Index Short Calling: How a Fraud Report on a Company Can Cause an ETF to Lose Value

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Can bears use short-sell reports about fraud in a company to short an ETF and the index it tracks? This post uses Safaricom PLC and an MSCI index as an example.

NASDAQ Index and its US$5 Trillion Loss

Shorting equity indices sends shivers down the spine of government policymakers, and for a good reason. A decline in value of stock market indices results in massive economic losses. For researchers, some indices and exchange-traded funds (ETFs) have created bubbles that need to be popped at the earliest opportunities – usually through release of reports about fraud, misvaluation of investment pools, and overvaluation of ETFs. It is the popping of these bubbles that results in economic losses that can have nationwide systemic effects.

Shorting indices is fraught with risk. When Larry Tisch of Loews Corporation suffered a US$ 2 billion loss on a short position he had on Standard and Poor’s 500 (S&P 500), the S&P 500 ETF that tracks the S&P 500 Index became a favorite for investors taking long positions. Another short seller, Tiger Management, was forced to close shop after its short interest on a basket of tech stocks resulted in a massive irrecoverable loss. These losses made some shorts sellers to avoid shorting tech-heavy stock indices.

However, a few bears continued to make short calls and they cashed in when the market turned, and the NASDAQ index declined by 75% thus resulting in a staggering loss of US$ 5 trillion. This was followed by the abandoning of the idea that tech-heavy stock indices were becoming off-limits to brilliant short selling research firms.

In July 2024, pessimistic reports about Alphabet and Tesla Motors caused the NASDAQ Composite to lose 654 points, which wiped off US$ 985 billion from the market and dampened investor confidence in large-cap technology equities. This was accompanied by a value loss of 6.1% by the popular ETF basket, the Roundhill Magnificent Seven ETF.

Presently, some researchers believe that the S&P 500 ETF with its Shiller P/E ratio of 38.37 is grossly overvalued. The historical average of this Shiller P/E ratio is 17.2 (for this ETF). This sentiment is backed by the Buffet Indicator that is currently just north of 200%. This has been attributed to the meteoric rise in the OMV of the Magnificent 7 tech companies i.e Amazon.com Incorporated, Apple Incorporated, Microsoft Corporation, Meta Platforms Incorporated, Google LLC, Tesla Incorporated, and Nvidia Corporation. The current weighting of these 7 companies in the S&P 500 Index and their average P/E ratio are shown in the table below.

Kagirison Research | Index Short Calling: How a Fraud Report on a Company Can Cause an ETF to Lose Value

The P/E ratio of Tesla Motors is a staggering 112.8, which explains an observation made in the post titled, Preliminary Notes on Upcoming Report on Safaricom Group. In that post, it was mentioned that a research firm advises investors to go short on Tesla Motors.

On January 27, 2025, NVIDIA lost US$589 billion following the launch of DeepSeek. This reduced the OMV of NVIDIA from US$ 3.5 trillion to US$2.9 trillion, which is still higher than the total nominal GDP of all the countries in the African continent (which currently adds to around US$ 2.8 trillion). I know DeepSeek as a censored artificial intelligence (AI) financed by the hedge fund, High Flyer.

DeepSeek is generative AI that uses the chain-of-thought reasoning model to deliver responses to prompts, unlike its main competitor, OpenAI. Still, the efficiency of DeepSeek served as a catalyst to investigate whether NVIDIA was grossly overvalued. The negative sentiment of investors was captured by the 1.5% decline in S&P 500 and the 3.1% decline in the NASDAQ Composite. Furthermore, Bloomberg reports that DeepSeek’s launch has wiped off US$ 1 trillion off the equity of the Magnificent 7 tech companies along with other Euopean and American technology companies.

The CEO of NVIDIA, Jensen Huang, also suffered a personal loss of US$ 21 billion due to the launch of DeepSeek. It is also estimated that DeepSeek’s launch has caused other high net worth individuals to lose about US$87 billion on Monday, January 27, 2025.

This raises some questions, will a pessimistic report on NVIDIA cause it to lose value? If so, how will this impact on the S&P 500 and the NASDAQ Composite? Would a positive report of DeepSeek cause further losses for American and European technology companies? I will let these questions be addressed by other researchers and experts.

Now, I want to consider what happens when a fraud report on an African company is used to short both its company stocks at the local securities exchange, as well as short international indices, equity derivatives, and ETF baskets. As is explained later in this post, stock indices can be shorted using short sell reports focused on specific tech-heavy companies. I will use Safaricom PLC and an MSCI index as an example.

US$ 7.4 Trillion Loss

Kagirison Research | Index Short Calling: How a Fraud Report on a Company Can Cause an ETF to Lose Value

In January 2025, the …

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