Fleckenstein on short selling

[Valuist]

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/whats-next-a-ban-on-stock-sales.aspx

[robert99]

How confused and rambling can a person be?
Nowhere has banned the selling of a stock that you own.
If a company is stupid enough to loan out stock for a few cents fee to be trashed and handed back in a devalued state then the exchanges need saving from themselves.
If one stock sold is equal in voting terms as to true value as one stock bought then there is no problem - a fair market price is established. When a 1000 non-owned stocks are sold for imaginary money it has no real voting value as compared to one stock bought with real money, and the downside slope is magnified to absurdity. When selling votes are made on stock that is naked ie not owned at all, then that is simply fraud within the market.
England banned all this for over two centuries then it reappeared like a cancer.

What actual good do these short selling supporters think they are doing when a formerly useful company in trouble is brought down. A doctor does not simply kill off patients suffering with an illness. They are not masters of the business universe nor could they even run or build up a business of their own. Once the weaker companies are gone do they then start on the next level of weaker companies until none are left - their thinking is absurd.

[DJofSD]

I didn't find the article difficult to read.

Short sellers serve the same function as movie critics. No one expects movie critics to be able to act or direct or edit a movie. They bring a perspective from the outside and can say 'look the emperor has no clothes.'

[Valuist]

How confused and rambling can a person be?
Nowhere has banned the selling of a stock that you own.
If a company is stupid enough to loan out stock for a few cents fee to be trashed and handed back in a devalued state then the exchanges need saving from themselves.
If one stock sold is equal in voting terms as to true value as one stock bought then there is no problem - a fair market price is established. When a 1000 non-owned stocks are sold for imaginary money it has no real voting value as compared to one stock bought with real money, and the downside slope is magnified to absurdity. When selling votes are made on stock that is naked ie not owned at all, then that is simply fraud within the market.
England banned all this for over two centuries then it reappeared like a cancer.

What actual good do these short selling supporters think they are doing when a formerly useful company in trouble is brought down. A doctor does not simply kill off patients suffering with an illness. They are not masters of the business universe nor could they even run or build up a business of their own. Once the weaker companies are gone do they then start on the next level of weaker companies until none are left - their thinking is absurd.

This market was not brought down by short sellers; it was brought down by companies with big problems.

[robert99]

The market has known for 2 years that financial companies were in serious trouble so absolutely no perspective on that topic was brought by short sellers. Leveraged short selling gives a leveraged perspective on negativity about a company that with the false sell-sell-sell rumours makes a false market and once a companies stock price tumbles means that credit is cut and the "insight" is self fulfilling. If they want their insight put into the market then sell any shares they OWN or don't buy. The point about companies is that it is much harder to set one up than destroy one and USA plus creditors, one way or the other picks up the costs, at a much higher overall expenditure. For investment banks a whole industry has gone.

The market is still there - it is just companies that could still be there have gone with huge costs to USA. Short sellers made a serious problem into a World crisis. UK is already starting FSA and Police enquiries into the damage they have done to banks. USA is far stricter on these things so time will tell what happens to these people.

[Valuist]

The market has known for 2 years that financial companies were in serious trouble so absolutely no perspective on that topic was brought by short sellers. Leveraged short selling gives a leveraged perspective on negativity about a company that with the false sell-sell-sell rumours makes a false market and once a companies stock price tumbles means that credit is cut and the "insight" is self fulfilling. If they want their insight put into the market then sell any shares they OWN or don't buy. The point about companies is that it is much harder to set one up than destroy one and USA plus creditors, one way or the other picks up the costs, at a much higher overall expenditure. For investment banks a whole industry has gone.

The market is still there - it is just companies that could still be there have gone with huge costs to USA. Short sellers made a serious problem into a World crisis. UK is already starting FSA and Police enquiries into the damage they have done to banks. USA is far stricter on these things so time will tell what happens to these people.

First off, any problems related to short selling can be corrected by re-instating the old uptick rule.

Banning all short sales temporarily was a stupid decision; and a bandaid at that. Its only temporary; apparently Chris Cox must think shorts have no memory. Most who short use those positions as hedges during bear markets or other economic downturns.

BTW, your crazy if you think short sellers are the only ones who make up rumors about companies on the various message boards. Longs are every bit as guilty yet I don't see any prospective jail time for them.

But, no, shorts did NOT create a world crisis. Greed and arrogance on the part of foolish lenders and ignorant borrowers did.

[PaceAdvantage]

Short sellers made a serious problem into a World crisis.Wow.

You act as if short selling is a risk-free proposition. Short selling is a valuable and necessary component of any market and to sit here and blame short selling for creating a world crisis is nothing more than passing the buck at its finest.

[Valuist]

Here's Whitney Tilson's take on short selling:

http://finance.yahoo.com/tech-ticker/article/83437/Stop-Blaming-the-Shorts!-SEC's-Ban-Hurts-Market-and-Didn't-Help-WaMu-Wachovia?tickers=GE,IBM,CVS,%5EDJI,%5EGSPC,XLF

[lamboguy]

they didn't eliminate short-selling. they just stopped the regular public from making the money off these bad company's ready to go under.

general electric will probably go on the no short sale list next, that's a good one to initiate a short now after the buffet bail out while there is meat on the bones to get! you can stay in that one until they go out of business, goldman sachs looks the same as ge to me and there is alot more on the bone on that one right now, but you can't short it.

[robert99]

Wow.

You act as if short selling is a risk-free proposition. Short selling is a valuable and necessary component of any market and to sit here and blame short selling for creating a world crisis is nothing more than passing the buck at its finest.

Short selling is not risk free, in general - not ever claimed it was.
In the present one-way market crisis "short sellers made a serious problem into a World crisis" is exactly what has happened and why it has been banned. It will take a brave or stupid man to reinstate it after the temporary halt especially if markets are struggling to recover. Nowhere have I stated that short selling was the root cause. It simply makes attempts to stabilise economies increasingly difficult. For foreign countries to fund the bail out of crippled Wall St banks to be able to survive and defend themselves and the US loan economy to move forward is a measure of that. SS serves absolutely no valid purpose, nor is it at all necessary - it has been banned for two centuries in places and the markets still worked - and worked far better than on Wall St etc over the last decade. If you have any valid evidence that it is helpful or worthy then please provide it - in detail.

[Valuist]

You also said the markets have known for 2 years that the financial companies were in trouble.

The market had NO idea two years ago. Just take a look at some of the prices: Wachovia at 55.50 and AIG 68.30 on the close 10/2/06. I believe Bear Stearns was well over $125 at the time. Yes, one year ago there was some idea but I don't think the market had any idea how serious the problem was going to be even then.

[robert99]

You also said the markets have known for 2 years that the financial companies were in trouble.

The market had NO idea two years ago. Just take a look at some of the prices: Wachovia at 55.50 and AIG 68.30 on the close 10/2/06. I believe Bear Stearns was well over $125 at the time. Yes, one year ago there was some idea but I don't think the market had any idea how serious the problem was going to be even then.

You could be twisting my words. Markets have known they were in trouble but not the full extent which is a completely different matter. They priced on what was known at the time - a problem but a containable one so they thought- short sellers were also active with their views at the time as well - they have no special gift nor information to forecast the future. As time has gone on a fuller horror was getting revealed and bank shares have drifted down by some 80% before the present crisis. The subprime problem of latest estimated bank etc losses worldwide was estimated at "only" $435B in July 2008. The problem is not so much the amount but still who is holding what percentage of it. I have lost count of the money worldwide above that figure that is being pushed into the system to overkill a problem.

Getting back to short sellers - take the recent example of UK bank HBOS.
This company went for a rights issue a month ago and was fully audited and funded as sound. Its audited profit forecast was for $2B this year. It gets a major sum of its cash from savers. Foreclosures in UK are around 77,000. In USA about 1.3M. House prices have fallen about 12%. In USA 22%. Share price day one about £2.50 (£11 a year ago) - share price day 2 £1.50 (a 40% fall). In USA relative terms HBOS possibly a really good bank to buy into.

Hedge fund managers are struggling to make any money at the moment and they claim to make money in good times and bad. To borrow a huge number of HBOS share from institutions takes pre-planning and collusion and to maximise falls and their profits they have to sell in concert. In concert, they phone around the market - HBOS is going under - look at the share price. The market reacts on fear in line with the credibility of the information source - they must know something, better sell quick. Other banks to HBOS sorry no overnight funds - your share price looks like you are going under - result HBOS cannot continue to trade and is taken over for a song. The institutions supposedly protecting their savers' money are handed back near worthless share paper. A company with its head at worst just above the water and moving into better times is sunk. Hedge funds - OK HBOS is toast who shall we go for next?

[ddog]

This line from your post nails the real deal as to shorts I think....

market reacts on fear in line with the credibility of the information source - they must know something, better sell quick


The question is the fear not a rational response to previous moves of money into an overvalued equity or commod?

I say , yes, if people had not made mistakes on the way up, you could not short on the way down.
I think this is a good thing for effective markets, markets will work without it but I don't think as well?????

This link kind of syncs with my feelings, and I was "in the tank" a bit, so I am biased.

http://www.iht.com/articles/2008/09/28/business/28stra.php?page=1

Because markets CAN funtion with a short ban in place doesn't mean that outside of the "comfort level of the masses feelings" it is the best way to function???

[DJofSD]

By definition, fear is not a rational response, it's an irrational one.

Bottom line: two emotions underpin the market, fear and greed.

[ddog]

fear is a very rational response.
there maybe irrational fears, but fear itself is the basic survival instinct.

[chickenhead]

I trade only when I'm in an uncontrollable rage.

[Valuist]

Without the option of shorting, ones options (no pun intended) are extremely limited in bear markets and downturns. Longs are every bit as greedy as shorts; one can say that anyone who is invested at all is greedy.....thats the nature of markets.

If prices of legitmately strong companies are driven down by shorts in a bear raid, what happens? Value hunters step in and buy. When toxic companies like AIG and Lehman get driven down, there's a reason for it.