When All Else Fails…

— You know things are getting a little grim when the old short selling ban comes into play. France, Italy, Spain and Belgium just put a ban in place that covers all short selling of banks and insurance companies for 15 days. These nations now join financial heavyweights Greece and Turkey, who imposed similar restrictions earlier this week.

— Not surprisingly the US is not joining in on the short selling ban, despite its financial sector taking a beating recently. That’s because memories of the last attempt to ban short selling on US markets turned out to be a disaster.

— Back on 18 September 2008, the SEC outlawed those trying to short-sell financial stocks on the US exchanges. Soon after, the sector basically collapsed. The ban wasn’t the root cause, of course, but it certainly accentuated the decline.

— Short sellers provide a very valuable commodity in volatile markets – liquidity. And at some point they must buy back the stock they have borrowed and sold in order to exit their position. This behaviour leads to short-term rallies (hence the name, ‘short-covering rally’), which provides balance to the market.

— Take away short selling and at extreme points there is no one left to do the buying. That’s why you should expect those European markets listed above to become even more volatile in the weeks ahead.

— In a sign of how pompous and ignorant the regulators are check out this comment from one of the French rule-makers, quoted in the FT:

‘Jean-Pierre Jouyet, head of the AMF, the French securities regulator, said on Thursday night: “They wanted to test French resistance. This is our response, as always very determined, and it will be so for all those who want to put us to the test.”’

— What a douche-bag. Does he honestly believe his rule changes can turn the tide of market opinion? Actually, he probably does…

— It reminds us of a passage we read in one of our favourite books, Once in Golconda, A True Drama of Wall Street 1920-1938. It was 1932 and the US was in the depths of the Depression. Both the stock market and the economy were in a deep hole.

‘With a presidential election coming up in November, Hoover and the Republicans badly needed a scapegoat to blame for the general disaster. The one they found most readily at hand was Wall Street, and the particular aspect of Wall Street that they chose was that old bugaboo, short selling on the stock exchange.’

— So yes, dear reader, it’s almost a given that short sellers will be blamed when markets are crashing.

— Even Australia’s Gerry Harvey is in on the ignoramus act. In yesterday’s AFR, in response to a question about whether he is contemplating any capital management initiatives, he responded:

‘Our share price is sh#t. But I’m in business for the long term. I do not believe in financial engineering. I believe that financial engineers, hedge funds and short sellers are largely responsible for the global financial crisis – and you want me to join their club?’

— Firstly, Mr Harvey, not all capital management initiatives are a form of financial engineering. When your share price has been hammered, perhaps assisted by dastardly short sellers, you can create value for your loyal shareholders by buying back stock at depressed levels. That’s smart capital management.

— Certainly there are plenty of eager investment bankers who think capital management is about gearing up the balance sheet to boost returns to shareholders. Mostly, that just increases the company’s financial risk and only benefits the bankers.

— But Harvey’s most extraordinary claim is that financial engineers, hedge funds and short sellers are responsible for the whole global financial crisis! What a powerful bunch.

— If only he would’ve gone back a few more links in the financial chain. He would then see the money trail does not lead to hedge funds and friends, but to the central banks that provide their sustenance.

— Without central banks creating years of almost free money and a monetary system that rewards speculation over saving, hedge funds in the thousands and financial engineers would not be around. Actually, after wiping themselves out in the last crisis, most financial engineers are gone.

— But the easy money policies of the central banks are still with us, encouraging other forms of speculation. Unfortunately, businessmen and politicians alike can easily identify the symptoms of a broken system, but never the cause.


Greg Canavan
Markets and Money Australia

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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Unpopular Truth

With any luck we run out of stupidity before we run out of money


Gerry Harvey considers himself the thoroughbred of the Australian bottom surfing scene. Those MRRT and carbon tax rents are to be considered his fodder.

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