firm violated securities laws...
There's nothing illegal about making money by exposing suspected fraud. The government pays some whistle-blowers for doing exactly that. Activist short sellers, who stand to profit from a company's collapse, do it all the time. They operate in a profession where it's legal to use subterfuge, including fake names, while trying to move stocks. It's also common to alert federal agencies. It's even okay for short sellers to do all this without revealing their motives.
There's just one catch: The short seller can't knowingly spread false information. And that's where UDF says Bass crossed the line. Its lawsuit, filed in state court in Dallas in 2017, alleges that his posts were misleading because the public was getting only part of the story – the part Bass wanted people to see.
Bass calls the lawsuit harassment and says he spared potential investors from plowing money into a corrupt company. His lawyer, Lawrence Friedman, says the SEC didn't raise any concerns about Bass's actions at the time and that any review now would result in "no action involving Hayman."
The unfolding legal battle provides a rare look into a short-selling campaign. Hundreds of pages of documents and emails that have come to light show how Bass's firm reached out to law enforcement and the media while trying to bend the market to where he wanted it to go. And they open a window on the symbiotic relationship between informants and the SEC, which looks to investors like Bass to help ferret out fraud in the marketplace...
Bass says he didn't make a lot of money on the short – about 10% of the firm's profit in 2016. But it "cost us five years of legal battles, distraction, aggravation and expense," he says. "Given the friction imposed by this frivolous suit, Hayman will be forced to rethink ever blowing the whistle again."
2) In Monday's e-mail, I wrote:
It's entirely possible that the South Dakotans will eventually be proven right !
If you look at the charts closely, you'll see that cases per day have been declining and hospitalizations have flattened over the past week. It wouldn't surprise me if the top was a week ago and the virus starts to fade away because South Dakota has reached the herd immunity threshold.
Here's why: As of today, the state has had a total of 71,070 cases (source). My rule of thumb is that only 20% of cases are identified by testing. If so, that means roughly 350,000 South Dakotans have been infected, which is 40% of the state's population – likely the highest of any state.
My guess is reinforced by this chart by data scientist Youyang Gu:
Three days later, my prediction is looking good...
Below are charts showing cases, hospitalizations, and deaths per capita for two states that haven't locked down at all despite the highest level of population infection – North and South Dakota – and a state that's locked down hard, New Mexico (sources here, here and here). As you can see in the map above, New Mexico has among the lowest levels of population infection.
So, which state(s) will peak and start to decline sooner... the ones with high levels of population immunity but with no lockdown (the Dakotas), or the reverse (New Mexico)?
It's too early to say for sure, but the evidence over the past week certainly seems consistent with herd immunity threshold theory – the metrics for the Dakotas have started declining, while they're still going straight up in New Mexico...
The story is the same for the positivity rate (source):
South Dakota
North Dakota
New Mexico
3) It's great to see that many countries in Europe appear to be past the peak:
4) We continue to do things exactly backwards, closing schools and banning small gatherings (low risk of spread), yet keeping bars and restaurants open (high risk). Here are two New York Times articles about this:
But are dinners and backyard barbecues really the engine driving the current surge of infections? The available data do not support that contention, scientists say. Still, the idea has been repeated so often it has become conventional wisdom, leading to significant restrictions in many states.
In dozens of statements over the past weeks, political leaders and public health officials have said that while previous waves of infection could be linked to nursing homes, meatpacking plants or restaurants, the problem now is that unmasked people are sitting too closely in kitchens and living rooms, lighting thousands of small COVID fires that burn through their communities.
"It's those informal, private gatherings where we're seeing the ignition taking off in terms of the infection rate," Gov. Ned Lamont of Connecticut said earlier this month, as he announced that private events would be restricted to 10 people.
Household gatherings have "become a major vector of disease spread," the Health and Human Services secretary, Alex Azar, said in an interview with CNN in late October.
But many epidemiologists are far less certain, saying there is little evidence to suggest that household gatherings were the source of the majority of infections since the summer. Indeed, it has become much harder to pinpoint any source of any outbreak, now that the virus is so widespread and Americans may be exposed in so many ways.
"Somebody says something, and somebody else says it, and then it just becomes truth," said Julia Marcus, an infectious disease epidemiologist at Harvard University. "I worry about this narrative that doesn't yet seem to be data-based."
Most states don't collect or report detailed information about the exposure that led to a new infection. But in states where a breakdown is available, long-term care facilities, food processing plants, prisons, health care settings, and restaurants and bars are still the leading sources of spread, the data suggest.
- And: In Canada, a Push to Keep Schools Open in Second Lockdown. Excerpt:
Most stores were shut. Barber shops and salons shuttered. Restaurants and bars – including the outdoor seating where hardy souls had braved meals under heat lamps – were banned. Gyms, pools, even the beloved hockey arenas were closed in the strictest shutdown Toronto has confronted since the pandemic's first wave last spring.
Except for the schools.
Facing a resurgence of coronavirus infections in Toronto, the fourth largest city in North America retreated back into lockdown on Monday, along with two booming suburbs. But in contrast to New York and other big American cities, officials are finding it more beneficial to keep schools open.
"We cannot put in-class learning at risk," Ontario's premier, Doug Ford, who is ordinarily an advocate for business, said last Friday when announcing the closures. Along with trying to avoid overwhelming the hospitals and to protect the elderly in long-term care homes, Mr. Ford said, schools were "what matters most."
Mr. Ford's announcement illustrated how Canada has followed the lead of much of Europe, prioritizing the opening or reopening of schools, while just across the border many U.S. states have focused on keeping businesses such as bars, restaurants and gyms at least partially open.
Since schools resumed classes in September across Canada after, in some cases, many months of remote learning, there has been strong enthusiasm to keep them open.
In most places there are no official thresholds for shutting schools down and there is little appetite to do so, according to Ahmed Al-Jaishi, an epidemiologist who is part of an academic team compiling school outbreaks across the country. And, despite fears among parents that students would bring the disease home and among teachers that they would get infected in large numbers, such outcomes have been rare.
Best regards,
Whitney
P.S. The Empire Financial Research offices are closed tomorrow and Friday for the Thanksgiving holiday. Look for my next e-mail on Monday, November 30. Have a great holiday!