What an interesting time, my friends. Seriously, we're going to look back on this period and laugh about it (maybe, depends on how much you lost, I guess). Not only has the government become one huge hedge fund as the new cliche goes, but perhaps the oddest thing about this entire episode was the ban on short-sellers.
Well, they weren't totally banned. There was a list of stocks that couldn't be shorted, and they were tied to financial businesses. For instance, General Electric (NYSE: GE), a stock I own, was on the list. Why? You see, even though it makes everything from movies to healthcare equipment, a large chunk of the conglomerate deals with financial transactions. Now, the short-selling ban is gone, and financial stocks are once again subject to the whim of the trading technique.
I hated, absolutely hated, the restriction on short-sellers. It never made any sense (check out Tom Taulli's perspective on this subject).
Look, I can understand and appreciate the fact that the government had to get into the business of capitalism. At some point, there was no choice. If we all could choose, we would choose capitalism over helping a bunch of Wall Street goofballs who became intoxicated on noxious greed and who are laughing at us right now for being bleeding-heart enough to do it. We would. But, there was no choice, sad to say.
However, banning the practice of selling short financial equities made precious little sense. Wouldn't the government want to allow the short-sellers to do their thing? Wouldn't that give them information? That's what a short-seller really is -- he or she is just another agent of information. If the short interest in Citigroup (NYSE: C) or Bank of America (NYSE: BAC) spikes, then that gives me a vital piece of information to add to my overall process of decision-making in terms of whether to buy Citigroup or not. But the removal of short selling only succeeds in taking away a valuable part of the information exchange. If I can't attempt to make a decision on whether short-selling is affecting a particular stock or not, then I simply cannot execute a buy/sell decision with any sort of proper education.
I found, on an anecdotal basis, that most people agree that banning short-selling on financial stocks was a mistake. So what if the evil traders who practice such villainous tactics crashed the market? Quite honestly, that's what we probably need at this point, a full flushing out of the system so we can finally rebuild and get tempted by prices that are just too low to ignore.
At some point, long-term investors (and even a whole bunch of shorter-term ones as well) will simply not be able to take it anymore and will have to dive in for some of these bargains. They'll ignore the fact that, technically, stocks are broken right now and won't rise for quite a while, even though there is obvious value in many, many equities (including many quality financial franchises). A real huge drop in the markets would most likely get us to such a point faster than the current volatility will. So, if the government thought that short-sellers might have elicited such a crash without a temporary cooling-off period (and I'm not sure they would have), then it's too bad they weren't allowed to do so.
Disclosure: I own GE; positions can change at any time.
Will Rich Ross really have a positive impact on Disney's movie operations?
Consumers sick of recession, may spend extra on holidays
Corrections, seasonality and Santa Claus
Reader Comments (Page 1 of 1)
10-09-2008 @ 10:34AM
Drjitsu said...
Here is your answer, open up an account and trade commodity futures, you can sell anytime. Why oh why are people here so intent on finding something to BUY. The market doesn't only go up, HELLO! Maybe CNBC should have another stock picker to find 1 or 2 stocks out of 500 that is going up. Just sell the S&P 500 futures and you wont have to figure which 1 or 2 stocks are going up. CME member for 25 & years.
10-09-2008 @ 10:48AM
Tom said...
Who ever wrote this article is a complete idiot. It was the short selling that caused the market crash in the 1929 area.
10-09-2008 @ 3:18PM
Gumby said...
Dont you know that stock certificates will prevent short sellers from borrowing your shares for shorts... No wonder brokers are charging $50 for stock certificates so to discourage you from taking out your stock certificates to protect yourself from short sellers.. It used to be for free. Brokers want you to surrender your shares to short sellers ... so brokers can make money on extra commissions... People just dont understand the purposes of stock certificates... It is no different than real estate title deeds that declare who owns what so that nobody can freebie your homes..or take your land
10-09-2008 @ 1:34PM
gumbo koontz said...
Dont you know that stock certificates will prevent short sellers from borrowing your shares for shorts... No wonder brokers are charging $50 for stock certificates so to discourage you from taking out your stock certificates to protect yourself from short sellers.. It used to be for free. Brokers want you to surrender your shares to short sellers ... so brokers can make money on extra commissions... People just dont understand the purposes of stock certificates... It is no different than real estate title deeds that declare who owns what so that nobody can freebie your homes..or take your land
10-09-2008 @ 1:37PM
gumbo koontz said...
You did a good job of convincing shareholders not to contribute further to their Keoghs and IRAs because mutual fund managers never bothered to take out stock certificates to protect against short sellers... I consider short sellers to be ants, cockroaches, rodents and vermin that has to be kept out of houses...
10-09-2008 @ 1:41PM
gumbo koontz said...
If any short seller wishes to borrow your shares for shorting, he can do by paying you interest for the shares plus a percentage of profit on the short sale/cover as agreed and refereed by brokers. Sure, brokers can take a cut... Short sellers has no business borrowing your shares just because they think the company is not doing well and that they are being inpatient with the company.. I for one would sometimes agree with short sellers and would gladly lend my shares to them for their short and pocket some money on the downside while I wait for my long postion to catch up at a later time.. Sure thing! YOU need my permission first!!!
10-09-2008 @ 1:47PM
gumbo koontz said...
Do you know that if you take stock certificate for your 100 IBM shares, your 100 IBM shares will no longer appear in your monthly statement?????/?//???????? THIS IS TRUE!! THIS IS HOW IT WORKS... IT MEANS THAT YOUR BROKER NO LONGER HOLD YOUR 100 IBM IN "STREET NAME". IT MEANS THAT YOU ARE NOW OFFICIALLY IN POSSESSION OF YOUR 100 IBM... SHORT SELLERS WILL NOT BE ABLE TO SEE YOUR 100 IBM...BECAUSE IT IS IN YOUR OWN VAULT... THIS IS A IMPORTANT DIFFERENCE TO REMEMBER... MOST IS TOO LAZY TO TAKE STOCK CERTIFICATES WHICH IS FINE AAS LONG AS YOU DONT MIND SHORT SELLERS BORRWOING YOUR 100 IBM FOR HIS SHORT ADVENTURE.. YOU CAN EITHER TAKE STOCK CERTIFICATE OR FIGHT FOR YOUR RIGHTS TO SHARE IN THE PROFITS OF THOSE SHORT SELLERS ABUSING YOUR SHARES FOR SHORTS WITH AID OF YOUR FRIENDLY BROKERS... I AM A FLEXIBLE PERSON BUT NOT A GULLIBLE PERSON... I THINK I HAVE RIGHTS TO CHARGE SHORT SELLERS SOMETHING FOR BORROWING MY SHARES.... DONT YOU SEE??/
10-09-2008 @ 1:49PM
gumbo koontz said...
I AM NOT SAYING THAT SHORT SELLERS ARE SINNERS OF WALL STREET.. THEY ARE USEFUL AS ANTS, COCKROCAHES, VERMIN THAT ARE NEEDED TO EAT CRAP ON THE GROUNDS... I AM WILLING TO DO BUSINESS WITH THEM FOR A CUT OF THEIR PROFITS... BROKERS ARE ALSO WELCOME TO CUT IN .. THIS SHOULD MAKE SHORT SELLERS THINK HARD BEFORE THEY START CRAPPING MANAGMENTS FOR A QUICK BUCK!!
10-09-2008 @ 1:53PM
gumbo koontz said...
OUR GOVT OR SEC COULDNT DO MUCH AS SHORT SELLERS REVELS IN ABUSING EVERYONE'S SHARES FOR SHORTS... WHAT IS THE USE OF OPENING YOUR KEOGH OR IRA AS LONG AS SHORT SELLERS ARE STILL ENJOYING FULL FREEDOM IN ABUSING YOUR SHARES.... WHY DONT SHORT SELLERS SHORT MUTUAL FUND SHARES AS WELL?? MUTUAL FUND MANAGERS TRADE STOCKS AND THEY HAVE TIME TO TAKE STOCK CERTIFICATES TO PREVENT SHORT SELLERS FROM BORROWING SHARES FROM MUTUAL FUNDS.. WHAT DOES IT TELL YOU?? WALL STREET IS CORRUPTED!!
10-09-2008 @ 1:56PM
gumbo koontz said...
STEVEN
YOU DONT UNDERSTAND THAT SHORT SELLERS ARE NOT PAYING ENOUGH FOR THE PRIVILEGES OF SHORTING STOCKS... SHORT SELLERS ARE GETTING THE FREE RIDES ALL ALONG... YOU ARE GIVING SHORT SELLERS A EASY TIME!!
10-09-2008 @ 1:57PM
gumbo koontz said...
EVERYONE IS BURYING HEADS IN SAND AS I WRITE COMMENTS ABOVE... UNTIL I LEAVE... OH WHAT A RELIEF! THEY RETURN TO BUSINESS AS USUAL DOING DAMAGE..
10-09-2008 @ 2:11PM
gumbo koontz said...
STEVEN
LOOK,, A SHORT SELLER WANT TO BORROW MY $10000 INVESTED IN 100 IBM FOR SHORT... THE SHORT SELLER ONLY NEED TO PAY INTEREST OF 4% OR SO ON MY HARD EARNED $10000 INVESTED IN 100 IBM. THE BROKER POCKETED THE INTEREST THAT IS MINE... THE SHORT SELLER POCKETED ALL THE SHORT PROFITS THAT SHOULD BE SHARED WITH ME FOR BEING WILLING TO LEND MY 100 IBM TO SHORT SELLER ...IF IBM FELL TO 60 FOR $4000 PROFIT ON SHORT SELLER JUST FOR 4% INTEREST ON MY 100 IBM.. YOU SEE HOW LOPSIDED THAT IS... SOMETHING IS NOT FAIR OBVIOUSLEY.. WHAT IF THE MARGIN RATE IS HIGHER LIKE 18% WOULD THE SHORT SELLLER STILL WANT TO SHORT MY 100 IBM JUST BECAUSE HE IS UNHAPPY WITH THE BAD MANAGEMENT?? YOU SEE HOW LOW INTEREST RATES CAN DESTROY CAPITAL FORMATION IN CERTAIN WAYS.. NOTHING IS PERFECT.. BUT AT LEAST I SHOULD HAVE THE RIGHTS TO EARN SOMETHING FOR BEING WILLING TO LEND MY 100 SHARES TO A SHORT SELLER .. I BOUGHT MY LONG 100 IBM WITH A GOAL TO MAKE MONEY.ON THE UPSIDE.. IF A SHORT SELLER FEEL THAT MY 100 IBM SHOULD COME DOWN , FINE, HE CAN MAKE A DEAL WITH ME FOR A CUT ON THE PROFIT ON THE DOWNWARD AS WELL.. THIS IS CALLED HEDGE BET... WHY CANT I PARTICIPATE IN THIS??
10-09-2008 @ 2:16PM
gumbo koontz said...
MY BROKER CAN GIVE ME A FORM TO SIGN DECLARING MY AGREEMENT TO PERMIT SHORT SELLERS TO BORROW MY STOCKS. OR I CAN SIGN A FORM DEMANDIKNG MY BROKER TO PROVIDE ELECTRONIC STOCK CERTIFICATES TO ME. ELECTROINIC STOCK CERTIFICATES ARE NOT 'STREET NAME" STOCKS... BOTH IS DIFFERENT... OR I CAN CHOOSE NOTHING AND ALLOWING SHORT SELLERS TO BORROW MY SHARES.
10-09-2008 @ 3:15PM
stevek said...
US government to punish responsible homeowners!
We can not allow John McCain or Barack Obama to push for a mortgage buy back or principle readjustment bailout for main street. The $700 billion bailout is bad enough for most Americans to stomach, but now you're going to watch your neighbor have his/her principle magically reduced by....
continued at ----
www.mortgagebreakdown.com
10-09-2008 @ 4:35PM
gumbo koontz said...
Wall Street is just so oversexed and over educated for our own goodness!! America is too overeducated and too chicken to invest in anything... Like overeducated squirrels scurrying around and hiding nuts..
10-09-2008 @ 6:12PM
Bill said...
Short selling owing to a genuine belief that a stock price is headed south is one thing. Short selling and then spreading rumors about the shorted stock to help your cause, an activity that certain formerly large hedge funds were known to employ, is criminal and cause for much of the ridiculously low prices of bank stocks, such as National City, that merit much higher valuations by every measure. If you want to bet on a stock's direction, use options. Short sellers can be first in line for Charon's boat to the worst hell I can imagine.