The following is an extract from this weeks rant, I thought I might share it as an alternative to the mainstream applause the changes seem to be attracting.
The amount of damage the regulators are currently doing to the freemarket in my opinion is unprecedented. The amount they will cost regular traders is significant.
Voice your objection to the regulators.
What an amazing week, and one that has triggered huge volatilty , applause and anger in one hit. Yes I’m referring to the international steps to ban or restrict short selling, in particular naked short selling. Now before I continue, let me ask a question. Do you think financial markets have a harmonic balance regardless of intervention? What I mean by this is, do you feel that a stock will ultimately find its true value in the market place? My personal answer to that question is yes, the reasoning behind my answer is simply that I feel oversold will always be bought, overbought will always be sold. Somewhere in the middle is the natural true value. Lets look at the financial sector, many of the events surrounding short selling have resulted from the financial sector, particularly the US mortgage sector. Yes they have been punished by the market, and yes they have attracted significant short selling all the way down. But if we go back two weeks to a previous rant which contained the charts of Fannie Mae and Freddie Mac, the charts have demonstrated long term weakness for a significant length of time, as early as 2004. The charts have also reacted to the short selling that occurred across the highs. While the short data isn’t displayed within the chart, the reaction to the short selling, and selling of the physical, is clearly displayed. None of the financial stocks that were sold were with the intention of manipulation, they were sold because the smart money anticipated long term events. The stocks that were subject to significant short selling were eventually exposed for mismanagement and financial distress. The actions of those sellers years ago, which have directly lead to the current actions of financial regulators, were correct. To be completely blunt, the stocks were smashed because that’s exactly what they deserved, absolutely no less. If any stock, regardless of whether it’s a bank or a company that manufactures a clothing line for gerballs, if they lose money they deserve to be punished by the market. So why have the SEC placed blame on the market decline at the short sellers? To make things worse, the US Feds have now announced a 700 billion rescue plan “to prevent financial meltdown”. In another breath the SEC state "The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,". So what is manipulation? Is it the short sellers that expose undisclosed weakness in a company, or is it the artificial support by regulators controlling our actions?
Make no mistake, there is manipulation, no doubt it does partly come from the short side, as it also does the long side. However the manipulation of those participants within the market, becomes insignificant when compared to the massive manipulation and control of the regulators. The SEC, through it’s actions, contributed nearly 1000 points to the Dow Jones in just two days, yet the companies are still in trouble, they’re still going broke and they’re still causing misery. So what’s artificial, the sellers that expose weakness, or the regulators that provide artificial support?
This is a very dangerous road, what is unfolding now has the potential to evolve to the extent that countless participants will be restricted in carrying on their normal trading activities.
There is one positive which has come from the changes, which is the issue of disclosure. This is one area I agree entirely with, in fact I think they could easily expand on current plans. Transparency in the markets has no disadvantages as far as I’m concerned, in Australia you may remember the push to have full level depth displaying broker transactions made available to the public. Ironically the greatest opposition to this was from the regulators that are now jumping up and down saying we need full disclosure. But in their infinite wisdom (or lack of) rather than make the markets more transparent, they decided to restrict the information available to brokers, full broker transactions are now only available after T3. Perhaps it’s time to revisit the topic of full disclosure.
CFD’s are another concern, using FMG as an example, there are currently 2.8 billion ordinary shares issued in FMG, in the CFD market, according to one source, there were also over a billion CFD’s created for this market. While these were artificial, we know CFD’s cover their positions through the physical market. THEY DO EFFECT THE PHYSICAL MARKET and as such we have a right to know how and what impact their positions will have.
