Is the Devil playing the market?

By: ispeculatornew
Date posted: 03.13.2009 (4:00 am) | Write a Comment  (12 Comments)

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devilOff course it is. The Devil is short sellers right? I’m being ironic of course but I always find it very interesting to hear how often the media and government gets in the game of blaming short sellers for so many of the problems in the market, as if they were the cause of all evil. That’s putting things simply, to say the least. Remember a few months ago when regulators in the US decided to ban short selling on financials, as they kept repeating that it was one of the main causes in financial institutions instability problems. Of course, a year or so later, we should take out those tapes again just to see who was saying that. The law came and went, nothing changed as financials continued their road to 0. Did you notice anything different when being short became illegal? I sure didn’t.

Of course, there are many causes for all the stigma around short sellers and most of it is caused by the unknown factor. Of course, it does not help that most major networks do not want to talk about shorting ideas. Sure, it might look bad to have a Walmart ad come on air right after an analyst announced he was selling the company, but isn’t that what the market is supposed to do? Buy companies that are undervalued and sell the overvalued ones? Or am I missing something?

Maybe I’m the one who doesn’t get it as I currently hold short positions on Valueclick(VCLK), Knot(KNOT) and Yahoo(YHOO). But there is a reason why short selling has been allowed and that is because it helps get better valuations in markets when investors can profit from an unfair valuation. And no, putting laws will not change the fact that financial stocks are overvalued. You might slow the slide of that stock a bit, but if it’s going down towards 0, that fact won’t change so there is no sense in trying to ban short selling in my opinion.

With that being said, there is another reason why short sellers have a bad name and that is somewhat warranted. The fact that some investors take a short position and then spin off some rumors to tank the stock. There are many different ways this is done, most of them being illegal. And of course, such market manipulation is illegal. But let’s not kid ourselves either, such manipulation also happens on the other side with investors spinning off merger rumors as well as many others. Think of how mining stocks always are rumors to have found the big field of gold.

In general, short sellers are hedge funds or market neutral funds, they are not short overall, they are generally as long as they are short, and so are looking for inefficiencies in the market. Isn’t that a good thing? Generally, having a market that is efficient is seen as a very positive thing. But somehow, if that means a stock is overvalued it’s not….?

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  1. Pingback by Linkstuff March 13 — March 13, 2009 @ 8:22 am

    […] The Intelligent Speculator wonders if the devil is playing the market. […]

  2. Comment by OneDay — March 13, 2009 @ 8:25 am

    Little question here, wouldn’t it be the confusion between naked short selling (without borrowing shares) and the conventional short selling (long/short position) the problem ?

    I agree, short selling provides more liquidity, more capital formation, and more efficiently allocated risk. But being naked short selling is a practice of speculation that can bring the price down. Unfortunately, some people use this practice to purposely manipulate the price.

  3. Comment by Dana — March 13, 2009 @ 4:41 pm

    Great point OneDay, naked shorts and shorts are very different. The former is highly speculative, if not manipulative in nature, the latter can be paired with a buy or short to protect the downside of a position.

  4. […] Speculator thinks that the Devil is playing the market. Better be on his […]

  5. Comment by The Financial Blogger — March 14, 2009 @ 6:39 am

    One Day,
    I would say that short selling has been created by the Devil and naked short selling has been created by Wall Streets financiers (which are more evil than the father of evil 😉 ).

    Seriously, I still wonder why naked short selling was created in the first place. It is completely against the nature of the market (who is seeking growth over long term).

  6. Comment by IS — March 14, 2009 @ 8:26 am

    Just to clarify, from my point of view short selling is always naked.. I was not talking about using options or anything, simply about being outright short. Was that what you meant OneDay and Dana?

    A “naked short” is when you short and your broker fails to borrow the shares, which is illegal by th way.

  7. Pingback by Carnival of Personal Finance#196: Music Edition — March 16, 2009 @ 5:34 am

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  8. Comment by OneDay — March 20, 2009 @ 1:44 pm

    OK, short selling is not always naked. And I’m not talking about using options or anything. I thought that short selling is with the intent of later purchasing the financial instrument at a lower price. So technically, you need to ensure that cash or equity is on deposit with his brokerage firm as collateral for the initial short margin requirement.

    Being naked short selling is a practice of speculation that can bring the price down, with NO intention of ever delivering the shares. In some place, it is not considered illegal yet… not that evil yet…

  9. Comment by IS — March 21, 2009 @ 10:38 am

    ok but to close a short position,you do need to buy back the shares, so how can you not have the intention of delivering the shares… you will end up doing so eventually no?

  10. Comment by OneDay — March 24, 2009 @ 12:01 pm

    Technically, there is no delivery time limit. But yes practically, the short seller can ending up closing the position.

    I’m not saying that naked short sell is good or bad, but it remains that some forms of it are still illegal. I agree with you that short selling has not been created by the devil. Short selling is necessary to prevent prices from reflecting only the views of the most optimistic investors in the market. However some can advocate that this can depress stock prices.

    Ahhhh still a subject to debate!! 😉

  11. Comment by OneDay — July 27, 2009 @ 12:22 pm

    FYI The Securities and Exchange Commission on Monday (July 27 2009) made permanent a rule designed to curtail abusive “naked” short selling.

  12. Comment by IS — August 2, 2009 @ 11:40 am

    Yes, heard about this but did not read details. From what I understand, “naked short selling” has always been illegal but not really looked at by regulators, guess it will be from now…

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