Why have 'short sellers' suddenly become Public
Enemy number 1?
Since the sell off of HSBO, the fall of Lehman
Brothers and the collapse in investor confidence,
the government both here and in the US have
introduced a ban on short selling.
I'm talking about those individual traders and
hedge funds that borrow shares, then sell them
and hope to buy them back later at a lower price.
They pocket the difference between the price at
which they sold the shares and the price at which
they buy them back.
Short sellers are an essential part of a healthy free
market. They keep companies and investors
honest.
I mean, if informed investors believe a share is
over-valued they're performing a vital service by
selling it short and pushing down its share price.
They are simply expressing an opinion in a free
market in the hope of making money from being
correct. And if that means that the banks should
pay for their stupidity, then so be it.
The actions of short sellers deprive a company of
capital and can be a signal to others in the market
that the company might not be as healthy as is
generally believed.
Is that such a bad thing? Or is it like the
messengers of old, who would be executed for
bringing bad news from the frontline to the
emperor?
Think about it - all this financial chaos could
have actually been avoided if MORE short sellers
had been in the market, aggressively selling the
shares of unsound financial institutions.
Why are we demonising those who are doing the
right thing and deflating an overvalued asset?
I mean, if short sellers were actually encouraged,
they could have pricked the property bubble
before it got out of hand and trillions of dollars
worth of bad debt had mounted up . . . and we
wouldn't now be facing the effective
nationalisation of bad debt and government
intervention in the markets.
The decision to intervene against short-selling
goes against free market principles and the
'wisdom of the markets'.
Of course short-sellers can be wrong and depress
share prices more than is justified by
fundamentals, but so what? And anyway, in the
long term, they would be proved wrong and
would lose on the trade.
The government doesn't intervene when it thinks
investors have exaggerated the true value of a
company's shares. In fact they bask in the feelgood
factor of economic booms - even if the cause is
the greed and dodgy dealings of banks.
And how many homeowners moaned about the
rise in property prices as easy credit created a boom?
It's all rather hyprocritical if you ask me.
What's more, short selling improves market
liquidity. By that I mean that short sellers not
only provide stock to those who want to go long
(buy), but also people who go short often do so as
the counterpart of long positions elsewhere
(hedge).
As one blogger put it so succinctly:
"People seek refuge in the stupidest ideas before
they admit that they were wrong. Holders of bank
shares, rather than face the fact that they are bad
stock-pickers, want to blame short sellers. So of
course, do banks' bosses. After all, they'd do
anything before admitting that they are just lousy
at running their businesses."
The real villains are the stupid greedy banks who
thought they could make money from bundling
up worthless debt into complex packages - the
same people who flooded the market with easy
money to people who could never really afford to
pay them back . . . and now face negative equity
higher mortgage repayments.
Right, that's enough of my rant . . .
By the way, the good news is the ban on short selling
does NOT effect spread betting currencies, so anyone
who is trading systems like The Ultimate FX Predictor,
can carry on profiting from shorting! More details
here:
Regards
Nick
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