* Some funds doubt political will for fiscal cliff deal
* Short positions increase ahead of Q4 reporting season
* U.S. shares on loan up 3 pct to $358 bln in wk to Jan. 4
* Stock lenders raise cost to borrow shares by 5 bps
By Sinead Cruise
LONDON, Jan 9 How durable is the Wall Street
bounce following last week's U.S. budget deal? Not very, some
Hedge funds are betting that a rally in U.S. stocks after a
retreat from the "fiscal cliff" will reverse as doubts grow that
politicians are ready to sacrifice party interests to keep the
world's economic engine running, early data shows.
On the cusp of a Jan. 1 deadline, Republicans and Democrats
agreed a moratorium on a package of tax hikes and budget cuts
critics claimed would tip the United States back into recession.
The news triggered sharp gains in the S&P 500 index,
which rose 2.5 percent to 1,462 points on Jan. 2. But the
momentum is fading, leading some funds and analysts to predict a
tough near-term outlook for U.S. equities.
"The recent rally is an opportunity to open promising short
positions. Taxes are going up in some shape and form and
spending will have to be reduced," said Athanasios Ladopoulos,
chief investment officer of hedge fund firm Swiss Investment
Managers. "Both feed into negative sentiment down the road."
Data measuring demand to borrow U.S. shares - a proxy for
the level of short-selling, or bets on a share price fall -
reflects expectations that markets will falter when the next
bout of negotiations collides with talks to extend a $16.4
trillion national debt ceiling in February.
According to Sungard Astec Analytics, the aggregate value of
U.S. shares on loan rose by 3 percent to $358 billion in the
week to Jan. 4, as sceptical funds bet on falls in consumer
confidence and company earnings.
That compares with a peak of $404 billion, seen in June when
the Federal Reserve rowed back on employment predictions and cut
2012 economic growth forecasts to 2.4 percent from 2.9 percent.
By contrast, the aggregated value of shares in the FTSE 100
on loan fell 4 percent to $1.4 billion in the week to
Jan. 4, while the equivalent for the STOXX Europe 600
dropped 3 percent to $6.6 billion.
Because such bets are struck privately, it's tough to
pinpoint exactly when shares are expected to fall. Some bets may
be pegged to the impending corporate earnings season, while
others will be timed to exploit February's looming fiscal cliff
SHORT, SHARP SHOCK
But even top stock market performers are seen suffering
share price volatility until a compromise on cuts and taxes is
Short-sellers are speculators who borrow shares then sell
them in the hope of being able to buy them back at a cheaper
price, before returning the stock to the original owner.
"While we are positive on U.S. equities for the year, the
possibility of a short, sharp contraction on news flow is
material in our view," equity strategists at BNP Paribas warned
in a note, arguing equity valuations looked over-optimistic.
"The trailing price-to-earnings ratio of 15 times is above
long-term averages and earnings growth has slowed to a crawl at
best, compared with a consensus forecast for 10 percent," the
Stock lenders - typically long-term investors such as
pension funds who can earn a fee by loaning out a stock at
little risk to themselves - ha ve also spotted an increased
appetite to bet on falling stock prices and have raised the cost
to borrow shares by 5 basis points (bps) to about 75 bps on
aggregate over the first week of 2013, Astec data shows.
This brings borrowing rates closer to the 78 bps average
earned on U.S. equity lending in 2012.
"There is much unfinished business ... not to mention the
much bigger question about how the U.S. can meet its long term
spending commitments in the face of an ageing population," Ian
Kernohan, economist at Royal London Asset Management said.
"Given the polarised nature of U.S. politics at the moment,
trying to sort all this out will be an uphill task."
The S&P 500, which rose 13.4 percent in 2012, closed 0.3
percent down at 1,457 on Tuesday. Some commentators say much of
the recent growth in U.S. stocks is not due to an influx of
optimistic buyers, but short-sellers closing out old bets from
2012 before embarking on a fresh set of short positions.
Heavily-shorted firms like $3.7 billion-valued U.S Steel
Corp and $1.9 billion Advanced Micro Devices saw
volumes of stock on loan drop by 15.1 percent to 17.5 percent
and 18.6 percent to 14.6 percent re s pectively in the past month.
This data from financial information firm Markit supports
the argument that bears, not bulls, are perversely largely
responsible for driving the recent upward move in U.S. stocks.
Certainly a negative view is not mainstream for the year as
The consensus forecast from respondents to a Reuters poll in
December was for the S&P 500 to finish 2013 close to its
lifetime high of 1,576.09 set in October 2007.
But signs of fresh short-selling coupled with Friday's
underwhelming December jobs data is putting pressure on market
Speaking at an investment forum hosted by asset manager Notz
Stucki on Tuesday, Anatole Kaletsky, a financial economist and
Reuters columnist, said cyclical factors such as weak housing
markets have been major headwinds but there was evidence these
have been neutralised.
But it may take time for this view to be adopted by many
consumers. A Reuters/IPSOS online poll of U.S. consumers on
Monday found four-fifths of respondents were bracing for another
Additional data from Markit showed sharp increases in demand
to short a range of U.S. stocks who stand to lose from a dip in
But the list of the 30 most heavily-shorted U.S names in the
week to Jan. 4 spans most sectors including pharmaceuticals,
machinery and aerospace & defence, indicating broader pessimism
in the market as well as cyclical or stock-specific concerns.
The volume of bets on a fall in the share price of $7.75
billion Tiffany & Co for instance shot up 17 percent
last week to 6.4 percent, more than double the 3 percent average
short interest on individual S&P stocks.
Demand to short leisure dot-com TripAdvisor Inc was
up 11.6 percent to 5.2 percent and Dr Pepper Snapple Group Inc
saw stock volumes on loan jump 15.1 percent to 7.8
"I am of the opinion that when Q4 earnings season starts
investors will come to realise that the prospects for 2013 are
not that bright," Ladopoulos said. "When the market turns down,
it will take with it many of those too optimistic investors."