In Defense Of Speculators
This morning's Ahead of the Tape column in the WSJ discusses the absurdity of targeting short-sellers during downturns.
"Some free markets are apparently freer than others: The price of oil is free to fall, while the stock price of a bank is free to rise.
That is one takeaway from Washington's recent response to market turmoil. By singling out "speculators" who want to push bank stocks down and oil prices up, lawmakers and policy makers reinforce a message that the free market is a wonderful thing as long as it isn't going against you.
It is a potentially slippery slope."
Apparently, Free markets means free to go up only . . .
>
Source:
Easy Targets: In Defense Of Speculators
MARK GONGLOFF
WSJ, July 17, 2008; Page C1
http://online.wsj.com/article/SB121625520953660253.html
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Thursday, July 17, 2008 | 09:00 AM | Permalink
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The political flailing of this lame-duck administration and Congress is a thing to behold. The prime dealers for institutions and hedge funds don't allow naked short selling. This is basic! Naked short selling doesn't occur with the volume necessary to drive down the price of a stock to the level that warrants the attention of Chris "California Dreamin'" Cox .
Posted by: bonghiteric | Jul 17, 2008 9:09:04 AM
Don't recall anyone complaining about speculators in the late 90s tech bubble. Speculators are a vital part of the system, read a book, learn something before you start wanting to change laws.
Posted by: Tim Tebow | Jul 17, 2008 9:13:01 AM
Free to go up, because the government's tax on phony nominal gains works as a tax on real wealth. And that helps make up for the nominal tax cuts and deficit spending.
"Everybody's happy!" ;-)
Posted by: wunsacon | Jul 17, 2008 9:20:38 AM
It's sickening the upside bias that all our politicians have. Things never go up or down over the long-term solely based on speculation or psychology. There is the whole set of economic fundamentals that long-term determines the direction of the markets.
Hmmm, could it be housing bubble bursting, insolvent financial institutions, rising unemployment, rising inflation, rising indebtedness, war in Iraq/Afghanistan, rising oil, and depreciating currency causing strife in markets? Nope. Must be naked short selling!
As a whole, our leaders are doing the equivalent of slapping a new coat of paint on, while the wood beams supporting the house are rotting away...
Too bad there is not a 'no confidence' vote on our ballots this coming November.
HCF
Posted by: HCF | Jul 17, 2008 9:27:29 AM
The question is, is it time to pop open the champagne....?
I hardly think so.....
Call me old fashioned, call me a speculator if you wish. There's more than one way to skin a cat.
I'm not the least bit surprised by these actions, it's a clear indication of the severity of the desperation. Things must be really, really bad.
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Jul 17, 2008 9:32:03 AM
This asymmetry of opinion (asset inflation good, cost inflation bad) helps magnify Bubbles.
Long before the Bush administration made it explicit, the Toxic Pied Piper Alan Greenspan was claiming that you can't identify a Bubble in real time; you can only clean up the mess after it pops.
How's that workin' out, Al? Still believe you're gonna win a Nobel Prize for Bubbling the whole freaking planet?
If it were up to me, I would hurl Greenspan into a volcano. This would appease the obviously angry gods, and allow housing to stabilize. Tough times require tough measures.
Posted by: Jim Haygood | Jul 17, 2008 9:33:18 AM
The question is, is it time to pop open the champagne....?
I hardly think so.....
Call me old fashioned, call me a speculator if you wish. There's more than one way to skin a cat.
I'm not the least bit surprised by these actions, it's a clear indication of the severity of the desperation. Things must be really, really bad.
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Jul 17, 2008 9:33:29 AM
One dimensional airheads appear to dominate economic discussion. When your right to short infringes on my right not to see my government and my taxes pay to shore up the economic blight caused by antics of organized thieves, then you have no right to short.
In textbooks, shorts help take the air out of overblown stocks. As long as you keep it in the playground and follow the rules, go at it as you wish.
In real life, crooks exploit stock and market weakness and the taxpayer helps subsidize the fallout. Crooks belong in jail.
On the other hand, long only commodity index funds bias prices upwards, making short sales a sucker bet. In this sector, shorts need a level playing ground. The crooks have taken over the high ground. When they are removed and shorts are given a level playing field in commodities, then oil will fall back a huge amount and the stock market ... and the entire economy ... will zoom to the stars.
Oil at $134 at this moment is a sucker bet. The longs will crash the market shortly (probably before Friday and certainly by early next week) and any shorts who were dumb enough to enter will eat another shit sandwich.
Posted by: cinefoz | Jul 17, 2008 9:41:22 AM
Congress went after Jesse Livermore after the '29 crash. Good to see that some things never change.
Posted by: Paul Stiles | Jul 17, 2008 9:41:29 AM
I thought free markets meant free for the big boys....and paid for by the rest of us
Posted by: DavidB | Jul 17, 2008 9:46:53 AM
That's right, its 'politicians' fault. There ain't no corporate influence in washington at all. No the corporations, and and private wealth just sit around rockin in their arm chairs, just a prayin' and a hopin' that those crazy 'folks' in warshinton' don't turn their eye on them. That's right why all they do is pay their taxes, and send their kids off to war, they don't have no say no how in nuthin' that them darn politicians do. Fact is, most politicians aren't even from the upper class. We don't rightly no where they come from really, maybe from the swamps in virginia, I reckon'
Posted by: VoiceFromTheWilderness | Jul 17, 2008 9:49:05 AM
This is fantastic. I'm sensing some opportunities for regulatory arbitrage. Restrictions on short sales for stocks and long buys for commodities? Awesome. What else? How about short sale rules for houses, too? No one can sell a house for a loss. That should help the mortgage backed securities market. And we'll need to regulate currencies. Only net longs allowed for the US dollar. And on and on.
Trading is going to get a lot easier!
Posted by: Melancholy Korean | Jul 17, 2008 10:09:21 AM
Consecutive headlines from WSJ this morning:
"J.P. Morgan Chase posted a 53% decline in profit as credit-loss provisions more than doubled and its investment bank cut the value of leveraged-loan and mortgage-related securities by a further $1.1 billion."
"The financial sector again led the way after strong earnings from J.P. Morgan."
What a stupid, candy-striped world of denial we're living in...
Posted by: CPJ | Jul 17, 2008 10:31:34 AM
the stock market and the economy will zoom to the stars? At some point it may even reach your home planet! Good luck!
Posted by: catman | Jul 17, 2008 10:32:48 AM
Nothing this crew does surprises me. They are desperate and dangerous. That's why you have to be ready to make money both ways in this market. Never goes down in a straight line. I agree with AT that this is a gift. Time to reflect and reload - wonder if they will strike down inverse ETFs next??
Oddly enough you can make an argument that restricting shorting actually makes the market MORE susceptible to a 1987 type crash, when we had a lot less vehicles for playing the market from the short side. Selling starts, but now as the selling intensifies no-one is stablizing it by covering....
I agree with cine that oil is going to fall, but only to erase the irrational Nigerian rumour premium... it will probably fall into a stable zone between $100-110. The long commodity funds have made the oil market very vulnerable to a sharp drop.
Posted by: leftback | Jul 17, 2008 10:40:37 AM
Thanks for the basic explanation of a fundamental premise to technical analysis. As a young professional who works 40-50 hours a week in the healthcare sector, I only have time to dabble at obtaining a financial self-education. Which leads me to ask the following question: Do you know of or have any affiliation with an actively managed investment vehicle which uses your fusion IQ technology well, and which is open to the small ($10,000-$20,000) investor?
Posted by: Brody Smith | Jul 17, 2008 10:40:50 AM
Hi, I'm sort of a noob, so be gentle. (That means, I'm not a finance guy--I'm just a dude who has too much invested in this market.)
I understand the purpose of shorting and "put" options. You should be able to assume risk to speculate that a stock's price will go DOWN as well.
But what the heck is with "naked" shorting? Forget the Fannie/Freddie angle for a second. How can you sell shares that you haven't even borrowed yet? Why isn't that just fraud? What's the social utility of allowing that?
And yes, I know I sound like Patrick Byrne. But please don't flame me. I'm genuinely curious/puzzled.
Posted by: ck | Jul 17, 2008 10:42:16 AM
Nothing this crew does surprises me. They are desperate and dangerous. That's why you have to be ready to make money both ways in this market. Never goes down in a straight line. I agree with AT that this is a gift. Time to reflect and reload - wonder if they will strike down inverse ETFs next??
Oddly enough you can make an argument that restricting shorting actually makes the market MORE susceptible to a 1987 type crash, when we had a lot less vehicles for playing the market from the short side. Selling starts, but now as the selling intensifies no-one is stablizing it by covering....
I agree with cine that oil is going to fall, but only to erase the irrational Nigerian rumour premium... it will probably fall into a stable zone between $100-110. The long commodity funds have made the oil market very vulnerable to a sharp drop.
Posted by: leftback | Jul 17, 2008 10:42:25 AM
Hi, I'm sort of a noob, so be gentle. (That means, I'm not a finance guy--I'm just a dude who has too much invested in this market.)
I understand the purpose of shorting and "put" options. You should be able to assume risk to speculate that a stock's price will go DOWN as well.
But what the heck is with "naked" shorting? Forget the Fannie/Freddie angle for a second. How can you sell shares that you haven't even borrowed yet? Why isn't that just fraud? What's the social utility of allowing that?
And yes, I know I sound like Patrick Byrne. But please don't flame me. I'm genuinely curious/puzzled.
Posted by: ck | Jul 17, 2008 10:42:55 AM
This chasing after speculators is just confirmation that we are in a bear market. So is this massive rally..
I thought WFC and JPM results were actually pretty weak.
I just can't get comfortable being long so I am out of here.
Posted by: Vermont Trader | Jul 17, 2008 10:43:57 AM
ck, check this WSJ article out for a good explanation:
http://online.wsj.com/article/SB121625146811560197.html?mod=hps_us_at_glance_markets
Posted by: Jonny | Jul 17, 2008 10:48:51 AM
VT-
JPM's results can be best summed up by this:
"we didn't suck as much as we told you we would"...
I haven't looked too deeply into what they call an 8k now but I'd be none too surprised if most of the "profits" are from reduced liabilities. I guess losing half a billion on BSC is good????
I expect more from C tomorrow.....
and for the absolute laugh of the day check out HOG.....if that isn't manipulation at it's finest I'd like to see a better example.
Ciao
MS
Posted by: michael schumacher | Jul 17, 2008 10:51:38 AM
ck-
When the naked shorting rule was implemented the SEC did not force institutions to adhere to it....they "grandfathered" them so that they could keep what they already had. I think the best point from Bryne was the mockery of the original statement from the SEC. I believe the SEC release went like this:
We are allowing firms to grandfather there positions so that there trading positions are not compromised.
Put in the word "illegal" before the word trading and you have an idea of what is really going on here. That was the major takeaway-for me-from his presentation. He may not know how to run a company but his emphasis and points just got validated.
That the SEC has decided to enforce a rule that already exists for a small amount of stocks is the farce.....but wrap a flag in it and cry "America" and you see what they are trying to accomplish.
There should be no "list" since according to the original rule it's illegal to do in the first place.
Ciao
MS
Posted by: michael schumacher | Jul 17, 2008 10:59:40 AM
CK,
Given the massive volume in equity options today, the naked shorting issue is really a red herring. Options market makers will often short a stock to hedge when they sell a put, and they're exempt from the need to borrow rules. Even assuming evil, rumor-mongering shorts are the root cause of "illegitimate" drops in share prices, those same shorts could still force a stock down by buying puts.
I suppose market makers could be required to follow must-borrow rules, but that would seriously impair their ability to hedge and might effectively shut down their ability to sell puts. Without the ability to buy put protection, longs might be inclined to sell outright to stem losses into a downdraft.
Posted by: Estragon | Jul 17, 2008 11:02:28 AM
There is nothing wrong with short selling and it is good for the markets. But naked short selling should always be illegal because if you are selling shares that are not available it basically expands the stock float and allows the short seller to take advantage of an leveraged artificial negative position. Cox has got to be the biggest jackass in government today---same gene pool as the bush administration.
Posted by: gunthestops | Jul 17, 2008 11:02:35 AM
