Short Selling Vacuum

[subi1]

Maybe I am a little naive about this but at a risk of a flaming here it goes:

I have no issue with covered short selling. You borrowed something that you will pay back later. As long as this is the case then there is no problem.

However naked short selling is fooling the market to me. You are talking about creating supply temporarily out of thin air of shares. If there isn't a supply of shares available for you to sell then you shouldn't sell. Just like anything else in life - how can I sell what I don't have right of ownership borrowed or owned to? I can't sell a house and depress house prices so I can get a bargain now can I? I can't just magically create land and sell it to get cash now can I? Shares aren't tangible; somehow that makes people believe that this excludes them from that right. The right of every long holder to me is to do what they like with their supply including the right to hold it from the market.

In the end it swamps the market with supply that doesn't exist. I can't see how that is an efficient market. It seems like an easy way to play on peoples sentiment and make a quick buck. Sure the smart traders are laughing, but the average person just wanting to be responsible, invest and retire does not like his asset being devalued by non-existant supply of stock.

Good post.

That is exactly what I think

 

[CamKawa]

Just short indexes.

Eh? ASIC say "covered short sales for all listed stocks will now not be permitted "

 

[skyQuake]

Eh? ASIC say "covered short sales for all listed stocks will now not be permitted "

SPI or CFDs

 

[Trembling Hand]

SPI or CFDs

Will be interesting to see how whippy the SPI will be without the Arb BOTS much need liquidity.

 

[nunthewiser]

Forgive my lac of knowledge here ........what about warrants too ? put warrants gone now too ?

 

[skyQuake]

Will be interesting to see how whippy the SPI will be without the Arb BOTS much need liquidity.

What % of volume do you reckon the arb bots account for? US banned shorting too but volume on DIJA and S&P were still ok...
Hopefully we see a nice smooth rally through the day as people cover. Easy trades

Forgive my lac of knowledge here ........what about warrants too ? put warrants gone now too ?

They're ok like oppies. Cause they're not shares and pretty much OTC as far as im concerned.

 

[CamKawa]

This is what I reckon, in particular the bit about the constantly changing rules. The market needs stability not government interference.

"Jim Chanos, who runs a large short-selling hedge fund in New York and is chairman of the Coalition of Private Investment Companies, said the emergency measures would do little to stabilise the market.

“Investors are best served when they can hear both the reasons to buy and the reasons to sell any given security,” he said.

“We also believe that markets cannot withstand for long constantly changing rules in which each new regulation is announced in the middle of the night without any public comment or participation.”

The head of one hedge fund of funds firm also said: “By stopping the short sellers, you are artificially inflating prices and rewarding speculators on the long side. The measures will increase volatility.”

source: http://www.ft.com/cms/s/0/ef5d128c-8677-11dd-959e-0000779fd18c.html

 

[singlefished]

The market needs stability not government interference.

Forgive me if I'm wrong (and there's a good chance I will be ) but wasn't it the lack of government interference (ie: fiscal regulation) in the US that ultimately led to sub-prime issue in the first instance?

Cheers,
Scotty....

 

[pepperoni]

Im still blaming massively negative real rates due to 9/11 overcompensation.

http://upload.wikimedia.org/wikipedia/commons/e/e2/Federal_Funds_Rate_(effective).png

 

[theasxgorilla]

Im still blaming massively negative real rates due to 9/11 overcompensation.

http://upload.wikimedia.org/wikipedia/commons/e/e2/Federal_Funds_Rate_(effective).png

Totally agree...this is what turned around what was IMO an incomplete unwinding of all kinds of speculative naughtiness during the late 90s.

 

[lakemac]

Intelligent argument and/or thoughts should never be flamed aleckara. They may be discussed, disagreed with, ignored or even become a religion
I always welcome such posts.

..You are talking about creating supply temporarily out of thin air of shares..

Ah the trick of fractional reserve banking. Creating credit out of thin air.

Although I am a proponent of really free markets, you may have swayed my mind on this topic aleckara. But then there may be another solution. Rather than limit or stop the practice, better to make it transparent. All you need is an index (an absolute number would be better) of the number of naked shorts out there (now there is a double entendre ). That way any investor can gauge the shorting process and make informed decisions.

 

[lakemac]

Forgive me if I'm wrong (and there's a good chance I will be ) but wasn't it the lack of government interference (ie: fiscal regulation) in the US that ultimately led to sub-prime issue in the first instance?

Cheers,
Scotty....

Never wrong Scotty, just always learning

Government regulation stifles markets, innovation, progress.
Now add to that the central bank which allows the unlimited creation of credit (well almost).

If you remove the central bank and the government regulations, would it stop sub-prime no. But removing the regulations would have limited the size of the problem. Why? Because of TRUST. Remember, any bank creating credit out of thin air ie. their goodwill, requires that another bank will accept that goodwill. If one bank keeps asking you to accept their goodwill above and beyond your trust of that bank you will eventually stop accepting their goodwill. This will happen sooner rather than later. Why? Without government mandated regulation you as a bank are going to be a LOT more wary of another bank's claims. You as a bank are going to do a LOT more due diligence - what Henry Kay (bless his heart ) calls extreme due diligence. Due diligence is nothing more than sorting out fact from opinion. If nothing else Henry Kay taught me, it was that very valuable piece of advice (and the truth will set you free Henry ).

It is the very regulation that gives people a false sense of security in what is inherently a very insecure environment. And that extends to the current "terrorism threat". Just another form of control. Get PERSONALLY responsible people. Get educated. Don't rely on the sugar coated words of the winner of a popularity contest (ie. a politician).

 

[lakemac]

Im still blaming massively negative real rates due to 9/11 overcompensation.

http://upload.wikimedia.org/wikipedia/commons/e/e2/Federal_Funds_Rate_(effective).png

pepperoni, interest rates do not, repeat do not affect the overall economy. It is the amount of credit in an economy that controls it.

On the basis of your theory lower interest rates should expand an economy. So explain why Japan's zero interest rates did not work during the 1990's. They didn't work because the credit tap was turned off via the window guidance system operated by the Bank of Japan (cf. Princes of the Yen - Richard Werner) (interestingly enough in Japan the government used to have control of the interest rate lever. The central bank didn't (for various historical reasons) - they now do).

Interest rates are like the magician's hand. "Watch the hand...". Slap! with the other one.

 

[Timmy]

Lakemac,

re interest rates not affecting the overall economy, amount of credit does...
I don't want to split hairs but doesn't an increase in rates reduce the dmeand for credit and therefore affects the economy?

Your Japan example, fair enough, but if all else remains equal (no change to windows etc.) then a lower interest rate should stimulate an economy (maybe in the indirect method you speak of, but a stimulation nonetheless).

 

[lakemac]

good question timmy.

I don't have (and have had no luck obtaining) figures indicating whether an increase in interest rates causes consumers of credit to reduce their demand for credit or if the reduction is due to banks not lending as much. Two very different situations.

I have been investigating credit card debt levels as a proxy but so far have not finished my research.

The issue is mortgages are 100 times larger (typically) than credit card limits. So my idea above may not be valid anyway.

The demand for mortgages by consumers may remain constant irrespective of the interest rate (opinion only - no hard data as I said before). That is based on the assumption that population levels keep rising and people still need housing. On the other side we have the mortgage lender. I suspect (opinion only - no data) that lenders are the controlling factor in that when they assess an application for credit in a higher interest rate environment the amount of repayment required will of course be higher and if you don't meet the banks requirements of trust ie. credit worthiness or ability to repay the loan then the lender will say no or only offer you a smaller amount (which of course means house prices have to come down as buyers have less money available).

So the question for any mortgage brokers and/or bankers out there is this: Has their been a lower DEMAND for mortgages since interest rates have gone up or is it just that you are getting less APPROVALS for those applications?

My proxy of using credit card debt levels may indicate consumer's demand for credit independently of the banks approval process. If you assume that on average not all people have maxed out their credit cards, there will be an amount of unused *discretionary* credit available (assuming banks don't lower credit limits - which is rare) that can be used by consumers without needing to get bank approval. ie. The theory is banks issue you a credit card with say $10k credit on it. You may have an outstanding balance of say $4k, so that means you have $6k of credit you can use before you need to ask the bank for more.

So if credit card debt is rising at the same time interest rates are rising it may mean the demand for credit by the consumer is still there. I don't know yet if it correlates to mortgage lending (demand side or approval rates).

Either way (demand down or approvals down) interest rates only form one tenth of the money supply (say 10% interest) and a 0.25% rise in interest rates is a 1:400 ratio to credit. Therefore a change in credit creation has a 400 fold effect relative to interest rate effects in an economy.

 

[Timmy]

Thanks lakemac

 

[aleckara]

Lakemac,

re interest rates not affecting the overall economy, amount of credit does...
I don't want to split hairs but doesn't an increase in rates reduce the dmeand for credit and therefore affects the economy?

Your Japan example, fair enough, but if all else remains equal (no change to windows etc.) then a lower interest rate should stimulate an economy (maybe in the indirect method you speak of, but a stimulation nonetheless).

Interest rates affect the demand in the economy for money/credit, that's true. This is the main part of policy I do not agree with. I think in a real free market for money interest rates would be a price - the incentive to save (i.e supply) would equal the incentive to spend/borrow. Just like every other market (i.e risk/return).

It affects the demand for the creation of credit I think. If interest rates are higher demand should fall obviously. Once current loans are paid off the destruction of money occurs - as lakemac was referring to below in the fractional banking system.

However if the price of the debt is low, but demand is being crimped by high eligibility criteria for loans, etc. then price can stay low with very minimal demand (and hence minimal economic activity). Japan are a nation of savers compared to us so maybe thats something to do with it.

Sometimes I think it pays to look at not just the equilbrium but the magnitude of both the supply and demand factors.

Lakemac- referring to your comment. I see shares as an asset - not as money. Just like land, your car, boat, whatever. An investment asset real value (i.e theoritically/not practically its share price) shouldn't really be affected by the creation of money too much (as profits should be inflation adjusted anyway). I never saw it as the creation of money to begin with - rather the same money is doing a lot of work at increased risk (i.e counterparty risk). That same bit of money is simply an incentive to get people to work and keep the economy moving. In the end we benefit as we are rewarded for the work we get from others. Only issue if the incentive to work/produce doesn't result in additional work/additional asset traded - i.e capacity constraints. Money is an idea. The money creation to me is no problem, as long as it is backed by additional work in the economy then it isn't meaningless - it is backed by something real in this case output.

 

[Tysonboss1]

The bad thing about shorts is that in a weak market they can trigger an avalanche,

A big hedge fund that does a massive short on say CBA, can make the share price drop artificially, which then triggers other peoples stop losses which floods the market with more stocks which can then trigger margin calls and force more stocks to be sold to clear the margin call,.... then the price drop breeds fear in the investors going long who may also sell down some stocks.

The hedge fund can then buy in at a lower price, but only at the expense of the investors and traders that had there margin calls and stop losses triggered.

Shorting can easily be abused by the big guys.

 

[prawn_86]

Shorting can easily be abused by the big guys.

No different than buying can be abused by big guys, imo.

If they want a stock to run they just have to place a few orders back in the queue to make it looks like buyers are building, and then if they really want they can just purchase a few lines of sell orders at once to give it increased volume and a nice price rise which will make people jump onboard.

 

[lular]

New to this so still learning. ( dont bite me if its obvious)

Would this be a valid assumption:

An organized atempt at creating a window of opportunity for a capital raising for the benefit of those institutions that are in trouble.
Blame the short sellers , take them out of the picture, rally the markets and fleece the sheep.