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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  1. bonghiteric commented on Jul 17

    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 .

  2. Tim Tebow commented on Jul 17

    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.

  3. wunsacon commented on Jul 17

    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!” ;-)

  4. HCF commented on Jul 17

    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

  5. ECONOMISTA NON GRATA commented on Jul 17

    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

  6. Jim Haygood commented on Jul 17

    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.

  7. ECONOMISTA NON GRATA commented on Jul 17

    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

  8. cinefoz commented on Jul 17

    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.

  9. Paul Stiles commented on Jul 17

    Congress went after Jesse Livermore after the ’29 crash. Good to see that some things never change.

  10. DavidB commented on Jul 17

    I thought free markets meant free for the big boys….and paid for by the rest of us

  11. VoiceFromTheWilderness commented on Jul 17

    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’

  12. Melancholy Korean commented on Jul 17

    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!

  13. CPJ commented on Jul 17

    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…

  14. catman commented on Jul 17

    the stock market and the economy will zoom to the stars? At some point it may even reach your home planet! Good luck!

  15. leftback commented on Jul 17

    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.

  16. Brody Smith commented on Jul 17

    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?

  17. ck commented on Jul 17

    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.

  18. leftback commented on Jul 17

    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.

  19. ck commented on Jul 17

    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.

  20. Vermont Trader commented on Jul 17

    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.

  21. michael schumacher commented on Jul 17

    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

  22. michael schumacher commented on Jul 17

    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

  23. Estragon commented on Jul 17

    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.

  24. gunthestops commented on Jul 17

    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.

  25. Estragon commented on Jul 17

    Gunthestops,

    One question I’ve not seen asked. Maybe it’s silly, but do we know with certainty that there isn’t a naked buying “problem” too? I recently got a note from a broker saying a stock I owned no longer traded. The interesting part is that although I wanted to take delivery on the worthless shares (to remind me why I should never trust a broker), they can’t deliver.

    How do any of us really know that having bought 100 shares of XYZ, especially in a margin account, the shares actually exist anywhere other than on our brokerage statement?

  26. martin commented on Jul 17

    It seems very few commentators here objects to people who are potentially exploiting flaws in the market. Its some how curbing freedom to address these exploits which can potentially destabilize the market.

  27. free markets! commented on Jul 17

    Ayone who makes money off speculation — oil traders, banks trading profits, levered equity hedge funds who in tandem churn small/genuine investors for a ride by artificially inflating equity prices for years when there is trend should all be taxed heavily — or make the field a level playing one for all players everywhere – maximum leverage ratios and access to capital

  28. bdg123 commented on Jul 17

    If all of the short sellers would go away, the economy would zoom to the stars. Haha. These stocks are going down because fundamentals, future earnings prospects and balance sheets are all generally a disaster. Neked shorting should not be allowed but frankly, there’s so much shady shit going on on Wall Street that naked shorting is only reserved for Mother Teresa and others in the cloister. That would be cloister —-.

    Plunging oil may relieve some of the burden on consumers but provides no impetus for economic growth or a rising stock market. Fear the economic consequences of falling oil.

  29. bdg123 commented on Jul 17

    If all of the short sellers would go away, the economy would zoom to the stars. Haha. These stocks are going down because fundamentals, future earnings prospects and balance sheets are all generally a disaster. Neked shorting should not be allowed but frankly, there’s so much shady shit going on on Wall Street that naked shorting is only reserved for Mother Teresa and others in the cloister. That would be cloister —-.

    Plunging oil may relieve some of the burden on consumers but provides no impetus for economic growth or a rising stock market. Fear the economic consequences of falling oil.

  30. michael schumacher commented on Jul 17

    “How do any of us really know that having bought 100 shares of XYZ, especially in a margin account, the shares actually exist anywhere other than on our brokerage statement?”

    Realistically we have no clue if they exist…..someone says they do so…..they do.

    Smoke and mirrors is what our system is all about these days.

    I liken it the the TSA….you know the perception of safety.

    Ciao
    MS

  31. Mike in NOLa commented on Jul 17

    MS:

    There’s also an obscure accounting rule they’re using that allows them to post a gain on their own bonds which have declined in price because the bonds are not as big a liability any more. ??? Yeah, I know it’s hard to fathom.

  32. DL commented on Jul 17

    I’m all in favor of short selling. What I don’t understand, however, is what the argument is IN FAVOR of a system that permits a small number of people to engage in “naked” short selling, while at the same time prohibiting the majority from doing so. There have been times when I have tried to short a stock, but it was unavailable for borrowing. At the same time, some well connected operator probably had the opportunity to “naked” short it. Why is this such a good thing?

  33. Donkei commented on Jul 17

    Mike in NOLa,

    It’s not obscure. It’s an FASB Rule (I think 146)–but it ought to be easy to look up. Do a search on free Bloomberg (Mark Gilbert wrote on it) and you should get a few decent articles from about 2-3 months ago explaining it. It’s the mark to market rule for liabilities.

    Thus, as a company approaches insolvencey, and the value of their liabilities approach zero, the accounting rule will make it appear that they are becoming ever more profitable.

    “Don’t believe none of what you hear and only half of what you see. You can’t even trust your mother.” Lou Reed, New York

  34. Larry commented on Jul 17

    @michael schumacher

    So, similar to the TSA, we have financial theater. See Bruce Schneier and security theater .

  35. gunthestops commented on Jul 17

    When you open an account you prob. signed an agreement saying you would except stocks held in the street name—so the actual physical delivery of a stock certificate will not happen in most cases even if requested, it will just be closed out on the books.

    Margin accounts purchases do not increase or decrease stock floats just the amount of money used to control a specified # of stocks held. My point of naked short selling is that it artificially increases the stock float as long as they are held naked.

  36. Philippe commented on Jul 17

    In large the concept of selling without having a share or a share in commodities, is equivalent to a purchase without having the intention to own and take delivery of a share or a share of physical commodities. The culprits are derivatives 600 trillion USD when introduced at the CBOT they were hedging instruments, they then turned as or hedging position.
    Not ethic to short sell fine! but no one raise the issue of being long futures in commodities in 2008, no one raised the issue of purchasing equities futures in 2005 it has cost corporations going in the fashionable acquisitions a large share of future profits, no one raised the issue of shorting the interest rates in 2005.

    Today s demise of the financial industry is an abuse of derivatives where else are the culprits? The proof is in BIS records

  37. Philippe commented on Jul 17

    Dates are to be read
    Interest rates 2005
    Equities 2006 2007
    commodities 2008

  38. mhm commented on Jul 17

    Estragon, when you sign up to an account there is an agreement to lend your shares to the broker. You _can_ opt-out but I think then you have to pay for escrow or take delivery.

    If the broker goes under, your account is protected by the insurance but better check the T&C for any “mutual” crap.

    And I second the Great American Whale: “Don’t believe none of what you hear and only half of what you see. You can’t even trust your mother.” Lou Reed, New York

  39. donna commented on Jul 17

    I just picture some guy standing there naked, wanting to sell me his shorts, shake my head and walk away.

    Do what you want on the markets but please wear clothes to do it…

  40. Vermont Trader commented on Jul 17

    Citi should be interesting. They are changing their reporting format starting this qtr. I am sure the changes are not designed to make things look worse.. Can you say lipstick!

    I won’t be around though… off to Montreal for a bachelor party weekend. Au revoir mes amis!

  41. michael schumacher commented on Jul 17

    VT-

    no finer place than Montreal for a bachelor party…..or so I’ve been told ;-)

    I actually bought some C calls this morning in anticipation of that. Not much though..just a portion to hedge the Jan. 15 puts.

    Mike NOLA-

    That is precisely what I meant…..

    Ciao
    MS

  42. Jay commented on Jul 17

    When the tide goes out, we will see who has been swimming with naked shorts.

  43. sbenard commented on Jul 17

    There is ONE bubble I’d like to see burst:

    The bubble of incumbents reelected from BOTH Republican and Democrat Parties.

    Throw every last one of them out on the streets!

  44. craig commented on Jul 17

    it’s getting to be a much tougher life if you try to make consistent, reasonably sized profits (levels commensurate with the risk taken) shorting certain sectors because the ever present potential that the govt will step in to change rules mid-game and send a sector rocketing upward. SKF owners got it right in the onion. it’s to the point where even if you’ve done solid analysis and are willing to risk capital to short an overvalued sector, you have to add an additional layer of analysis of whether the govt will render your work moot with one press-conference about rule-changes or special powers to be enacted. strange days indeed. BTW: i was not long SKF or short any financials.

  45. Susan commented on Jul 17

    Boo hoo — the hedge funds can’t rape and pillage the retail investors with naked shorting. What’s the world coming to? Guess what, it’s illegal now, the SEC has just been turning a blind eye to it. Remove the MM exemption too and level the playing field.

  46. coler commented on Jul 17

    Moral hazard keeps taking on new dimensions, doesn’t it?

    You United States residents had better start speaking up loudly (and soon), or you’re going to be under a lock and key quicker than you can freely flip your next coin.

    If your government keeps it up, China will be a more desirable place to live in the not-too-distant future.

    The same goes for many “free” countries who are gradually allowing fear to change laws and behaviors that were designed to protect freedoms.

    Excellent article by the WSJ. But it needed more teeth.

  47. HCF commented on Jul 17

    “The authorities have tried. They banned short sales and they put in circuit breakers to limit daily declines to 1 percent. The result was that volume plunged, since few were willing to buy at prices that were artificially held up. Now the exchange will try a fund to buy stocks, while removing the earlier impediments to selling. That may not work for long either.”

    http://norris.blogs.nytimes.com/2008/07/17/rioting-over-stock-prices/

    They are describing Pakistan, but it’s probably gonna come here soon if the present regulatory trend continues.

    Should be fun to see what happens…

  48. MarkTX commented on Jul 17

    Merrill Lynch & Co Inc (MER)

    after 4.65 Billion $ Loss

    down ~9% after hours

    I am Shocked, SHOCKED I tell you, how can the short sellers do this to such a fine company!!!!!??????

    They are on “THE LIST” dammit. ;)

  49. Kimo commented on Jul 18

    When I buy stock, I don’t want it ‘lent’ out for shorting without my permission. Period.

  50. Fiske commented on Jul 18

    Wow… When did this site get taken over by the tin foil hat crowd? I like Catcher in the Rye as much as the next guy, but come on. Is the consensus here really that short sellers aren’t driving down the financial buy *naked* short sellers are? Run a good business and the shorts — naked or otherwise — will run the other direction.

    P.S. Want to see a stock take off? Fire Byrne from OSTK and watch the shorts head for the hills. I guarantee it will be far more effective than getting rid of the naked shorts. Similarly, if any of the financials could credibly make a case that the worst was behind them, they would take off as well.

  51. century commented on Jul 18

    f the rules make it harder to short, so be it.

    Uptick rule is great! No naked short is great, should be for all.

    Also investigate, round up the rumor mongers/shorties/illegal activities. Show them on screens, then lock them up for good.

    Big G just ain’t do enough.

  52. michael schumacher commented on Jul 18

    “I actually bought some C calls this morning in anticipation of that. Not much though..just a portion to hedge the Jan. 15 puts.”

    And to close that out…thanks for the free money C

    bought at .44 sold to a fool at 1.30

    Ciao
    MS

  53. Susan commented on Jul 18

    Looks like Chairman Cox caved in. The way in which the naked shorts have been employed is entirely illegal (RICO violations). The hedge funds say it is the prime brokers who are at fault, but the hedgies know what they are doing. They know if they enter certain options trades it will force the MMs to short the stock. It is just like writing a bad check and that is what naked shorting, with an intent to effect fail to delivers (FTDs) is fraud.

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