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OPINION

Caught short

Caught short
August 8, 2019
Caught short

Once again, investors will be wondering whether this is the start of a sustained sell-off, or – as we have seen before – a sharp but rapidly reversed correction that sees the market recover and power on to even higher highs. Given the muted response to last week’s Fed cut, it’s hard to see where the stimulus could come from this time or where the fallout from the US-China spat could end – as do numerous negative government bond yields and a six-year gold price high. 

It’s not just the indices that have caused consternation. On Tuesday, shares in Aim favourite Burford Capital plunged by a fifth as rumours of an imminent short attack started to circulate. By Wednesday, that attack had been confirmed and the shares lost another 50 per cent as famed US short-selling group Muddy Waters published a lengthy report into alleged accounting irregularities. You can read our take on this on page 7. 

Unsurprisingly, Burford’s management had threatened legal action against the coordinators of what it describes as “actionable misconduct” even before the report was published. As the saying goes, the best form of defence is attack, and as well as the legal threat Burford’s attack has been to cast doubts on the credibility of its accuser as a greedy bear raider in the mould of Gordon Gekko. 

This is where things get, well, muddy. Muddy Waters’ profit motive is unambiguous. And to maximise that profit, they’ve cleverly manipulated social media, and timed their attack to coincide with a broader bout of market fearfulness. This leaves them open to accusations of market abuse and depiction as evil short-sellers.

But Muddy Waters are also serious analysts. And without wishing to endorse Muddy Waters’ view, I remember a similar reaction when Quindell was targeted by Gotham Capital some years ago, justifiably as it turned out. Like Quindell, Burford is also thought to be something of a black box; as Mark Robinson points out on page 45, analysts at Canaccord asked similar questions of the company’s accounts three months ago, while our own Phil Oakley has put Burford in his “too difficult” pile. “If a company tells me they are making lots of money but I can’t see any trading cash flow, I scratch my head and walk on,” he has tweeted. 

Many investors did not walk on, and until recently will have enjoyed fantastic gains despite probably not fully understanding how the company works – a knowledge gap that creates the uncertainty Muddy Waters is now exploiting. Which goes to show that if you fear the unknown, you shouldn’t buy into it.