Just Say No To Naked Shorting
First step toward ending the crisis.
"FOMC participants indicate that considerable uncertainty surrounds the outlook for economic growth and that they see the risks around that outlook as skewed to the downside. They also see prospects for inflation as unusually uncertain, and they view the risks surrounding their forecasts for inflation as skewed to the upside."
To translate Chairman Bernanke's statement: We're between a huge rock and a very hard place.
Discussions about monetary policy generally revolve around which aspect of the Fed's dual mandate should take precedence: growth or inflation. Today, it became apparent that both are taking a back seat to a greater mandate: Keeping the nation's financial infrastructure relatively intact.
Chairman Bernanke and the Fed aren't alone. Their counterparts at the Treasury are attempting to do some of the heavy lifting. Secretary Paulson has gone so far as to literally ask for a "blank check" from Congress to backstop the GSEs.
Giving anyone blank check power should be a non-starter - especially for a cabinet post that generally turns over every few years. If you were legitimately considering granting such power, it should be to the Fed, where the Chairman's post has a much larger degree of stability.
It doesn't make sense to wait for Congress to pass legislation in order to stem the rising tide of GSE panic, since it shows no signs of occurring in a timely fashion.
In fact, the markets have already clearly said that it'd be nice to see a Plan B. Asian banks are getting beaten up for simply holding GSE paper, indicating that global concern is more significant and at panic levels. It's more likely that this current episode will pass before legislation is signed.
But there is an action our regulators can perform overnight: Eliminate naked shorting, which we believed was already illegal anyway. Enforcing the rules on the books should have been occurring all along. When we start talking about bringing back the tick rule and changing the current short-sale rules, we're letting ourselves get distracted from the real problems.
For the record, the shorts didn't create the problems at these troubled institutions; to start vilifying them is simply an attempt to make it appear that something is being done. Yes, action's being taken, but not where it will effectively influence the system in a positive way.
Short-selling as a practice is a very important component of free capital markets. We learn that in Free Markets 101. Hoping a return of the tick rule will save the stock market is ludicrous.
That being said, we wouldn't want to be short the financial sector as a whole at this point in time.
Despite the 1% loss in the S&P 500, today's trading was a push, and there are several reasons to give the bulls a slight edge. Chairman Bernanke's grim but realistic assessment of the economy set several actions in motion. The Vix finally ticked above the 30 level as the S&P 500 hit the 1200 level.
The move was short-lived, as equities bounced, but it was a positive step toward ending the current downdraft. I wouldn't be surprised if it gets back up there tomorrow.
The other benefit of the Chairman's acknowledging the real downside risk to the economy was that the problems everyone else is facing are finally resonating with crude. While it would much more comfortable if crude broke below $130 sooner rather than later, the fact that these big downside moves are appearing as often as the upside ones is encouraging.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter