The Artificial Inflation of Stock Prices, Due to the Short Selling Ban 32 comments
- Grace Cheng's articles on Seeking Alpha
- Visit: Daily Markets
- Subscribe: Daily Markets RSS feed
-
Font Size:
-
Print
- TweetThis
Short-covering and bidding interest pushed the Dow over 400 points intraday in stock trading on Friday and London’s FTSE 100 closed up by more than 8%. As much as many people are elated at SEC’s ban on short selling, there are also many traders fuming at this illogical and unreasonable decision, including myself. After all, money can be made both ways, when an asset goes up and when an asset goes down. Why make short sellers out to be ruthless and manipulative when many of them also do their homework before deciding to short a stock? Say bye to free markets. We can also say bye bye to liquidity in the markets too.
Why is this so? Because short selling is a necessary part of any free market. It is the ability for a security to be pushed down in price when short-sellers realize it has lower value than what the market has priced it at. Banning short selling of these companies will artificially inflate their prices as no one will be allowed to short them if they think the stock is not worth its price. Sure, short-selling has been abused, but that abuse seems to pale in comparison to the artificial market pumping that is going on now and the rescuing of certain companies thus guaranteeing their bonds and benefiting a select group in Wall Street. Besides, many of these companies of which short-selling is now banned on their stock have been the worst market abusers in everything from overleveraged subprime, naked shortselling, commodities pumping etc.
Pimco CEO El-Erian said that the recent government rescue will have a significant impact on markets, but he thinks that these efforts may be too late to fix the damaging impact on the economy and financial system. However, will it turn out to be a wrong move in time to come?
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 32 comments:
I have a better idea. Why don't we ban the selling of all stocks?
Why not? It's illegal to sell certain drugs like marijuana. Of course it would just be temporary to " stabilize " the markets. I thought I lived in a free country. Today I feel like I'm in China. Where the goverment manipulates the markets and won't let you short stocks.
But in this environment i doubt anyone cares. The banks and brokers wanted to spur a market upturn by inflating the money multiplier with the passing of the Gram bill, letting banks siphon money into brokerages (packaged mortgages), insurance policies (insuring mortgages), and strange derivatives. Clearly the shorters are not unfounded in calling a bankrupt company bankrupt. No one is shorting because they happen to hate Lehman. They shorted it because it has no equity. If everyone was so smart a year or two ago (SEC and Fed), they would have noticed it before we got into this mess as deeply as we are now.
There is a market solution, let them go bankrupt and clean up their mess when they open their books (Sadly, they lie until they can't anymore). And put back the firewalls. They were there to prevent fires from burning out of control. That or change the USA into the socialist republic of America and suffer a lingering recession as banks spend 20+ years trying to hide and write off their hidden losses much like Japan has been going trough all these years.
socialism to benefit the rich at the expense of the taxpayer, have to wonder what they see as their endgame...is this just a reprieve so the fat cats can get their money out and put it in foreign currencies? because they've just shot ours in the foot, wait, there's still more they can do...lets see them lower the rate again so the dollar can get completely flushed. The republicans' free market true colors show when their political donors start calling. Anyone who goes on about those evil shorts doesn't know how the market works. I was totally out of the market for the first time in ten years as of yesterday so didn't get caught short but spent the day today researching and taking a few new short positions because changing the rules doesn't change the stench of the fundamentals. Talk about lipstick on a pig.....
I don't really agree with the rule but it is only going to be in effect until Oct 2nd (maybe) and it is only for 799 financial companies. There are 10,000 other stocks out there to short. i don't buy the 'do their homework line' she states in the article. Banning short selling does not eliminate free markets. Do people short cars or houses? No but there is still a 'free market' for it.
Why don't you 'do your homework' and INVEST in a company instead of playing the spoiler for everyone else.
I have made money by not shorting. Maybe you should do the same and stop whining.
Of course, we live in a country full of people who are so ignorant that if you ask them what their main concern is, they say gas prices, and add that it's the govt's job to keep gas prices down.
Maybe we long investors should start a class-action suit against the government. By propping up stock prices, they are depriving us of the opportunity to buy low (is USB worth a PE of 16? - no.). Also, we have had several thousand dollars added to our individual tax burdens!
At least the Chinese are happy.
If short selling was leading to fairly valued stocks in an expeditious time frame there would be no problem. What was happening though was something else - stocks that were fairly valued were coming under attack, with the potential to destroy the entire banking system. Problems like mutual funds dropping below par value were starting to appear - and if this were to happen on any significant scale we would see a REAL financial panic on main street that would make what was happening on Wall Street look like child's play.
Never mind that short sales - indeed NAKED short sales - are still A-OK for distorting the rest of the equities and commodities markets.
What an age we live in.
Sure as a trader you want to invest using models and simulators that productively guide your assets. But only as a function of investment that first are qualitatively in order for the market to perform as intended. Then the companies traded must further bestow the fundamental values of commerce that is expected of them.
Bears and Bulls, one follows the other and never both. Banning shorts put trading back on the right track so the bulls go their own way, just as the bears go the other. Bears and bulls on the same trail don't mesh nor live in Alaska.
Where things get tangled is in the computer programs that trade options and the like, that now have to adjust for time and liquidity.
biz.yahoo.com/ap/08091...
biz.yahoo.com/ap/08091...
It is doubtful that all the contradictions in the SEC's temporary ban on short sales will be worked out before the ban is lifted.
However, the existing rules against naked short selling will be enforced and they're not going away.
So, if you want to make money as a naked short seller, you may have to go elsewhere.
Speaking of which, I hear that Brazil is now promoting a few secluded beaches where naked short sellers will be allowed to congregate. However, I don't think they'll be allowed to buy or sell anything. :-)
jegan ;-)
Hey how long have you also been working for the hedge funds. Either you are stupid or corrupt. You should know that the ability to print an unlimited number of fake shares and dump them into the market can manipulate and collapse a company’s stock. Its is call supply and demand just incase you never took a economics class. So go and place you Hedge industry propaganda somewhere else. And take you new basher IDs with you
Think of it as an endangered species list. There's plenty of other overvalued stocks to "do your homework" with.
You want a pound of flesh, take it out on free money and lack of ethics, and zero accountability. While your at it, check your fund holdings...I'll bet you own(ed) BSC, AIG, and LEH and didn't even know it. Guacho and Norms need to stick to long only...not smart enough to see the other side.....Hedgie or Govt.
This is going to be a disastrous policy. Over the weekend, the big boys will realize that without shorting banned, there is no one to temper the flames and will be able to send all financials to the moon.
I have been long ETFC for a year, but at the end of the day I loaded up on XLF and Dec calls. All it will take is a couple big buyers to launch every financial upward, which will eventually cause a panic among remaining shorts.
I predict the ban will last longer than 10 days, and the gov't will use these skyrocketing prices as validation of their brilliant "policies."
This seems like the trade of a lifetime, am I missing something?
MM
thanks!
There is no U.S. constitutional, free market, global free trade,capitalistic RIGHT to "make a down side bet" that a company's stock is over valued through the mechanism of shorting shares, especially when those shares aren't actually borrowed from another party. In the old days one merely sold their shares of a high priced to earnings stock, or did not bother to invest in it. The market determined value purely by the willingness, or dearth, of individuals to buy and hold a publicly traded company's shares.
Something needs to be done to forcibly stifle the volatility in the equity and bond markets so current and future INVESTORS will feel confident in sticking with a company or a mutual fund for the LONG TERM. Otherwise, the hedge fund/trading community will actually end up destroying the capitalistic free market system that they are now whining about to the press.
so of what use is mark-to-market accounting when the market is rigged?
You forget that they have to BUY back the stock at some point to actually make money. No one shorts to zero. Thus, as a stock declines and you take profits, you actually support the price in the upwards direction at some point.
Changing the rules in the middle of the game generally backfires.
Take what the market gives you. Looks like we have an artificial rally, so it's good for a trade. Buy the banks till the restrictions come off, then short the hell out of them. Opportunity of a lifetime!
3Q earnings are going to be disastrous for some companies, what with writedowns from exposure to FNM/FRE/LEH/AIG, new marks on assets based on continued housing price declines and cheap distressed sales, high costs of capital, and the freeze-up of a lot of financial business. While people may look forward to good earnings next year, at least some of the currently high prices could get knocked down in short order as people fear for the near-term earnings and take trading profits.
The 3Q earnings (losses) will most assuredly be a horror show; natural longs, true holders of financial cos. shares may say "I'm not willing to hold my shares at this time", and price/share will drop accordingly, more sellers than buyers.
What will not happen at this point in time is the gang rape of a company by naked short sellers; with complicitous assistance by the idiots at the credit ratings agency, one of which has a majority shareholder with the initials W.B., who just happens to be competing with the likes of AIG,MBIA,AMBAC,MTG,etc...
After October 2nd this thing will start a volatile and bumpy journey onwards and upwards and eventually break $300.