Short Seller Block Calls US Stocks Rally ‘Dead-Cat Bounce’

Prominent short seller Carson Block, founder of research firm Muddy Waters LLC, said on Wednesday he remains bearish on the U.S. stock market and that the recent rally feels like a "dead-cat bounce."

"I would say that this does feel like it is a dead-cat bounce because how much more ammunition really do policymakers have?" Block told Reuters at its New York headquarters. "I just don't know if there are that many more bullets that central banks could fire."

A dead-cat bounce is a small, short-lived recovery in the price of a declining security, such as a stock. As of Tuesday's close, the benchmark S&P 500 Index .SPX had gained in 11 out of 17 sessions since its Feb. 11 low, and on Friday closed above its 100-day moving average for first time in 2016.

The Bank of Japan's negative rates have backfired, Block said. "You see negative interest rates introduced in Japan, and guess what? That didn't really provide the relief that they had hoped for," he said.

"I've been very skeptical about the fundamentals of the U.S. economy for a long time. I don't feel that there have been permanent solutions that have been introduced."

Block said there has been a tremendous amount of misallocation of capital, as a result of loose monetary policies.

"We knew this years ago when we saw companies issuing debt to buy back stock and pay out dividends," he said. "We knew that we would be at a point in a few years where when these companies were just really, maybe not mortally wounded, but seriously wounded."

He added: "So from a short (selling) perspective, this is a target-rich environment because of that. There are far more companies with fewer legs to stand on than they were a few years ago."

Corporate America chiefs have become, in many cases, compensated to think like equity traders, he said. "Especially with larger companies, they run these businesses that in this global environment, 'Where do you really get growth?' Even if you have a new CEO come in, is this CEO so much smarter and has much better insight than the last CEO and he can figure out a way to grow?"

As a result, Block said he has seen some companies attempt to increase returns for equity holders in ways that are unsustainable.

Block made his mark in the $3 trillion hedge fund industry after he challenged accounting practices of a number of Chinese companies that trade on North American stock exchanges, then bet against them using his own money to short their stocks.

Block reiterated that he was targeting European companies and credits rated just above "junk" status, or BBB-, for shorting opportunities.

In Europe, "the government and the regulators are very suspicious of short sellers. But that's also the opportunity because there is just this cultural bias against short sellers there. There are a lot more problems in the shadows, as a result of that."