An old friend of SI, Bill Fleckenstein weighs in on the shorting debate:
Of Bubble Unwound and Pound of Flesh: Turning to the news, I need to take exception to a story in yesterday's Financial Times titled "Short-Selling Faces Clampdown by SEC." I will grant it high marks, however, for illuminating the fact that markets make opinions. By that I mean, with the markets having gone down for three years, the people who didn't understand why they were up in the first place are now trying to find a scapegoat. This quote sums it up rather nicely: "U.S. regulators say they are being pressed to clamp down on short-selling by politicians who complain the practice hurts companies."
Now I can believe that politicians may be pressing regulators. But let's be clear about one thing: Short-selling doesn't hurt companies. I find it rather interesting that this mistaken notion still receives any press. The implication is that short-selling is all about manipulation, but that the cheerleading by companies and dead fish does not constitute manipulation.
Obviously, stock prices can collapse for many reasons. Either they become far higher than they ever should have been, or something goes dreadfully wrong with the business. But neither of those two is caused by short-sellers. If there is any blame to be laid, it should generally fall on an over-promotional management, on the analytical community, or on a crowd that simply got carried away.
Tar-and-Featherweight Arguments: And it's not just happening in the U.S. The story says, "Regulators around the world are under pressure to tighten rules on short-selling ... amid concern that it is used by professional traders to manipulate share prices, particularly of small companies." Let me just say that as a short-seller, neither I nor anyone else I know of attempts to "drive" prices lower, and we couldn't even if we wanted to. Could somebody affect the market price of a stock for a couple of hours or a day? Sure, but not much longer than that. And, that tactic would be a recipe for disaster.
In any case, the article proceeds along in a lame fashion, talking about the need to clamp down on naked short-selling, which is selling stock that you did not borrow. I don't know anyone who does that, and most brokerage firms will not let you do that. So that seems to be a paper tiger. The other rationale in support of a clampdown was so preposterous that it almost makes the article laughable: "But others say it [short-selling] is too often abused to corner small companies by controlling most or all of a company's publicly traded shares."
Now read that again. Short-sellers don't control the float. Somebody can control the float, corner a stock on the long side and precipitate a short squeeze -- which, by the way, was considered a legitimate investment practice in the mania. But a short can't corner a company. Mostly, I think all these claims are much ado about nothing, though that never stopped the press from trotting them out from time to time. The outrage over practices by the actual culprits is certainly ignored in this particular story, and in general. Also rarely seen are stories that praise short-sellers for uncovering the abuses being perpetrated by others. |
