September 20, 2008
Prohibition on Short Selling Creates Problems
The SEC's bone-headed suspension of all short selling on 799 financial stocks has created havoc in the markets and the SEC is scrambling to create exemptions. Options market markets cannot hedge positions; exchange traded funds that short the market cannot follow established trading programs; and long position traders (whom we are desperate to accommodate) may limit long positions because they cannot hedge. Suspending trading has always been a very poor method of managing markets--even bailouts, which I abhor, are better. Cox is lurching around like a drunken sailer in a wind storm.
September 20, 2008 | Permalink
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I wrote this the other day, so excuse the past dates, but perhaps you'd be interested in this perspective:
My interpretation, for what its worth, on the implications of today's ban on short selling the 799 financial companies covered by the SEC is that it will only create more volitility in our markets, rather than stablize them as the government intends. For example, today we had a 368 point gain, which followed yesterdays 400+ point gain, for 770 points up in two days. Why the gain, especially today? Did the fundamentals change, or was this simply an artificial technique to manipulate the traditional economics of the the natural equilibrium in a free market? It seems to me that this latest intervention has simply temporarily removed a significant portion of downward pressure on stock prices (the shorts), so what is the obvious result...a big upswing like what we got today. Now that we don't have the downward pressure from shorting, (I think there may be some exceptions here for professionals who will hedge thier options/futures with shorts, but in general shorting financials is closed temporarily), what downward pressure is left? For the most part, just those trying to sell thier long positions.
Great, but thats in the past now, and ceteris peribis (it if was only this easy), if I'm correct, the real question is what will happen when this short selling ban is lifted, and how can you profit from it? Will traditional economics dictate a reverse shift in equilibrium of a similar magnitude, thus resulting in a sudden 400 point loss? I'm doubting that, but I would expect the returned downward pressure from the shorts to have some role, whether gradual or sudden. Of course this analysis cannot be limited to supply and demand forces in the market, as between now and Oct 2 (when this ban will supposedly be lifted) the fundamentals of these companies, and the other market forces (and gov interventions) may change things significantly.
In accord with my above points, I sold a postion in oil services Friday afternoon to cash out on the big two day gain, and immediately took a position in a real estate shorting ETF that is still open for trade "SRS." Today, I'm up 12% as of 3PM with the market down 260. I'm not selling though, given the points I mentioned above, until SRS goes up another 15% or so (as I belive the DOW's headed right back below 11,000), which I believe will happen in a matter of days, perhaps before Oct 2 when the shorts are allowed back in. Then again, just as you mentioned with the hedge and soverign wealth funds, there's no way I can play the government wild card and predict some other radical intervention that will screw up my analysis and investments. I've got the stomach for it, but we'll see how it all turns out.
Posted by: Anonymous | Sep 22, 2008 12:05:37 PM