Fear and Greed: Premise for Capitulation and Overreaction 23 comments
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Fear and Greed are regularly embraced and exploited by professional traders. At no time has this been more evident than in early September 2008. Professional traders, hedge fund managers, and specifically short sellers exploited the fear in the Market, and combined with seasonally low volume they were able to compound the result in their favor.
Critically, the economic distress that existed at that time was unusually escalated and the fear in the public eye became the greed of Wall Street. Right, wrong, or indifferent, this was all perfectly legal. Unless collusion to deceive can be proven, naked short selling and 'runs' on the banks were not against the law at the time.
Unfortunately these actions caused the stress on our banking system to exponentialize. The snowball effect destabilized the global economy, and with rating agencies acting out of sequence to prior standards, some of the best companies on Wall Street crumbled in front of our eyes.
Again, complaints are futile. These companies made errors in risk management, they played integral roles in exploiting the system, and they concurrently paid the price. In most cases though, the short selling practices ramped up the filtering process considerably. This disallowed any attempt at internal stabilization, and solidified the destruction of these once stalwart companies. I am speaking of course of Fannie Mae (FNM), Freddie Mac (FRE), American International Group (AIG), Merrill Lynch (MER), Goldman Sachs (GS), and Morgan Stanley (MS), to name a few. The latter have avoided the same perils as the former as we know.
Nonetheless, the short selling practices that began in early September, but which were defined by the Bear Stearns debacle earlier in the year, caused fear and panic to reverberate beyond the general public, into the global economy and to many other professional advisors. Normally professional investors buck the trend once volume levels rematerialize, but that didn't happen this time.
This was unique, and it demonstrates the severity of the economic crisis that existed and that was exploited.
With that, however, came an overreaction.
Fear and Greed run the 'Street.' In 2007 greed was the name of the game. At that time the Market overreacted to profit opportunities and risks were diluted in consciousness. In 2008 profit opportunities are dismissed as almost ridiculous, and risk aversion is running rabid.
I am not attempting to discount the severity of the economic conditions that exist today, nor am I trying to rationalize the Market actions. Instead, I am identifying the irrational behavior that stems from the market regularly, and which can be exploited at extremes.
First, natural growth sequences were distorted in September and the Market began acting on emotion. Not until those emotional vibes are constrained will the Market stabilize again. Interestingly, that capitulatory measure seems to be occurring now.
With Congress offering solace to the inoperative banking system, those professional traders who once sold short, nakedly and without hazard, are now reconsidering those efforts and categorically fighting the system. Short selling practices and 'runs' on the banks may have been exhausted, which is typical of any exploitive opportunity. Eventually the strategy runs its course, and then the opposite happens....
This is likely to be the scenario in the days, weeks, and possibly months ahead.
The overreaction of 2007 led the the capitulation of 2008, and the cycle should continue with an overreaction to the upside again in the months ahead. However, expecting a trump of the 2007 overreaction would be egregious.
The suffering in our economy will not abate for very long. I expect greed to rationalize the upside overreaction yet again, but the next down leg should then begin. My long term analysis tells me that it will begin again at some point.
However, the current conditions define troughs, and the next major leg of direction is up, in my humble opinion.
Note: as the banking system stabilizes and as lending resumes per the direct effort of the US Government investors will regain confidence and inch their way back into the Market. Don't be fooled though, The impact of The Investment Rate has only just begun.
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This article has 23 comments:
Rapacious shortselling hedgefunds nearly ruined the economy based on lies and innuendo.
Emotions throw both good & bad stocks in different directions at times and creates attractive entry positions for a long-term investor. It's much easier for a retail investor to move within the market than managers of large professional equity.
We haven't seen volatility in quite some time and when investors haven't gotten used to something they generally fear it immediately and over-react.
short sellers sold what was damaged goods...
transparency : trust : confidence ...duhhh...
In other words, let's just hope and pray that we can somehow re-inflate the bubble???
Look, it was 'over-easy' credit, a delusional perception of endless money supply, and arcane vehicles that masked risk that got us into this mess in the first place!
Make no mistake! Short sellers DID NOT 'nearly ruin the economy'! Rather, the collusion of Wall Street Banks, the Fed Reserve and gross negligence by the rating agencies and lack of due diligence and oversight laid the final straws on the back of a very sick and ailing economy, and presented a target-rich environment for short-sellers.
This blaming of the short sellers is ridiculous! If you think for one minute that a short selling ban will save the markets, you'd best take a peek at the Shanghai exchange's performance over the past year! They have banned short-selling as a general rule, and it has failed miserably!
Short sellers have to eventually cover by buying; this is the buying action that induces confidence and leads other buyers into the markets! Eliminating short-sellers results in eliminating a unique class of 'captive buyers', and it is the short-squeeze at the bottom that ignites a great upturn!
In the meantime, what we have to recognize is the seismic shift that is occurring before our eyes. Investment opportunities abound where there is sound economic growth based on increased production and expanding markets, NOT simply loose credit and expanding debt!
Now, we have the ludicrous situation of the arsonists (Hank, Ben, and company) presenting us with the solution and posing as the firemen!
Be nimble, my friends, and conserve your capital! Above all, look for opportunities elsewhere than where you've found them in the past!
If a company uses the value of its stock to raise more capital (presumably diluting its stock), how does this differ from a Ponzi scheme? It differs only if the additional capital provides investment in production. If the additional capital is used for delevering and not for increasing production it satisfies a basic condition of Ponzi's operation: newer investors provide the money to pay investment returns to the older investors. WOW!!!!!
Don't tell me that shorts make any positive contribution. If they are so beneficial to markets, why are they now banned in over 20 countries?
Try again. maybe someone will believe you.
These people would defend nuking cities if they could make $10 doing it. They are not part of humanity.
FACTBOX-Short-selling bans in various countries
Tue Sep 23, 2008 4:53pm BST
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Sept 23 (Reuters) - Stock market regulators around the world have introduced curbs on short-selling, especially in financial stocks. Short-sellers are investors who borrow shares and sell them on in the hope of buying them back at a lower price to make a profit. Those who do not borrow the securities in advance of the sale are "naked" short sellers.
Following is a glimpse into actions taken by some countries around the globe to curb short-selling:
* AUSTRIA:
-- There is no provision in Austrian law to ban shortselling. Regulator FMA has tried to curtail shortselling instead by declaring that shortselling beyond a certain volume is deemed probable cause for market manipulation or insider trading. It has reminded participants of their duty to report to the FMA if they suspect others to hold short positions exceeding 0.25 percent of an issuer's share capital. This would then trigger further investigation.
* AUSTRALIA:
-- The Australian Securities and Investments Commission banned short-selling on Monday for at least one month to help stop the share market plunging. However it eased its blanket ban on Tuesday to allow investors trading the difference between share prices on dual-listed stocks to make covered short sales.
* BRITAIN:
-- On Sept. 18, the Financial Services Authority banned investors from shorting the shares of 29 financial companies, including the UK's biggest banks and insurers. The next day four more companies were added to the list. The ban will remain in force until Jan. 16, 2009. * CANADA:
-- The Ontario Securities Commission, Canada's largest provincial securities watchdog, announced a temporary ban on short-selling in certain financial stocks on Sept. 19.
* GERMANY:
-- Finance ministry and financial watchdog BaFin banned on Sept. 19 short-selling of shares in 11 of its financial services until the end of the year.
* GREECE:
-- The stock exchange will flag short sales from Sept. 24 to Dec. 31. The regulator will publish a daily account of all short sales that took place during the trading day and the number of shares by company that were purchased by borrowing.
* ITALY:
-- Stock market regulator Consob banned short selling of bank and insurance stocks on Sept. 22 until the end of the month.
* LUXEMBOURG:
-- Luxembourg's financial regulator CSSF banned naked short sales on Sept. 19, with immediate effect.
* NETHERLANDS:
-- Dutch market regulator AFM on Monday released the names of eight financial institutions covered by a three-month ban on "naked" short selling of their shares.
* PAKISTAN:
-- Short selling in the ready and futures market of the Karachi Stock Exchange will be prohibited for a month starting from Sept. 24 when trading in the October contract begins.
* PORTUGAL:
-- Portugal's CMVM market regulator prohibited short-selling of financial stocks on Sept. 22. The ban applies to eight banks listed on Euronext Lisbon.
* SINGAPORE:
-- Singapore Exchange said late on Monday that it would tighten rules to discourage "naked" short-selling. Traders who cannot deliver shares they sold will now face a penalty of 5 percent of the value of the failed trade subject to a minimum of S$1,000 ($710).
* TAIWAN:
-- Taiwan's Financial Supervisory Commission said on Sept. 21 it was reimposing a ban on short-selling shares in 150 companies below their closing prices in the previous session. Investors cannot short stock in 150 companies in the Taiwan 50 Index, the Taiwan Mid-Cap 100 Index and the Taiwan Information Index from Sept. 22 to Oct. 3.
* USA:
-- The U.S. Securities and Exchange Commission has temporarily banned short selling in the stocks of 799 financial companies. The ban will stay in force until Oct 2. (Writing by Jijo Jacob. Editing by David Cutler and Andy Bruce)
Liquidity and price discovery are greatly damaged by restricting LEGAL short selling... and if you're such a fool you don't know the difference between LEGAL short selling and naked shorting then you should be investing in hummels instead of stocks... the fools who think its a quick fix to anything to bail them out of their losing positions should learn to take a look at a chart and see what the elimination of short selling has done for them... absolutely nothing.
But they're the fools who bought stocks and houses at the top and now they want a whole basket of quick fixes... typical of this society and the number ONE reason we're in this nightmare.
I encourage interested investors to contact their representatives and the SEC regarding continuing a short selling ban.
Further, the SEC should publish shortsellers short lists under the freedom of information act and put a robust uptick law in place, now.
Both types of shorts are pernicious and create very negative financial 'karma' in the market and must be tightly regulated, if not outlawed, to create a positive, and growing, market.
Enough of these negative types spreading rumors and hoping that particular stocks, and possibly the country, fail just to maximize their short returns.
Yeah, I pissed off about what they've done.
Wow, first off this guy has youtube videos making presentations to the public on why he's shorting stocks. I'm thinking the CEO's, CFO's Analysts and Assistant Analysts, Underwriting Staff at these banks should've applied more risk management in their models. These banks levered bets backed were all backed by a house of cards and illiquid insurance (swaps) backed by every other bank that was doing the same thing! It was a mess from the start, these public banks wouldn'tve done this if the owners/managers were playing with their own money don't you think.. I'm thinking hedge funds will just take over the role, and get big, merge and go public and the cycle will just happen again in 20 years. ???
excellent posts by jlounsbury and distressed volatility, finally someone people who "get it".
Anyone?
news.yahoo.com/s/nm/20...