Everyone hates Bruno Iskil for single handled costing JPMorgan $2 billion, but some titans of finance wield just as much power over financial markets by uttering a few words -- and get rewarded handsomely for it. Market watchers saw that power in action yesterday during the Sohn Investment Conference, an annual day-long affair where some of the brightest stars in the investment universe give brief presentations (with slides!) about their own market predictions, including up-or-down picks on a handful of specific stocks. The roster of speakers includes the biggest of the big shots, portfolio managers for some of the world's most successful hedge funds, most of whom rarely (if ever) discuss their investments in public. That's why attendees pony up as much as $4,000 a seat just to get a glimpse into some of the best minds in the business. (At least the money goes to cancer research and not more private jets.)
What has become apparent, however, especially in the age of livetweeting and lightning-fast trading algorithms, is that people invited to speak at this conference are so successful and so influential that they can make or break companies with a single word. Thousands of analysts offer buy and sell ratings everyday, but when these guys talk, as the proverb goes, people listen. Particularly when it's clear that they have their own money on the line when talking about a stock.
If you need proof, Business Insider has a fascinating breakdown of how several different stocks behaved yesterday after being mentioned on stage at the conference. At 12:40 p.m., Larry Robbins of Glenview Capital Management told the crowd that he's bullish on hospital stocks. At 12:41, trading on Tenet Healthcare Corp's stock spiked, sending the price higher. Ten minutes later he said he was shorting the energy company ITC Holdings. Everyone back in the office immediately started selling. DoubleLine Capital’s Jeffrey Gundlach got up and said he wasn't fond of Apple. The stock dipped 2 percent in the afternoon, dropping the company's market value by $96 million. You probably can't blame all of that on Gundlach, since the stock was already down for the day (and tanked even further on Thursday), but he certainly didn't help.
Then came hedge fund superstar David Einhorn, the billionaire founder of Greenlight Capital (and the lifelong Mets fan above.) Einhorn made his name as a short seller, famously betting against Lehman Brothers before it collapsed and, more recently, Green Mountain Coffee, which has struggled for months. He stood up for Apple yesterday, saying that it had the potential to be a $1 trillion company, which helped the stock rebound from Gundlach's damage a bit. Then he slamed a company called Martin Marietta Materials, saying it was "a strange stock in a cyclical business." Their stock immediately dropped 10 percent and trading had to be temporarliy halted.
Maybe the most dramatic example is the one stock that didn't get mentioned: Herbalife. Many people in attendance assumed that Einhorn himself was already shorting the stock, based on some questions he asked during a company conference call earlier in the year. So when he got up to speak yesterday, everyone eagerly waited for him to crush that stock too. When he finished his presentation without saying a word about Herbalife, the stock went up 20 percent. Everyone decided the stock was safe, simply because David Eihorn didn't say it wasn't.
The problem, as you may have figured out, is that many of these calls become self-fulfilling prophecies. David Einhorn decides to short a stock. Then he tells a huge room of other investors that the stock is no good. They believe him (or assume that everyone sitting next to them will believe him.) Everyone sells. The price collapses. David Einhorn makes a ton of money for his clients and looks very smart for shorting. Repeat.
Seriously, this Einhorn thing has gone too far. Do people realize he can be wrong 100% of the time and still make 10+% short all the time?— Elliot Turner (@ElliotTurn) May 16, 2012
People are definitely starting to notice that his outsized influence can have a warping effect on the market. Martin Marietta says there is nothing wrong with their company, and that may be true, but we'll never know because Einhorn's prediction never got a chance to play out naturally. Even other analysts who might secretly believe in the strength of a particular stock are forced to admit they can't recommend it if there is even the possiblity that Einhorn might be shorting it. It's just too risky.
This isn't a critisim of Einhorn, personally. You don't get to be the voice that everyone listens to without a long and successful run of making great calls and he and the other men on that stage earned their reputations and their success. Others are much harder on him, of course, saying that he "represents everything that’s wrong with modern finance." Not because he's so rich, but because he doesn't respect the power that he has. The boys at JPMorgan didn't seem to respect it either and now they have to answer to Congress. So far Einhorn only has to answer to his investors (and the market.) At least until another big fish comes along and maybe sells him short.