Morgan Stanley: Exploding the Short-Seller Myth 29 comments
September 21, 2008
| about: MS
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While no one is likely to change their mind on this -- the vilification of short-sellers is more or less complete -- let's keep working away at it. Here is some data on the role of short-sellers in Morgan Stanley's decline this past week, specifically the presence that short-sellers had in Morgan Stanley stock. The numbers reflect the percentage of MS's market value sold short at the time in question (according to Data Explorers):
July 2008: 7% (peak)
Sept. 1, 2008: 2%
Sept. 16, 2008: 2.8%
Are these numbers non-zero? Yes. Are they monstrously large, as conspiracy theorists are alleging? No. Are they large in historical terms? No. And had we hit new peaks in recent weeks? No.
Next question.
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This article has 29 comments:
But I don't wholly disagree... and this is also why MS didn't go to 0.
In the rules of capitalism, it's fair, Darwin's natural selection right? But why not leave the irresponsible companies alone if you don't own the stock?
Ok, you could use the argument that in the long run weaker companies who survived can do more damage to the system.
But in my view, if systemic risk is on the table, allowing short sales can be the shortcut to hell. Stock markets should be something that help the economies, not a casino, where you are just gambling on who's to fail. IT's about investing in companies for christ sake.
But keep trying. Oh, and capitalist pig, USO has been on the Reg SHO list for over 300 days; the fact that no one complains about that is sufficient cause to assert that this has nothing to do with a desire for fairness in the markets or proper price discovery and everything to do with avoiding acknowledging that the banks are all insolvent and deserved to go to zero.
Now, our government wants to use our money – remember, we the people, provide all the money – to rescue the very organizations that government regulation forced into failure. And yet the blowhards in Congress fail to recognize the vast majority of us: those who live by the rules and expect no favors from anyone.
Explain your thinking . . . if there is any. If shorts are attempting to drive down a stock THEN the uptick rule WILL slow down the trading so a more orderly market for the stock can occur, whether it be down or up.
IF A STOCK IS SO GOOD AND SHORTS COULD DRIVE THE PRICE DOWN, OTHER PEOPLE LIKE ME WOULD BE PICKING UP THE BARGAINS.
I think most people against short selling are momentum buyers,
they don't like the rationality that shorts apply to quick and unjustified run ups in weak companies.
Naked shorts can result in short positions that exceed the number of outstanding number of shares of the equity. There is no long equivalent to balance this, meaning that shorts have power to drive a stock down that is not balanced on the long side.
The disclosure requirements are different for shorting.
Regulators are behind the curve in their ability to enforce rules covering shorting.
Shorting can destroy a company; drive it into BK. Excessive long positions do not carry the death penalty.
And the big one, the real reason that shorts of financials are currently banned is that these companies are inter-connected. Company GS financially sound, but is connect to MS. MS is OK too, but is connected to L. L runs into some hubris, needs to raise capital but the shorties get there first. L goes into BK. This makes MS vulnerable, so the shorties take MS down. Now all that is left is GS. Investors are panicked and look to dump. GS is weakened by its relationships to other companies in the same industry. Shorties having nothing else to do feed on the panic.
At the end of the day GS goes under. MM funds are destabilized and drop under par. Main Street panics and starts $4 trillion run on MM funds. The dollar crashes. Great Depression II.
This inter-connectivity does not exist in other industries. If GM goes under TM is not dragged down with it.
Shouldn't insolvent bank stocks be trading at $0?
Do you want to know the reason why Morgan Stanley is selling under $30? Take a look in the mirror. That's right; neither you, nor anyone else in the world, is willing to buy another single share of MS for $30. I don't care how many of their shares you already own, or how much you paid for them. Right now, you're not willing to buy another share for $30, which is why it is selling for $27.
It doesn't take short sellers, hedge funds, or gypsies to drive a stock price down. All it takes is lack of demand. That simple.
As User237528 states, it is the interconnectedness. IB and CBs lend money to one another often using stock prices and assets as collateral. When the value of those assets go down, so does the necessary collateral reserve necessary to lend money. For a non-financial company, eg PG or AAPL, the stock price may not matter as much
It is all psychology. The problem is, few "investors" really know what a stock is worth, and most of those lack courage in their convictions. If the stock is down, they freak out and want to sell. If it is up, they are giddy and want to buy. It is exactly the opposite of what good investors do. It really has little to do with short sellers. The same thing happens the opposite way when momentum stocks go up.
Exactly to the point. I hope Saudis force NYMEX to do the same when the price of oil suddenly drops (like it just recently did). They would be just protecting their revenue then. If the FED/SEC thought government price manipulation is good then they aren't the ones to criticize anyone else. Or is it manipulation or financial terrorism (LOL) only when it adversely affects them?
Christopher L. Culp, an adjunct professor of finance at the University of Chicago’s Graduate School of Business, wrote a paper early this year in the economics of naked short selling. Here is a link to the faculty bio web page, and that will lead you to the article:
www.chicagogsb.edu/fac...
In brief, the effect on supply and demand of naked short selling is to increase marked volatility, much like the effect of margin leverage on an account, or on a position on the SML security margin line. It does not, per se, lead to a market pricing inefficiency.
What the article does not address is behavioral finance, by which I mean the age-old practice of making a "run on the bank". I think what several people here are alluding to is that this increased volatility of the price of a bank stock, subject to heavy naked short-selling, price cuass a market panic, and if targeted by large hedge.
The increased price volatility of a stock (associated with naked short selling) has particular implications for bank stocks, which are inarguably more vulnerable to rumor-mongering than other types of issues. A "run on the bank" is as "old as the hills", and nothing in the way things are done today has changed that. Therefore, concerted short-selling of bank stocks will, justifiably, always raise the concern of market manipulation, as is evidenced by the comments here, and (I suspect) by the actions of the SEC this week.
By the way,
I bet a cds market is thin and illiquid. Much easier to push around than a stock market. So, what happens when a Credit default swap rate blows out? Does it create forced hedging sell volume in the stocks?
If you're a market maker in london and somebody comes in and buys a hundred million bucks of cds's from you, it seems one of the ways to hedge this position would be to short a hundred million dollars of the stock, buying puts, selling calls, or outright shorting.
If the premium paid for the cds's seemed particularly high at the time you wrote them, then it would be very easy to aggressively sell the underlying collateral. After all, in a corporate wrap up, the bond holder is paid in full before the equity holders get a dime.
So, could this have something to do with the unusual option volume and share trading volume happening to these stocks on these grand falls we have seen? Could it be one of the causes? The CDS buyer, of course, is planning on attacking the stock from the short side, but it seems like the cds seller MUST ALSO ATTACK to hedge his exposure.
Is this right? Anybody?
Jmorace
Also saw that MS and GS have now become banks. Any borrowing that they do from the FED will now be unobserverable. I expect them to borrow loads of money from the discount window and start buying back their debt. Time to buy MS/GS bonds, I think.