We all know that America has a debt crisis. This crisis is not simply the result of borrowers. The debt crisis is the result of a financial system that floods capital markets with easy money.
Notably, the fractional reserve lending system of the Federal Reserve multiplies the amount of debt. Banks lend out multiple dollars for each dollar saved. The Fed works like a lens systematically magnifying debt.
Perhaps the most pernicious effect of short selling is that it contributes to this debt crisis.
A short sell is a similar source of easy money. Short selling is not an investment in production, but a financial tool derivative of other's productivity. It is a paradox-ridden kin to a margin play.
When a person shorts a stock, they borrow a stock then sell it at market prices. The person who lent the stock for the short sale no longer has an investment a company. The investor has a loan that tracks the price of the stock.
These loans often take place without the knowledge of the investor. So, you might think you have 100 shares of GM, when really you have a loan to a third party that tracks GM's price.
When a short seller sells a stock, the short seller gets money. This easy money floods into other investments. Short sellers often hold the money in tools like government bonds or mortgage backed securities ... creating an artificial demand for these financial products.
(Short selling feeds the beast that crashed our economy)
The amount of easy money created by short selling is phenomenal. It is second only to the amount of easy money created by the Fed.
Hedge Funds use a formula for shorting. For example, some hedge funds with have $30 in shorts for ever $70 in investments. The amount of money being shorted is massive.
Following the short interest on stocks, I find it common for the short interest to be 20%, 30% or even 40% of the float for long durations.
For a trillion dollars in investments, one might see short sellers generate $200 billion in easy money through shorting.
Free-marketeers should be irrate about short selling. This is not wealth created by the re-investment of surplus production (as was described by Adam Smith). It is vast quantities of easy money created by the financial regulations that allow short selling.
Short selling (selling stock that does not belong to you) is a direct violation of the principles of property rights. The system has numerous perverse effects that muck up the process of generating real wealth.
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Showing posts with label shorting. Show all posts
Showing posts with label shorting. Show all posts
Sunday, November 21, 2010
Monday, October 11, 2010
Short Sighted Regulations
NOTE: This is part one of a two part post. I have an errand to run and will post the second part tonight or tomorrow.
Short selling was the creation of centralized exchanges for the expressed purpose of regulating stock prices. Short selling regulations allow traders to sell stock that they do not own. Proponents of short selling claim that short selling improves the liquidity of a stock. If a stock is in short supply, a short seller simply creates phantom shares of stock with the promise of buying it back later.
This justification is a joke. Historical data shows that short interest tends to increase during a liquidity crisis. Short selling increases during economic dips effectively decreasing liquidity when liquidity is needed most.
Even worse, not all shares get repurchased. If a stock goes bust, then the short seller never repurchases and keeps the loot from the sale tax free.
Short sellers claim that their actions can prevent pump and dumps. Just like everyone else, short sellers want to buy high and sell low. So, when short sellers find a pump and dump scheme, they join in on the pumping while they are selling stock, and enjoy the downward slide.
The only difference between the short seller who pumps and dumps and the CEO who pumps and dumps is that the short seller loves to rub it in.
Short selling is an inherently negative and inherently anti-market activity. The regulations that allow short selling are a direct assault on property rights.
Stock ownership is a mechanism for shared ownership. The people who want to share ownership will issue and distribute stock.
The short selling regulations say that, for this group to sell their stock on a public exchange, they must allow anyone in the market to start selling phantom shares of the equity on the market. The sale of phantom shares competes with the sale of real shares.
The short sellers claim that they are performing a public service, but the selling of phantom shares in equities ends working exactly the same as a large tax against the most productive elements of an economy.
Each year hedge funds, market makers and market manipulators reap billions of dollars in short selling regulations each year. As such, they spew forth with inane justification for the regulations.
Claims by these groups systematically prove false. As short selling has the same effect as a tax on the most productive elements of our society, I believe that the regulations allow the short-sighted allowing short selling be removed and the destructive process of short selling be eliminated.
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Short selling was the creation of centralized exchanges for the expressed purpose of regulating stock prices. Short selling regulations allow traders to sell stock that they do not own. Proponents of short selling claim that short selling improves the liquidity of a stock. If a stock is in short supply, a short seller simply creates phantom shares of stock with the promise of buying it back later.
This justification is a joke. Historical data shows that short interest tends to increase during a liquidity crisis. Short selling increases during economic dips effectively decreasing liquidity when liquidity is needed most.
Even worse, not all shares get repurchased. If a stock goes bust, then the short seller never repurchases and keeps the loot from the sale tax free.
Short sellers claim that their actions can prevent pump and dumps. Just like everyone else, short sellers want to buy high and sell low. So, when short sellers find a pump and dump scheme, they join in on the pumping while they are selling stock, and enjoy the downward slide.
The only difference between the short seller who pumps and dumps and the CEO who pumps and dumps is that the short seller loves to rub it in.
Short selling is an inherently negative and inherently anti-market activity. The regulations that allow short selling are a direct assault on property rights.
Stock ownership is a mechanism for shared ownership. The people who want to share ownership will issue and distribute stock.
The short selling regulations say that, for this group to sell their stock on a public exchange, they must allow anyone in the market to start selling phantom shares of the equity on the market. The sale of phantom shares competes with the sale of real shares.
The short sellers claim that they are performing a public service, but the selling of phantom shares in equities ends working exactly the same as a large tax against the most productive elements of an economy.
Each year hedge funds, market makers and market manipulators reap billions of dollars in short selling regulations each year. As such, they spew forth with inane justification for the regulations.
Claims by these groups systematically prove false. As short selling has the same effect as a tax on the most productive elements of our society, I believe that the regulations allow the short-sighted allowing short selling be removed and the destructive process of short selling be eliminated.
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Thursday, April 01, 2010
Anarcho Regulation
DeepCapture introduced a wonderful term "Anarcho-Regulation" to describe the current state of securities regulation.
I like this term much better term than "deregulation."
During the market crash of 2008, the world learned of an absolutely insane mix of derivatives and re-insurance that created a systemic fault in the economy.
I dislike using the term "deregulation" as most of these derivatives and financial instruments were designed to regulate the economy. For example, the credit default swaps that blew up were created by the massive Security Modernization Act of 2000 ... a regulation. Government backed re-insurance came from New Deal Legislation in the form of Fannie Mae and Freddie Mac. The Community Re-investment Act showed that Congress was pro-actively trying to tip the market toward social goals ... social engineering.
Most of the derivatives on the market today exist for the express purpose of regulating the economy. "Hedge Funds," as the name implies, weren't designed primarily as investment tools, but as tools to hedge investments. Short selling is justified with the claim that it enhances liquidity. Above all, insurance exists as a means of regulating risk.
Modern financial thinking has been dominated by a desire to regulate the market. What happened in the Clinton/Bush years is that the government realized that it was ill equipped to monitor the bizarre mix of derivatives that was being used in the financial industry. So, the Feds simply took their hand off the tiller with the hope that the market would magically reach a stable equilibrium.
I believe one should use the term "deregulation" to describe the removal of a regulatory machinery. What our leaders did in the Clinton/Bush years was to leave all off machinery designed to regulate the economy running at full bore ... but with no supervision.
The term "anarcho regulation" aptly describes a system where one leaves the regulatory machinery in place, but removes the supervision.
I applaud Deep Capture in their effort to reduce the abuses of naked short selling and FTDs.
The drum i wish to pound is one that reminds the world that short selling is a tool designed to regulate a stock. Unfettered naked short selling is best described anarcho-regulation. The deregulation would involve the actual removal of the regulatory machinery. Since naked short selling exists to regulate stocks, deregulation would eliminate the regulation that make naked short selling possible.
I like this term much better term than "deregulation."
During the market crash of 2008, the world learned of an absolutely insane mix of derivatives and re-insurance that created a systemic fault in the economy.
I dislike using the term "deregulation" as most of these derivatives and financial instruments were designed to regulate the economy. For example, the credit default swaps that blew up were created by the massive Security Modernization Act of 2000 ... a regulation. Government backed re-insurance came from New Deal Legislation in the form of Fannie Mae and Freddie Mac. The Community Re-investment Act showed that Congress was pro-actively trying to tip the market toward social goals ... social engineering.
Most of the derivatives on the market today exist for the express purpose of regulating the economy. "Hedge Funds," as the name implies, weren't designed primarily as investment tools, but as tools to hedge investments. Short selling is justified with the claim that it enhances liquidity. Above all, insurance exists as a means of regulating risk.
Modern financial thinking has been dominated by a desire to regulate the market. What happened in the Clinton/Bush years is that the government realized that it was ill equipped to monitor the bizarre mix of derivatives that was being used in the financial industry. So, the Feds simply took their hand off the tiller with the hope that the market would magically reach a stable equilibrium.
I believe one should use the term "deregulation" to describe the removal of a regulatory machinery. What our leaders did in the Clinton/Bush years was to leave all off machinery designed to regulate the economy running at full bore ... but with no supervision.
The term "anarcho regulation" aptly describes a system where one leaves the regulatory machinery in place, but removes the supervision.
I applaud Deep Capture in their effort to reduce the abuses of naked short selling and FTDs.
The drum i wish to pound is one that reminds the world that short selling is a tool designed to regulate a stock. Unfettered naked short selling is best described anarcho-regulation. The deregulation would involve the actual removal of the regulatory machinery. Since naked short selling exists to regulate stocks, deregulation would eliminate the regulation that make naked short selling possible.
Saturday, October 03, 2009
Squeezing the Lemon, and coming up short
Blogging Stocks notes that there was 38.2 million Failure To Delivers (naked shorts) in the collapse of Lehman Brothers.
This whole concept of capitalism is premised on the idea that companies could use their capital for re-investment. The regulations that allow naked short selling create a feedback loop where power-brokers seeking a quick buck can launch a naked short attack against any firm that has leveraged its capital.
A naked short attack launched on a company with leveraged stock magnifies the hurt of a down quarter and can throw even the largest companies into insolvency.
It is important to remember that naked short selling exists because regulations within stock clearinghouses. Clearinghouses justify the regulations claiming that naked short selling assures liquidity.
I mention this as Blogging Stocks supports Barney Frank's solution. Barney Frank wishes to force all stock transactions through clearinghouses.
As it is the regulations in the clearinghouses that cause the problem, my mind had fallen on the exact opposite solution.
Companies and investors wishing to protect themselves from the corruption of the clearinghouses would be wise to pull sizable chunks stock from the clearinghouses and trade directly.
Trading shares in real time closes the artificial gaps in the trade where naked short selling occurs.
A real time trade is like a transaction at the grocery store. The groceries become yours when you hand the clerk your cash.
I could understand a requirement forbidding short sells outside a clearinghouse. A person trying to sell stocks that don't exist should be recognized as a counterfeiter. Investors should be allowed to take legal action and sue brokers that sell counterfeit stocks.
In conclusion: The massive naked short attack which deepened the fall of Lehman Brothers is a great example of the way that short selling (a contrivance of regulators) is anti-market. The solution is for investors to demand that they receive the shares they purchase. If the clearinghouses are captured then investors need to pull their stock from the clearinghouses.
The black box clearinghouse system appears to have created a structure open to capture. Barney Frank's demand that we give a broken clearinghouse system absolute power seems absurd.
This whole concept of capitalism is premised on the idea that companies could use their capital for re-investment. The regulations that allow naked short selling create a feedback loop where power-brokers seeking a quick buck can launch a naked short attack against any firm that has leveraged its capital.
A naked short attack launched on a company with leveraged stock magnifies the hurt of a down quarter and can throw even the largest companies into insolvency.
It is important to remember that naked short selling exists because regulations within stock clearinghouses. Clearinghouses justify the regulations claiming that naked short selling assures liquidity.
I mention this as Blogging Stocks supports Barney Frank's solution. Barney Frank wishes to force all stock transactions through clearinghouses.
We need transparency for each and every trade done by each and every financial institution. That means that all trades must be done on a listed exchange and cleared through a clearinghouse.
As it is the regulations in the clearinghouses that cause the problem, my mind had fallen on the exact opposite solution.
Companies and investors wishing to protect themselves from the corruption of the clearinghouses would be wise to pull sizable chunks stock from the clearinghouses and trade directly.
Trading shares in real time closes the artificial gaps in the trade where naked short selling occurs.
A real time trade is like a transaction at the grocery store. The groceries become yours when you hand the clerk your cash.
I could understand a requirement forbidding short sells outside a clearinghouse. A person trying to sell stocks that don't exist should be recognized as a counterfeiter. Investors should be allowed to take legal action and sue brokers that sell counterfeit stocks.
In conclusion: The massive naked short attack which deepened the fall of Lehman Brothers is a great example of the way that short selling (a contrivance of regulators) is anti-market. The solution is for investors to demand that they receive the shares they purchase. If the clearinghouses are captured then investors need to pull their stock from the clearinghouses.
The black box clearinghouse system appears to have created a structure open to capture. Barney Frank's demand that we give a broken clearinghouse system absolute power seems absurd.
Saturday, September 26, 2009
A Billion Dollar Thought Experiment
A few posts ago, I brought up the possibility that one could create an electric monetary system simply by having a big database with a fixed number of entries. Cash transactions would entail assigning an entry in the database to a new owner.
This program would be similar to the cash in your wallet. You will notice all those crisp hundred dollar bills bear unique serial numbers. (Well, there is only one lonely five dollar bill in my wallet ... that's a different story).
As the entries in the database are fixed, this system would not be subject to the counterfeiting problems of paper money.
I decided that in the Open Source Real Time eXchange that I would have a cash account that was just that, a database of real live cash. If you bought $100 in the cash account, it would point to a specific hundred dollar bill.
Speaking of hundred dollar bills: When I check books into the library, I tell the clerk that I use $100 bills as bookmarks. They know I am lying, but, like clock work, they thumb through the books I check in to see if I left a bookmark.
The cash account brings up an interesting thought experiment:
If I took a billion dollars out of my checking account, put that money in a super safe place under a rock at the bottom of the ocean, then sold shares of that money on the NASDAQ; we could learn a thing or two about the market.
One would think that my billion dollars would be worth a billion dollars. The shares in the IPO would sell for less than a billion dollars because of the transaction cost.
After the IPO, something really strange would happen. People who think they've found an investment that will grow at a rate faster than cash would start shorting my billion dollars. They would short my billion dollar cash account with gusto. The shorting would continue until the shares of the cash account were selling at about have a dollar a piece.
The thought experiment on trading a cash account is important. The value of a cash account should stay closely in line with the cash value of the cash. If traded on the OSTRX, this would happen. A pure cash equity on the NYSE or NASDAQ would be shorted.
This shorting of a cash account has essentially the same effect on the economy as counterfeit currency, it floods the market with bogus paper that pushes down the value of the real paper on the market.
In weighing market regulations, I think the regulators should examine questions like the viability of a billion dollar cash account. If the account isn't viable, then there is something wrong with the regulations.
This program would be similar to the cash in your wallet. You will notice all those crisp hundred dollar bills bear unique serial numbers. (Well, there is only one lonely five dollar bill in my wallet ... that's a different story).
As the entries in the database are fixed, this system would not be subject to the counterfeiting problems of paper money.
I decided that in the Open Source Real Time eXchange that I would have a cash account that was just that, a database of real live cash. If you bought $100 in the cash account, it would point to a specific hundred dollar bill.
Speaking of hundred dollar bills: When I check books into the library, I tell the clerk that I use $100 bills as bookmarks. They know I am lying, but, like clock work, they thumb through the books I check in to see if I left a bookmark.
The cash account brings up an interesting thought experiment:
If I took a billion dollars out of my checking account, put that money in a super safe place under a rock at the bottom of the ocean, then sold shares of that money on the NASDAQ; we could learn a thing or two about the market.
One would think that my billion dollars would be worth a billion dollars. The shares in the IPO would sell for less than a billion dollars because of the transaction cost.
After the IPO, something really strange would happen. People who think they've found an investment that will grow at a rate faster than cash would start shorting my billion dollars. They would short my billion dollar cash account with gusto. The shorting would continue until the shares of the cash account were selling at about have a dollar a piece.
The thought experiment on trading a cash account is important. The value of a cash account should stay closely in line with the cash value of the cash. If traded on the OSTRX, this would happen. A pure cash equity on the NYSE or NASDAQ would be shorted.
This shorting of a cash account has essentially the same effect on the economy as counterfeit currency, it floods the market with bogus paper that pushes down the value of the real paper on the market.
In weighing market regulations, I think the regulators should examine questions like the viability of a billion dollar cash account. If the account isn't viable, then there is something wrong with the regulations.
Wednesday, September 09, 2009
Deep Capture Thread
I can't believe that it's been a year since my ranting about short selling.
Not wanting to give up on a good rant, I started a thread on DeepCapture.com about the OSRTX (Open Source Real Time eXchange).
Deep Capture claims that the black box regulatory system of the DTCC and SEC have been captured. This capture harms legitimate business.
An Open Source Real Time eXchange would directly answer the challenge. An open source project allows for greater transparency in the operation of the exchange. An exchange that traded stock in real time would eliminate naked short selling as it demands that all stock be identified before being sold.
So, as I wait to see if anyone at DeepCapture responds to the thread, I thought I would add some elevator music to my blog with ticked off people singing "Unsustainable."
Not wanting to give up on a good rant, I started a thread on DeepCapture.com about the OSRTX (Open Source Real Time eXchange).
Deep Capture claims that the black box regulatory system of the DTCC and SEC have been captured. This capture harms legitimate business.
An Open Source Real Time eXchange would directly answer the challenge. An open source project allows for greater transparency in the operation of the exchange. An exchange that traded stock in real time would eliminate naked short selling as it demands that all stock be identified before being sold.
So, as I wait to see if anyone at DeepCapture responds to the thread, I thought I would add some elevator music to my blog with ticked off people singing "Unsustainable."
Thursday, April 09, 2009
Uptick Rule
The SEC is considering re-instating the uptick rule.The assumption behind the uptick rule is that the primary problem with short selling is that short selling accelerates market declines.
If this assumption is wrong; then the uptick rule is likely the wrong fix.
Even worse, the uptick rule might even make things worse.
Looking at the massive sales volume of the day, one realizes that it is very easy for market makers and brokers with access to multiple accounts to generate an uptick for a client. It is also possible to programmatically manipulate trades to prevent prevent small investors from short sales.
The uptick rule is likely to devolve into a regulation that gives further advantage to insiders.
The uptick rules being considered by the SEC are all programmatic rules. That is, they are rules that will automatically kick in according to market conditions. As a general principle, programmatic rules simply give an advantage to those engaged in programmatic trading.
To manipulate the programmatic rules, one need simply enter the new rules into a computer model. Run simulations on different trading strategies. Then create a programmatic trading system that manipulates the programmatic system.
An immutable law of the financial universe is that programmatic rules lead directly to programmatic manipulation.
Need I mention that giving an advantage to programmatic traders gives a disadvantage to value trader.
My Solution
Before implementing the uptick rule, I would want the SEC to do serious thinking about short trading itself.Historically, short trading came into existence as a way to overcome market inefficiencies. In ancient days, a person might have to send a rider from Liverpool to London to make a trade. The short sale allowed for efficient trades.
Modern communication technology has eliminated the inefficiency that led to the need for short selling. It is absurd, but regulatory regime on Wall Street has implemented an artificial three day clearing period for transactions for the sole purpose of continuing the short selling practice.
I contend that short selling is inherently anti-market in that it allows people to sell things that they do not own. Naked short selling is plain evil in that it allows traders to sell things that do not exist.
A large number of our currently economic woes are directly related a regulatory regime that allows widespread short selling.
In recent history, we have found large number of traders engaged in a practice of hedging investments with leveraged positions. In 2008, we learned the hard way that this paradoxical act of hedging with leverage creates systemic risk.
I contend that the best method for market reform would be to remove the artificial inefficiencies created by DTCC and to move to a system of real time trading.
A system of real time trading transfers ownership of the stock at the moment the transaction takes place. Questions of market efficiency are moot because one can't get more efficient than instantaneous. Real time trading is the ultimate in market efficiency.
We would not need a new large regulatory regime with complex programmatic rules. A Real time trading system would use the inherent physical constraints of reality to prevent people from selling shares that do not exist.
A real time system does not completely eliminate the ability of people to engage in short selling. Investors would still be able to enter contracts that allow other investors to borrow and sell their stock. A system of real time trading, however, would force discipline on the practice. When an investor lends to a short seller, then they would have their stock replaced with an IOU slip.
The goal of a real time system is not to eliminate short selling. The goal is provide a system that lets people know exactly what they own at all points during a stock transaction. People should know that the second they lend stock to a short seller that they are no longer invested in a stock. Instead, they have a loan to a short seller.
I am happy that the SEC is addressing the systemic problems created by the currently regulatory regime. I ask that, before slapping regulations on the market, they think deeply about the nature of the market, and about the effects of programmatic regulations.
Programmatic regulations like the uptick rule would give advantage to programmatic traders. Transition to a real time exchange would give the advantage to value investors. I opt for the latter for the value investor is the true source of our prosperity.
Wednesday, December 31, 2008
The Bacon's been Fried
There is a growing consensus that financial tools like credit default swaps, short selling, federally-re-insured mortgage backed securities, hedge funds, leveraged ETFs and other creations of the modern financial world require greater regulations.
The 2008 market implosion was dramatic. Lots of paper money was destroyed.
The modern progressive thinkers, who oddly were the inventers of these failed financial tools, wish to push the conclusion that failure of these weird financial tools prove what they've known all along that the American experiment in freedom is a failure, the free market is a failure and that wee need a new social order akin to the progressive regimes in Cuba, Venezuela, El Salvador, Haiti, North Korea and Iran.
My parting shot for 2008 is that all of the financial instruments that appear to require greater regulation should never have existed in the first place.
The best example is naked short selling. Our corrupt financial system created a network of centralized brokerages in cahoots with a secretive organization called the DTCC. The insiders in this group can dramatically increase the float of any publicly traded company on a whim. Naked short selling undermines the ability of companies to re-invest the capital that they have built up through the years.
Short selling itself is anti-market. Short selling is a creation of regulators that allow people to sell the equity in companies that they do not own.
A large number of regulatory failures came to light during the economic collapse. The message of these regulatory failures, however, is not that the free market failed, but that Americans were a bunch of chumps for having faith in financial tools that are dependent on the integrity of regulators.
Rather than more regulation, we need to return to a financial regime based on the direct ownership of equity and away from the leveraged and federally backed financial system favored by the elite.
The 2008 market implosion was dramatic. Lots of paper money was destroyed.
The modern progressive thinkers, who oddly were the inventers of these failed financial tools, wish to push the conclusion that failure of these weird financial tools prove what they've known all along that the American experiment in freedom is a failure, the free market is a failure and that wee need a new social order akin to the progressive regimes in Cuba, Venezuela, El Salvador, Haiti, North Korea and Iran.
My parting shot for 2008 is that all of the financial instruments that appear to require greater regulation should never have existed in the first place.
The best example is naked short selling. Our corrupt financial system created a network of centralized brokerages in cahoots with a secretive organization called the DTCC. The insiders in this group can dramatically increase the float of any publicly traded company on a whim. Naked short selling undermines the ability of companies to re-invest the capital that they have built up through the years.
Short selling itself is anti-market. Short selling is a creation of regulators that allow people to sell the equity in companies that they do not own.
A large number of regulatory failures came to light during the economic collapse. The message of these regulatory failures, however, is not that the free market failed, but that Americans were a bunch of chumps for having faith in financial tools that are dependent on the integrity of regulators.
Rather than more regulation, we need to return to a financial regime based on the direct ownership of equity and away from the leveraged and federally backed financial system favored by the elite.
Ending the Year on a Sick Pun
On an end note, I was devasted to hear that one of my favorite actor had his bacon fried in the Madoff scheme. Tremors was the best goll-darn movie every made. It shows the grim reality of life in Southern Utah, dagnabbit. Footloose captures the deep inner conflicts utopian dreams of Northern Utah ... Oh My Heck.Tuesday, December 30, 2008
The Ruling Class Predators
Last night, I left a snippy comment on DeepCapture. The comment sums up a few of my thoughts on modern business thought. The comment was a response to a 2006 quote from a 13 year veteran rogue from the SEC named Richard Sauer:
With a few edits, my rant was:
This funny little trick of using reason to overcome our base nature is called "civilization."
Sauer's use of the predator metaphor to describe short selling is quite interesting. Throughout history, a common trait of the ruling class is that they see and treat the lower classes as animals. The Marxist Dialectic out and out denies man's rationality. This ruling class mantality has always been the antithesis to civilization.
Personally, I think this division between the classical and modern view of rationality is much more important than the division between left and right.
I might write more about Sauer's editorial. It is a prime example of the progressive view of the way business works.
SHORT sellers occupy a position in the stock market like that of predators in nature.
With a few edits, my rant was:
Saying that we need predators in the market killing companies is equivalent to saying that we need murderers roaming the street to keep the population healthy.
One of the primary themes of classical tradition was that man could use rationality to overcome the base state of nature.
That tradition works. It brings on prosperity.
Man is a rational creature. We can improve our lot through reason and deliberation. Short selling appears to be undermining the ability of investors to engage in the rational process of assessing investment options. With modern communication technologies, the market is so efficient that we no longer need artificial regulatory measures like short selling.
Just as we don’t need rogues roaming the streets randomly killing people, we don’t need an elite class of insiders in brokerage firms randomly destroying companies.
Human rationality overcomes the need for predators.
In the last several years, there has been a predator class randomly killing large numbers of people in Iraq. I see absolutely no sign that the average Iraqi is better off with the killings. They actually look quite miserable and unhappy about all the killing.
Anyway, the current rot in Wall Street is more like a plague than a sleek predator. Sauer’s argument is akin to saying that the market needs to be covered with a festering pustulation to be healthy.
Look ma! That man is oozing with superating sores ... he must be really healthy!
Mankind is a rational creature. We thrive by using reason to overcome the plight of disease and predators. That’s why there’s billions of us. Sauer is simply repeating a failed elitist ideology that causes widespread hardship and misery.
This funny little trick of using reason to overcome our base nature is called "civilization."
Sauer's use of the predator metaphor to describe short selling is quite interesting. Throughout history, a common trait of the ruling class is that they see and treat the lower classes as animals. The Marxist Dialectic out and out denies man's rationality. This ruling class mantality has always been the antithesis to civilization.
Personally, I think this division between the classical and modern view of rationality is much more important than the division between left and right.
I might write more about Sauer's editorial. It is a prime example of the progressive view of the way business works.
Monday, December 01, 2008
Dialectics of the Short Sell
My contention is that ideas matter. Before we constrict our financial system in a new straightjacket of regulations, we should engage in a debate about what ideas went wrong.
The western tradition appears to have created two fundamentally different views of the economy. I will call these the analytical and dialectical view.
The analytical view traces to the days of Pacioli and The Renaissance and is centered quite solidly in the analytic tradition of Aristotle. Luca Pacioli (1446-1517) was a Franciscan friar who codified the system of double entry accounting. The early Florentine Renaissance was centered on the process of the creation of assets. Florence produced a plethora of grand master artists, because the town saw the work of the grand masters as a valuable asset.
Pacioli's system of accounting would produce balance sheets and income statements for businesses. Investors could use these balance sheets and income statements to determine how best to invest their resources. The basic idea is that when businesses are using the same standards of accounting you can move to a higher level that lets you use the ancient tools of analysis to figure out what is best use of resources.
The dialectical view can trace its history through antiquity as well. Most modern thinkers are enraptured with Plato. The writings of Machiavelli clearly indicate that there was a change in thinking toward the waning of Florence.
The dialectical view really took hold in the wake of Kant … the 1800s.
The analytic view is that commerce is this thing where rational people are engaged in a process of analyzing their resources and engaging in trade with the goal of developing assets and improving their condition. IMHO, this is the soul of classical liberalism.
The dialectical view has an extremely dim view of the common man which they see as irrational creatures yanked about by hormones and impulses. The merchant class is nothing but a petty bourgeoisie incapable of rational thought.
The view has permeated the intellectual class for centuries is that bourgeoisie is this horrible group of people engaged in these petty business wars each seeking domination of the market.
Short selling is a creation of this dialectical view. Short selling is a regulatory measure put in place by central banks and brokers that allow them sell stocks that they do not own. The trader sells the stock with a promise of buying the stock back at some point in the future.
The regulations that allow short selling create a market where anyone is able to sell shares in an asset at any moment without actually owning the asset. The goal here is to create a dialectical process where the price of assets by a conflict between shorts (those who sell the asset without owning it) and the longs (the people who actually own the asset.
Short selling is antithetical to the analytic tradition that sees the economic process as a system where people improve the assets that they own.
Short selling directly hampers the development of equity by confusing ownership. A system of widespread short selling creates a situation where multiple people believe that they own the same share of stock.
It is common during a hostile takeover for the robber baron in the hostile take over to heavily short the company under business attack. A business warrior laying siege on a company can have an army of agents short the asset. For example, they may have their agents short 51% of the shares in a company while buying 51% of the company. The business pirate can leap over the railings, storm the boardroom and claim ownership when in fact the pirate had simply engaged in a trick to confuse title.
Ideas matter.
The 2008 market collapse (and other historic market collapses) was fueled largely by short selling (people selling stock they do not own). This market collapse pushed many companies out of existence. Pushed many families out of their homes, and yanked food from the mouths of children.
Short selling is part of this absurd dialectical framework created by the tradition of Machiavelli, Hegel and Marx which leads directly to unnecessary conflict and division in our society.
Conversely, I contend that short selling is diametrically opposed to the concepts of free trade and analytical tradition that produces wealth. This tradition has people tending and improving the assets that they own. Short selling is an anti-market mechanism dreamed up by a ruling class which wishes to enmesh the market in absurd business wars that create massive inequities in society.
END NOTE: Please note, elitists on both the right and left support short selling and the dialectical dreams inherent in the practice.
The western tradition appears to have created two fundamentally different views of the economy. I will call these the analytical and dialectical view.
The analytical view traces to the days of Pacioli and The Renaissance and is centered quite solidly in the analytic tradition of Aristotle. Luca Pacioli (1446-1517) was a Franciscan friar who codified the system of double entry accounting. The early Florentine Renaissance was centered on the process of the creation of assets. Florence produced a plethora of grand master artists, because the town saw the work of the grand masters as a valuable asset.
Pacioli's system of accounting would produce balance sheets and income statements for businesses. Investors could use these balance sheets and income statements to determine how best to invest their resources. The basic idea is that when businesses are using the same standards of accounting you can move to a higher level that lets you use the ancient tools of analysis to figure out what is best use of resources.
The dialectical view can trace its history through antiquity as well. Most modern thinkers are enraptured with Plato. The writings of Machiavelli clearly indicate that there was a change in thinking toward the waning of Florence.
The dialectical view really took hold in the wake of Kant … the 1800s.
The analytic view is that commerce is this thing where rational people are engaged in a process of analyzing their resources and engaging in trade with the goal of developing assets and improving their condition. IMHO, this is the soul of classical liberalism.
The dialectical view has an extremely dim view of the common man which they see as irrational creatures yanked about by hormones and impulses. The merchant class is nothing but a petty bourgeoisie incapable of rational thought.
The view has permeated the intellectual class for centuries is that bourgeoisie is this horrible group of people engaged in these petty business wars each seeking domination of the market.
Short selling is a creation of this dialectical view. Short selling is a regulatory measure put in place by central banks and brokers that allow them sell stocks that they do not own. The trader sells the stock with a promise of buying the stock back at some point in the future.
The regulations that allow short selling create a market where anyone is able to sell shares in an asset at any moment without actually owning the asset. The goal here is to create a dialectical process where the price of assets by a conflict between shorts (those who sell the asset without owning it) and the longs (the people who actually own the asset.
Short selling is antithetical to the analytic tradition that sees the economic process as a system where people improve the assets that they own.
Short selling directly hampers the development of equity by confusing ownership. A system of widespread short selling creates a situation where multiple people believe that they own the same share of stock.
It is common during a hostile takeover for the robber baron in the hostile take over to heavily short the company under business attack. A business warrior laying siege on a company can have an army of agents short the asset. For example, they may have their agents short 51% of the shares in a company while buying 51% of the company. The business pirate can leap over the railings, storm the boardroom and claim ownership when in fact the pirate had simply engaged in a trick to confuse title.
Ideas matter.
The 2008 market collapse (and other historic market collapses) was fueled largely by short selling (people selling stock they do not own). This market collapse pushed many companies out of existence. Pushed many families out of their homes, and yanked food from the mouths of children.
Short selling is part of this absurd dialectical framework created by the tradition of Machiavelli, Hegel and Marx which leads directly to unnecessary conflict and division in our society.
Conversely, I contend that short selling is diametrically opposed to the concepts of free trade and analytical tradition that produces wealth. This tradition has people tending and improving the assets that they own. Short selling is an anti-market mechanism dreamed up by a ruling class which wishes to enmesh the market in absurd business wars that create massive inequities in society.
END NOTE: Please note, elitists on both the right and left support short selling and the dialectical dreams inherent in the practice.
Friday, October 31, 2008
Not Since Joseph Kennedy ...
First, some good news. I was checking the short interest on several stocks. Now that the presidential election is in the bag, short sellers have started backing out big time. We have not seen such skillful manipulation of the markets since the days of Joseph Kennedy's legendary stock manipulations.
Unfortunately, short sellers pulling back from the market does not restore stability. The short interest has dropped from the stocks I follow from around 80% to a more reasonable 7%. Wary investors now know that the street know that short sellers can essentially double the number of shares floating on the market of any stock at any given moment. This means, short sellers have a greater effect on a stock than the performance of the company.
As our communication technology gives us the ability to trade stocks in real time. There is zero value to shorting. The argument that shorting makes the market more efficient is moot because you can't get more inefficient than instantaneous.
On the down side, Patrick Byrne has a piece on how naked short selling destroyed an alternative energy company called VeraSun.
Alternative Energy is precisely the industry that requires mechanisms of shared equity financing to survive. Alternative energy requires huge upfront investments of capital. Since the price of energy fluctuates, alternative energy firms have a balance sheet that slams back and forth. Naked short sellers can use this volatility to destroy any publicly traded alternative energy company in down quarters (which are inevitable).
The practice of short selling allows the big oil cartels to collude with any rogue on Wall Street to wipe such firms out of existence.
The regulations that allow people to sell stock they do not own sits among the lamest regulation ever conceived.
Unfortunately, short sellers pulling back from the market does not restore stability. The short interest has dropped from the stocks I follow from around 80% to a more reasonable 7%. Wary investors now know that the street know that short sellers can essentially double the number of shares floating on the market of any stock at any given moment. This means, short sellers have a greater effect on a stock than the performance of the company.
As our communication technology gives us the ability to trade stocks in real time. There is zero value to shorting. The argument that shorting makes the market more efficient is moot because you can't get more inefficient than instantaneous.
On the down side, Patrick Byrne has a piece on how naked short selling destroyed an alternative energy company called VeraSun.
Alternative Energy is precisely the industry that requires mechanisms of shared equity financing to survive. Alternative energy requires huge upfront investments of capital. Since the price of energy fluctuates, alternative energy firms have a balance sheet that slams back and forth. Naked short sellers can use this volatility to destroy any publicly traded alternative energy company in down quarters (which are inevitable).
The practice of short selling allows the big oil cartels to collude with any rogue on Wall Street to wipe such firms out of existence.
The regulations that allow people to sell stock they do not own sits among the lamest regulation ever conceived.
Wednesday, October 15, 2008
Manipulators Vote Obama
8y million shares traded hands in the last minutes of 10/15/2008.
The great underlying problem with the market is that all of our securities have been so far removed from the equities and risks that they represent that the whole system is subject to epic manipulation.
The report that is supposed to have caused the sell off was a report that sales at stores had their sharpest decline in THREE years.
That is non-news if I had ever heard non news.
I repeat my belief that shorting, as it is practiced today, is very much a part of the problem. It increases volatility and makes the trading climate hopelessly removed from reality.
The great underlying problem with the market is that all of our securities have been so far removed from the equities and risks that they represent that the whole system is subject to epic manipulation.
The report that is supposed to have caused the sell off was a report that sales at stores had their sharpest decline in THREE years.
That is non-news if I had ever heard non news.
I repeat my belief that shorting, as it is practiced today, is very much a part of the problem. It increases volatility and makes the trading climate hopelessly removed from reality.
True to form, Obama joined the market manipulators and attacked the American economy during the debate. This process is so sickening.
Sunday, October 12, 2008
Staggard Horizon
I consider the short ban on short selling a failure. The ban created an event horizon and that event horizon dominated trading for several days.
This post lists two elements needed to make a short ban work.
The biggest problem with the 2008 ban is that it created an event horizon. Everyone knew that the ban would end at a given time. This softened buying prior to the event horizon. It also created an opportunity for manipulators to hit the stock with twice the venom after the ban.
To stop the creation of an event horizon, the end of the ban must be staggard.
The reason for the ban is to prevent stock manipulation. Manipulation happens in the absence of real data about a company. Manipulation tends to happen in the ladder half of a quarter and tends to stop just prior to a company's quarter report. The 2008 ban ended a good two weeks before quarterly reporting started to hit the scene.
The second step to making a short ban work is to time the end of the ban with the quarterly report.
As quarterly reports tend to be staggard, you could pretty much stagger the end of the ban with the reporting cycle.
This post lists two elements needed to make a short ban work.
The biggest problem with the 2008 ban is that it created an event horizon. Everyone knew that the ban would end at a given time. This softened buying prior to the event horizon. It also created an opportunity for manipulators to hit the stock with twice the venom after the ban.
To stop the creation of an event horizon, the end of the ban must be staggard.
The reason for the ban is to prevent stock manipulation. Manipulation happens in the absence of real data about a company. Manipulation tends to happen in the ladder half of a quarter and tends to stop just prior to a company's quarter report. The 2008 ban ended a good two weeks before quarterly reporting started to hit the scene.
The second step to making a short ban work is to time the end of the ban with the quarterly report.
As quarterly reports tend to be staggard, you could pretty much stagger the end of the ban with the reporting cycle.
Friday, October 10, 2008
Byrne's Regulatory Regime
Hmmm, my entry in the Crack the Capture essay contest has three votes. The reason it is so high is because I cheated. I told people about it, and was annoying to the point that they voted for me.
Patrick Byrne's Deep Capture project simply seeks strong regulation to assure that shorts borrow stock before they sell. In disciplined shorts, I contend that, to prevent Failure to Delivers, one must also prevent the people who've loaned their stock to short sellers from borrowing until they get their shares back.
I contend that one final element is needed to make a short regime feasible. Brokers and mutual funds must report to investors when shares are shorted.
The vast majority of people who think they own stock today don't own stock. Their broker lent their shares to a short seller. Most of the people who think they own stock are simply creditors to short sellers. People want to be invested in the market. They do not want to be creditors of short sellers.
A disciplined regulatory structure for shorts would dramatically reduce abuses of short sales, but it would all but eliminate the number of people willing to lend their shares to short sellers.
The question is if a disciplined regulatory regime is tenable.
I contend that it is not.
The first problem is that a large number of hedge funds and investors have taken to investment formulas where 30+ percent of their portfolio is short at any given moment. (NOTE I see this systematic shorting as problematic as it diverts trillions of dollars from investments into paper fluff). Regardless the formulas exists and there is now a massive demand for short positions that outstrip the demand.
Because the demand for short paper outstrips the market, a disciplined shorting regime lends itself to manipulation. The first problem is that the restricted supply of short paper will be gobbled up by hedge funds making it neigh impossible for independent investors to short.
The second problem is that it simply adds one more layer to stocks for manipulation. Since the demand for short stocks would be insatiable, hedge funds will be able to manipulate the price of stock by making short paper available or by removing it at a critical time in the buying process. For example, a hedge fund would make all of their shares in a stock available for shorting preceeding a large buy, then they would clam up after the buy.
Disciplined shorting does not prevent hedge funds from being able to artificially increase the float of a stock. For example, a firm could buy 1M shares of stock in a sector, lend that stock to themselves and short. They could then role the IOUs and the short sales into two separate instruments. The hedge fund could then sell these instruments to their customers. Their customers would think they were invested in the market, but were just invested in fluff.
The disciplined short regime would reduce problems, but at every turn regulators will find market players doing reindeer games to manipulate the market by manipulating shares poised for shorts.
Any attempt to create a disciplined short regime will fall as the rogues of the world recapture the regulatory mechanism that enforces discipline.
Patrick Byrne's Deep Capture project simply seeks strong regulation to assure that shorts borrow stock before they sell. In disciplined shorts, I contend that, to prevent Failure to Delivers, one must also prevent the people who've loaned their stock to short sellers from borrowing until they get their shares back.
I contend that one final element is needed to make a short regime feasible. Brokers and mutual funds must report to investors when shares are shorted.
The vast majority of people who think they own stock today don't own stock. Their broker lent their shares to a short seller. Most of the people who think they own stock are simply creditors to short sellers. People want to be invested in the market. They do not want to be creditors of short sellers.
A disciplined regulatory structure for shorts would dramatically reduce abuses of short sales, but it would all but eliminate the number of people willing to lend their shares to short sellers.
The question is if a disciplined regulatory regime is tenable.
I contend that it is not.
The first problem is that a large number of hedge funds and investors have taken to investment formulas where 30+ percent of their portfolio is short at any given moment. (NOTE I see this systematic shorting as problematic as it diverts trillions of dollars from investments into paper fluff). Regardless the formulas exists and there is now a massive demand for short positions that outstrip the demand.
Because the demand for short paper outstrips the market, a disciplined shorting regime lends itself to manipulation. The first problem is that the restricted supply of short paper will be gobbled up by hedge funds making it neigh impossible for independent investors to short.
The second problem is that it simply adds one more layer to stocks for manipulation. Since the demand for short stocks would be insatiable, hedge funds will be able to manipulate the price of stock by making short paper available or by removing it at a critical time in the buying process. For example, a hedge fund would make all of their shares in a stock available for shorting preceeding a large buy, then they would clam up after the buy.
Disciplined shorting does not prevent hedge funds from being able to artificially increase the float of a stock. For example, a firm could buy 1M shares of stock in a sector, lend that stock to themselves and short. They could then role the IOUs and the short sales into two separate instruments. The hedge fund could then sell these instruments to their customers. Their customers would think they were invested in the market, but were just invested in fluff.
The disciplined short regime would reduce problems, but at every turn regulators will find market players doing reindeer games to manipulate the market by manipulating shares poised for shorts.
Any attempt to create a disciplined short regime will fall as the rogues of the world recapture the regulatory mechanism that enforces discipline.
Thursday, October 09, 2008
Regulators Short on Common Sense
A few weeks back, the Feds placed a temporary freeze on short orders for a select group of financial equities. The short term order expired between the trading session on 10/8 and 10/9/2008. Not surprisingly both days saw massive drops in the market.
The stock market is driven by anticipation. It was apparent to all that the end of the short ban would result in record shorting activity. Before the end of the expiration, people were hesitant to buy and quick to sell. The day after the ban expiration was another massacre. Why would you buy when you knew that shorts were going to artificially inflate the float on the market by several hundred million shares?
The defenders of shorting are pointing to the fact that investors behaved like lemmings in light of the short ban as proof that shorting is good.
My observation is that the lemming cliff dive taken by investors on the last days of the shorting ban shows that attempts to regulate shorting will have unanticipated consequences.
The very fact that several days of trading were dominated by the anticipation and manifestation of the end of the short ban shows that shorting has the affect of diverting attention from the underlying value of securities. Short selling and all the regulations around the activity around the anti-market activity draws attentional away from the actual value of securities and into destructive day trading and power games.
To me the events are further evidence than we can never have a happy middle ground where shorts are regulated. We will either have a market with completely unrestricted shorting where short sellers routinely short multiples of the float of securities, or shorting must be disallowed altogether.
The point I want to drive is that shorts are an artificial creation designed to regulate stocks. Selling something that belongs to someone else is the ultimate violation or property rights. Short selling is a regulatory tool that is antithetical to the free market.
Elimating short selling is not the matter of adding regulations. It is the matter of removing regulations that were designed by elitists who believed that the market was incapable of pricing equities on its own. The design of short selling is based on the premise that elitist brokers had perfect knowledge and that they would altruistically short overpriced stock.
The temerity of this assumption is astounding.
The short sell is the creation of regulations. Like most such regulations, history has shown that shorting have done substantially more harm than good.
Short selling is the creation of regulators.
Short selling is the creation of regulators.
Short selling is the creation of regulators.
Short selling is the creation of regulators.
Short selling is the creation of regulators.
Get the point?
Banning short selling is not a regulation. It is the removal of one of the most idiotic regulations conceived by anti-market regulators. The regulation has done nothing but transfer massive amounts of equity from productive segments of the economy into the hands of traders.
Shorting was designed by regulators as a tool for regulating the market. It exists so that brokerages can increase the float of a the market if they feel an equity is overpriced.
Like most regulations it has failed. The regulatory tool of shorting has proven itself to add to market volatility. Shorting makes it exponentially more difficult to value assets.
We can file the temporary short ban as another fiasco in the long line of fiascos created by this absurd regulator tool--the short sell.
The stock market is driven by anticipation. It was apparent to all that the end of the short ban would result in record shorting activity. Before the end of the expiration, people were hesitant to buy and quick to sell. The day after the ban expiration was another massacre. Why would you buy when you knew that shorts were going to artificially inflate the float on the market by several hundred million shares?
The defenders of shorting are pointing to the fact that investors behaved like lemmings in light of the short ban as proof that shorting is good.
My observation is that the lemming cliff dive taken by investors on the last days of the shorting ban shows that attempts to regulate shorting will have unanticipated consequences.
The very fact that several days of trading were dominated by the anticipation and manifestation of the end of the short ban shows that shorting has the affect of diverting attention from the underlying value of securities. Short selling and all the regulations around the activity around the anti-market activity draws attentional away from the actual value of securities and into destructive day trading and power games.
To me the events are further evidence than we can never have a happy middle ground where shorts are regulated. We will either have a market with completely unrestricted shorting where short sellers routinely short multiples of the float of securities, or shorting must be disallowed altogether.
The point I want to drive is that shorts are an artificial creation designed to regulate stocks. Selling something that belongs to someone else is the ultimate violation or property rights. Short selling is a regulatory tool that is antithetical to the free market.
Elimating short selling is not the matter of adding regulations. It is the matter of removing regulations that were designed by elitists who believed that the market was incapable of pricing equities on its own. The design of short selling is based on the premise that elitist brokers had perfect knowledge and that they would altruistically short overpriced stock.
The temerity of this assumption is astounding.
The short sell is the creation of regulations. Like most such regulations, history has shown that shorting have done substantially more harm than good.
Short selling is the creation of regulators.
Short selling is the creation of regulators.
Short selling is the creation of regulators.
Short selling is the creation of regulators.
Short selling is the creation of regulators.
Get the point?
Banning short selling is not a regulation. It is the removal of one of the most idiotic regulations conceived by anti-market regulators. The regulation has done nothing but transfer massive amounts of equity from productive segments of the economy into the hands of traders.
Shorting was designed by regulators as a tool for regulating the market. It exists so that brokerages can increase the float of a the market if they feel an equity is overpriced.
Like most regulations it has failed. The regulatory tool of shorting has proven itself to add to market volatility. Shorting makes it exponentially more difficult to value assets.
We can file the temporary short ban as another fiasco in the long line of fiascos created by this absurd regulator tool--the short sell.
Tuesday, October 07, 2008
Divorced from Reality
The UN joins the call for greater regulation of the market.
Arrgggghhhhh!!!!!!!
The problem with our financial system is not with the lack of regulation. The problem is that the paper traded on the market is divorced from reality.
The mortgage backed securities don't reflect the value of the housing stock. They reflect loans backed by real estate ... they are a degree removed from the actual item. This degree of separation from reality allowed people to slip bad loans in the systems.
The stock market was brought to its knees by comic book regulations that allow unlimited shorting of stock. The market movers can inflate the number of shares on the market overloading the system with fantom shares. The short interest on the stocks I follow jumped from under 5% to up around 60%.
I suspect that half of the decline in the market this year can be attributed to brokers and hedge funds flooding the market with fake paper.
To fix the system, we need eliminate the regulations that allow insiders to inject fake paper into the system.
Common sense things solve the problem. For example, shorts must actually borrow the stock before they sell it. People who lend to shorts can't sell or vote in corporate elections until the shorter returns the stock.
As the real estate market is local, we need to get the grubby fat hands of the Federal Government and now the United Nations out of loans. Each and every effort made by the federal government to reinsure the mortgage market have failed. So, the feds need to stop that insanity.
The Feds and UN are too distant from the equities traded. Regulations at these high levels simply create a stage for catastrophic economic failure.
When local banks have to bear the risk of the loan, they don't make stupid loans.
It is possible that mortgages were a bad idea in the first place.
We also need new instruments to allow the people in a community to share in the development of equities in their community.
The last thing we need is more regulations. It was the capture of the regulatory regimes that allowed the ne'er-do-wells of the financial world inject their toxic paper into the system.
The market doesn't need more fluff from regulators. The market needs more of the hard fiber that only natural diet lends.
NOTE: On the page Shared Equity, I examine the difference between equity in businesses and equity in real goods and argue that while there may be a place for shorting in the business world, shorting a real estate equity would be poison.
Arrgggghhhhh!!!!!!!
The problem with our financial system is not with the lack of regulation. The problem is that the paper traded on the market is divorced from reality.
The mortgage backed securities don't reflect the value of the housing stock. They reflect loans backed by real estate ... they are a degree removed from the actual item. This degree of separation from reality allowed people to slip bad loans in the systems.
The stock market was brought to its knees by comic book regulations that allow unlimited shorting of stock. The market movers can inflate the number of shares on the market overloading the system with fantom shares. The short interest on the stocks I follow jumped from under 5% to up around 60%.
I suspect that half of the decline in the market this year can be attributed to brokers and hedge funds flooding the market with fake paper.
To fix the system, we need eliminate the regulations that allow insiders to inject fake paper into the system.
Common sense things solve the problem. For example, shorts must actually borrow the stock before they sell it. People who lend to shorts can't sell or vote in corporate elections until the shorter returns the stock.
As the real estate market is local, we need to get the grubby fat hands of the Federal Government and now the United Nations out of loans. Each and every effort made by the federal government to reinsure the mortgage market have failed. So, the feds need to stop that insanity.
The Feds and UN are too distant from the equities traded. Regulations at these high levels simply create a stage for catastrophic economic failure.
When local banks have to bear the risk of the loan, they don't make stupid loans.
It is possible that mortgages were a bad idea in the first place.
We also need new instruments to allow the people in a community to share in the development of equities in their community.
The last thing we need is more regulations. It was the capture of the regulatory regimes that allowed the ne'er-do-wells of the financial world inject their toxic paper into the system.
The market doesn't need more fluff from regulators. The market needs more of the hard fiber that only natural diet lends.
NOTE: On the page Shared Equity, I examine the difference between equity in businesses and equity in real goods and argue that while there may be a place for shorting in the business world, shorting a real estate equity would be poison.
Thursday, October 02, 2008
Short Sighted Totalitarian Thinking
NOTE, I reworked this post on 10/3, putting the conclusion at the top and my opinion of Beyers' analsys below
Yesterday, I read an article by Tim Beyers titled "First, Lets Kill All the Short Sellers. I was disappointed to find out he was being sarcastic.
The debate around short selling tends to be shrill.
I think that a primary reason for the shrillness of the debate is we've grown accustomed to totalitarian thinking. People want to force their ideas on how the system should work on everybody in the market.
People seem to be driven by some sort of illusion that there can be only one set of rules that control all exchanges. Even worse, people feel that the rules come in the form of absolutes.
People speak as if the options are that shorting should be absolutely prohibited, or that it should be absolutely ubiquitous, and done with no restrictions ... not even the restriction that one most borrow the stock, or the restriction that the total shares short must be less than the number of shares in existence.
I really dislike the affects of shorting. As it is possible for short sellers to massively inflate the float of any stock on the market, I no longer feel comfortable having any money invested in firms trading on the major exchanges. I also no longer feel comfortable having money in mutual funds and find money market accounts suspect.
Now, there are people who are absolutely sold on shorting. I simply do not want to trade any of my labor or effort on an exhange where shorting is allowed.
I suspect that many other people share the same opinion.
Rather than my trying to force my world view on the short sellers of the world. I think the better option would be to have multiple exchanges with different rule sets.
Quite frankly, I think our economy would be stronger if we had multiple exchanges. Perhaps banks trading on an exchange that excluded shorting would be more prone to collapse during a bubble. They would be less prone to collapse during market downturns when shorting becomes rampant. Having a mix of exchanges would mean that only one set of banks collapses during a given market crisis.
A truly free and robust market would have a bunch of different things going on concurrently.
I would really like to push for an open source, real time system that excludes short selling. With a second exchange on the market, people who want to trade equities but don't want the equities devalued by short sellers would have a place to go.
In the Equity Project, I argue that the OSRTX.com exchange should preclude shorts. It would do by creating real time stock transfers and by requiring that only the owner of the stock can sell the stock.
I am not arguing the point that my distaste of shorting should be imposed on others. I argue this point from a belief that people who want to share equities in a market where shorting is banned should be allowed to do so.
Having multiple systems with different regulatory regimes is the opposite of short sighted totalitarian thinking that rules the market and discourse about the market these days.
BTW, Tim Beyers article was rather absurd. Mr. Beyers claims that shorting saves us from stock bubbles, and reminds us of all the pain we felt with the burst of the dotcom bubble. I point out that the very fact that the dotcom bubble happened in a regulatory regime that allowed widespread shorting indicates that shorting does not stop bubbles!
My observation was that people who shorted on the upside of the bubble were all squeezed. My one and only attempt at short selling happened on the upside of the dotcom bubble and it was a dreadful fright. The company I shorted at $50 a share jumped to $74 a share! I ended up covering at a loss. Needless to say, my assessment of the company was correct. The stock fell to $3.00 a share within months of my covering the short.
The claims of the short sellers works only if the short seller is altruistic and has perfect knowledge.
People shorting on the upside of the bubble were squeezed. The squeeze added artificial pressure to the absurdly high prices.
The major shorting that happened during the dotcom bubble happened on the downside of the bubble. This leads to the argument that short selling simply magnified the hurt of dotbust. If my observation is true (people shorting on the upside got squeezed, while short positions increae on the downside), then shorting simply adds to market instability.
In the 2008 crisis, shorters added to their position with each down tick in the market. If the short sellers had started buying back big time a month ago and saved us from the bank failures and government bailout, then I would be standing on the highest tower exalting the benevolence of the short seller.
It appears that shorts are not altruistic and have the same irrationally exhuberant mantality as the herd of longs. They keep increasing their position until crisis occurs.
Now, when a long bubble pops, the long investors are the hardest hit. When a short bubble pops, the economy at large suffers.
Tuesday, September 30, 2008
Submitting The Entry
I started writing up my proposal for the Open Source Real Time eXchange on the site y-intercept.com. I have to take Coco for a walk. I will spend the night adding articles to the proposal.
The important news is that I just submitted my entry for the proposol on the DeepCapture Crack the Cover-Up essay contest. My entry is under the name "yintercept" it starts with the words: "Competition drives the free market."
If you like the idea; Vote for It!
BTW, you might notice that I've written several essays with links to Deep Capture. I wrote the posts and made the links because I believe DeepCapture is saying something important.
I did not know about the essay contest until yesterday. I wrote this post and my last post (Open Source Real Time eXchange) because I want to win the competition.
If you like the idea of a new open source stock exchange. Go to this page, find my entry and vote for me!
The important news is that I just submitted my entry for the proposol on the DeepCapture Crack the Cover-Up essay contest. My entry is under the name "yintercept" it starts with the words: "Competition drives the free market."
If you like the idea; Vote for It!
BTW, you might notice that I've written several essays with links to Deep Capture. I wrote the posts and made the links because I believe DeepCapture is saying something important.
I did not know about the essay contest until yesterday. I wrote this post and my last post (Open Source Real Time eXchange) because I want to win the competition.
If you like the idea of a new open source stock exchange. Go to this page, find my entry and vote for me!
Open Source Real Time eXchange
In recent posts, I've been ranting about abuses in the Stock Market.
Truth be told. I prefer doing to ranting.
IMHO, the problems in the current market result from gaps in the securities traded and the real items that the securities represent.
A driving force in the 2008 market collapse was the fear that bundles of mortgage backed securities were rife with bad loans. The market froze and banks collapsed as people lost confidence in the value of the securities.
Gaps in the trading system made things worse. As people lost confidence in securities, Hedge Funds hit the market with an unprecedent barrage of short selling. In the current regulatory regime, there is a multiday gap between a trade and transfer of the stock. During the market crash, there was an increase in the failures to deliver stock purchased.
It appears that these Failures to Delivered artificially accelerated the crash.
The crash was caused by investment tools that do not accurately reflect the real items behind paper securities. IMHO, the solution is to create a new exchange with fewer gaps.
Anyway, I just registered the domain name OSRTX.com. The acronym stands for Open Source Real Time eXchange.
Unfortunately, a blog is not the right format for writing a proposal. As such, I will place the proposal on the page called The Shared Equity project.
Truth be told. I prefer doing to ranting.
IMHO, the problems in the current market result from gaps in the securities traded and the real items that the securities represent.
A driving force in the 2008 market collapse was the fear that bundles of mortgage backed securities were rife with bad loans. The market froze and banks collapsed as people lost confidence in the value of the securities.
Gaps in the trading system made things worse. As people lost confidence in securities, Hedge Funds hit the market with an unprecedent barrage of short selling. In the current regulatory regime, there is a multiday gap between a trade and transfer of the stock. During the market crash, there was an increase in the failures to deliver stock purchased.
It appears that these Failures to Delivered artificially accelerated the crash.
The crash was caused by investment tools that do not accurately reflect the real items behind paper securities. IMHO, the solution is to create a new exchange with fewer gaps.
Anyway, I just registered the domain name OSRTX.com. The acronym stands for Open Source Real Time eXchange.
Unfortunately, a blog is not the right format for writing a proposal. As such, I will place the proposal on the page called The Shared Equity project.
Monday, September 29, 2008
Market Hyperactivity
Apparently one of the prime reasons that the market started allowing short selling of stock some 300 hundred years ago was "market efficiency."
Traders used to have to send messages afoot or on horse to arrange a sale. As riding horses for long distances gets old after awhile, people were open to tools that would make trading more efficient. Shorting a stock allows gentlemen traders to make a deal, then send a rider to get the stock later to clear the transaction. Combining carriage rides is efficient.
Today's communication technology obliviates most of the concern with market efficiency. If anything, today's market is suffering from hyperactivity. The trades take place faster than real information.
I am looking at Yahoo Charts. The chart currently indicates that over 100 million shares DJIA stock traded during September 29th sell off.
The cause for this sell off is that people don't know how to price mortgage backed securities. Consequently, they don't know how to price any stock that might have a dependency on such securities. To add more unknowns, they don't know the form of the bailout.
Trillions of dollars traded hands based on lack of knowledge, and herd movement.
We are in an age of trading hyperactivity. Artificial tools like the short sell, which were designed in a day when horses were common on Wall Street, just add to the turmoil.
Traders used to have to send messages afoot or on horse to arrange a sale. As riding horses for long distances gets old after awhile, people were open to tools that would make trading more efficient. Shorting a stock allows gentlemen traders to make a deal, then send a rider to get the stock later to clear the transaction. Combining carriage rides is efficient.
Today's communication technology obliviates most of the concern with market efficiency. If anything, today's market is suffering from hyperactivity. The trades take place faster than real information.
I am looking at Yahoo Charts. The chart currently indicates that over 100 million shares DJIA stock traded during September 29th sell off.
The cause for this sell off is that people don't know how to price mortgage backed securities. Consequently, they don't know how to price any stock that might have a dependency on such securities. To add more unknowns, they don't know the form of the bailout.
Trillions of dollars traded hands based on lack of knowledge, and herd movement.
We are in an age of trading hyperactivity. Artificial tools like the short sell, which were designed in a day when horses were common on Wall Street, just add to the turmoil.
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