April 1, 2006
After the Shorts
I rarely agree with Joe Nocera of the New York Times, but today's column on "Selling Short the Virtues of Short-Sellers" is one I could have written. Indeed, I am working on an article on the topic. His thesis is that market participants, who are overwhelming long in stocks, dislike short sellers and that the press and the SEC seem to be piling on. (See the "60 Minutes" show on Gradient Analytics/Biovail or the SEC prosecution on Overstock.com). The impact is that short sellers do not talk to the press at all any more for fear of being sued. Let's be clear: A short seller cannot spread false negative rumors to cash in on a short position but a short seller, like anyone else, can express validly held opinions (held in good faith) and marshal actual facts on a company's negative outlook. Yet if short-seller does talk to the press there is a risk of litigation from disgruntled CEOs and the SEC if the opinions are not in perfect accord with how the future bears out. So the incentive is to take a short position and not talk, adding to the pro-long bias already in the stock market. The muzzling of short sellers, as Nocera points out, hurts the efficiency of the pricing of the markets. It also contributes to bubbles -- the market runs up longer than it should -- pushed by CEOs and other investors with stakes in long positions -- and crashes only when the negative become painfully inevitable. So we have sustained run-ups followed by cliffs and precipitous declines in stock prices.
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