Its a New Day (a sad day)

As I prepare to head off to the airport I wanted to drop a note to our faithfull readers.

The SEC in concert with the UK financial regulatory bodies has banned short sales in financial stocks. As I write this a small rally is taking place in the markets. I say small because in terms of what has happpened (and in my opinion what still will happen) it is a pittance of a rally. This is the near elimination of free markets as we who have traded for any length of time have come to know them. Short sales did not cause the current financial crisis. If anything the savy short sellers out there should be hailed for pointing out the risks that were in the system long before they were realized. Just because something has not had an effect does not mean it never will!

The removal of legal (shares are truly borrowed) short selling is only going to setup a vaccum that will not have a way to be filled later on. Most people do not conceptualize the fact that short sellers add a large layer of demand to the markets. They HAVE to buy back the stock.

This is a sad day.

Good Trading

Craig

Comments

[Nilesh]

I agree with you when you say "END of Free Markets".

However, everything has its own pro & cons. In India because of this Sensex will be stable for some time and it's good news, though I am short. India did not had any financial problems earlier like credit issues, Inflation, Growth except the overbroughtness in early Jan 2008. Just because all other Markets were falling we also started moving southward, in week's time Sensex was down 25% and all are happening now. So, my point is the next growth engine for the world economy can be ASIA & for it to happen this kind of temp. arrangements are requied.

So ignore it.

[Dino]

Sad days are better then the end of the world. Yesterday after Putnam announced the freeze of their money market fund,equities were going to zero and tbills to negative return. Inflation is real bad but deflation and depression is much worse. It took WWII to get us out of one. WWIII is something that might happen if the Govt. didn't act. Also no
one was complaining the past 5 years when their house prices were going up and they were using them for an ATM machine.
Buy Gold and wait for the inevitable inflation and when it hits buy 30 year bonds at 14 %.

[Craig]

I think that a major painful event like a depression is what is needed here. Its a personal opinion. However, freedom not only entails the freedom to succeed hugely but the freedom to fail. That is what brings discipline to markets.

This kind of wanton bailout is a shear travesty and a slap in the face to free markets. We need to have a normal business cycle to build a foundation once again to go up. This is just a bandaid and will only encourage more undiscipline bad financial behavior, both by institutions and individuals.

I did hear many people complaining as houseing prices where rocketing up. It priced many out of the market and encourage the stupid behaviour thatlead us into this mess. The upshot of that is that people who did the right thing are being punished here and those who risked more than they could afford are being bailed out.

Now the only true cure is to take the pain. But no, our ever prescient government is going to prolong the issue and encourage bad behaviour once agian.

Craig

[anthony]

Hi Criag,
From you many years of experience what are the chances that the US will follow Australia's lead & ban all short selling ? Do you think its safe to short non-financial stocks right now (assuming that they meet one of the GET stratagies).
Thanks

[Craig]

I had not heard that Australia had banned ALL short selling. That is shocking. I cannot put a percentage chance on it but in these times it would not surprise me to see the U.S. government attempt something silly and destructive like that. I think that the risks are high right now on the short and long side. It is time for extreme caution and capital preservation. Have a look at how much the ban on short selling helped the Karachi exchange $KSE-IDX.

It is an ever evolving situation.

Craig