Is Capitalism Dead?
Financial short selling has been banned in the UK.
Editor's Note: The following was posted in real time on our premium Buzz & Banter. It's being shared here for the benefit of the Minyanville community. See also The Great Expression, Victim or the Crime?, Random Thoughts: Straddling the Great Divide and Random Thoughts: The Here is Now.
Consistent with our efforts to communicate real-time financial insight with ye faithful, we’ve been publishing the Buzz & Banter content with as many Minyans as possible during these trying times. It's what we do. It's how we roll.
The string below is an extension of that and I will draw your attention to the final segment that discusses Britain’s Financial Services Authority announcement that it will ban short-selling on financial stocks altogether and forbid any new increase in positions. The ban will be effective until January 16 but will be reviewed in 30 days.
As reasons for the move, Hector Sants, CEO of the FSA said it has taken the move “to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector.”
Ironically enough, I had a conversation last night with a hedge fund manager who told me "if they ban short selling entirely, the hedge fund community will be out of business."
My response? "Dude, they can't do that—it would mean the end of the global capital market structure. And even if they were to consider such drastic measures, they wouldn't do it until DJIA 7000."
Blimey, we live in interesting times. While this is industry specific, it moves the needle in a most disturbing direction.
The specter of stateside adoption of this mandate is what turned the tide today.
Long live the Queen, I guess, because capitalism just took one on the chin.
Bye bye, Mrs. American Pie. I'm getting myself a crumpet.
The following is what was said at the time, on the Buzz, as it happened…
Holy Moley Guacamole! - 1:37 pm
For what it's worth and so it's said, as soon as I posted that last Buzz, my antennae vibed the first scenario and I tried to scoop some Goldman (GS) at $90. As I put the final touches on the Buzz (Minyans first!), I missed it and POP!, it's ten handles higher. I pride myself on a quick trigger but this is nuts.
- Serendipity? Minyan Adil shot me a note to offer "S&P 1080 is a 61.2% Fibonacci retracement from 2002 through 2007." Thanks bubba.
- While I think "true" panic could take the VXO to 70, that last lurch lower was the first sniff of desperation I've felt in some time. That could lead to the MOAS (mother of all Snappers) but make no mistake, real risk remains... particularly with the double whammy (buy backs halt & redemptions hit) looming at 3:30 EST.
- So we have that... versus an inevitable government agenda into expiration (I wouldn't be surprised to see a sizable rate cut). Does anyone else feel like they brought a knife to a gun fight?
- Oh joy, lunch is here. Another salad. With balsamic. Ain't life grand?
- Where does this rank in my all-time trading experiences? I don't know if it's the nuttiest but it's right up there with the Thai Baht contagion, LTCM, Orange County (I'm showing my age), the dot.com implosion and yes, Letter I.
- Get over it, go out with someone else! If you're getting bullish on upticks and bearish on downticks, do yourself a solid and take a step back and a deep breath. This is no time to be reactive, friend, this is a time to exercise the discipline we're been practicing all these years.
- And with that, Mr. Rabbit is gonna nibble on some lettuce. Where's Jenny?
Just when you thought you've seen it all... - 1:40 pm
I had a conversation last night with a powerful hedgie who said to me that "if they ban short selling entirely, the hedge fund community will be out of business."
My response was "Dude, they can't--it would mean the end of the global capital market structure. And even if they were to consider that, they wouldn't do it until DJIA 7000."
Blimey, we live in interesting times.
The specter of stateside adoption will be enough to jack 'em, if only for a trade.
Other professors' take on the situation:
U.K. Poised to Crash - Mike Mish Sedlock - 1:58 pm
Banning short selling is an act of pure desperation guaranteed to fail. Short term, I do not know what the market will do, but if shorts are squeezed out an air pocket below will form just as happened in the U.S. with share prices of Fannie Mae (FNM) Freddie Mac(FRE).
The simple fact of the matter is that short sellers add liquidity to the market. Barring bankruptcy, shorts have to cover at some point. Also short selling is a necessary function of market makers.
Finally, attempts to prop up the market simply will not work regardless of what government intervention there is. If by some miracle the market manages a sustained rally after this announcement, it will do so only because the market was ready to rally on its own accord.
I spoke about government intervention in earlier today in China, Russia Intervene In Equity Markets. Inquiring minds should take a look.
BRAINSTORM!!! - Bennet Sedacca - 2:01 pm
I have been expecting a radical move in short selling rules. The fact it happened in Europe rather than here is moot to me. It is a sign of desperation.
I really like free markets, but the idea of not allowing investors a way to express their view in the markets is either Socialism or Communism, I haven't decided yet.
So I have an idea.
Treasuries and gold have been rising. So the people that are short are getting killed. Why don't we just disallow folks from buying what's going up? I mean, what the heck is the difference?
Short sellers are an important part of the market's efficiency.
The key is the debt, the leverage, the poor management and rotten real estate.
I am keeping my eyes peeled on credit to see if that market cares. It is a rational market and can't be manipulated by a bunch of Socialistic regulators.
Let's just let markets be markets.
In the meantime, 'Get Shorty' is back.
Me thinks it won't work.
Wow, UK Banning New Shorts on Financial Stocks - Sean Udall - 2:15 pm
It's an amazing and sad situation when a government regulatory body feels the need to do this. But as I typed the other day, companies with leverage can be shorted into submission, no matter how strong their asset base. I think this reaction is an even stronger sign how important the uptick rule was and the fact that it needs to be reinstated.
Had we had the uptick rule in place, we would have found natural asset values with much less governmental interference. We need to get back to that environment asap. Please folks, let's put the rules back in place that existed for 80 years and not layer on a bunch of rules that are far, far too extreme.
I'm thinking of buying some Finance names, but not sure I want to chase this Strong of an initial spike -- maybe we'll get a dip to move into in a few minutes.
No positions but was looking at Credit Suisse (CS) just minutes before the UK announced that crazed rule.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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