shorting issue..., page-4

Thanks for the vote of confidence!

In her article mid Feb, Elizabeth Knight scribed some insightful comments on short selling. This came about when the ASX announced what they thought was a good profit result only to see their share price annihilated by short selling. I'm not a big fan of the SMH or Fairfax publications generally but she raises some good points.

Article is here: http://business.smh.com.au/asx-feeling-naked-flame/20080214-1sbt.html

From a high level perspective, I am in favour of short selling (sorry folks) and believe it should be available on at least the ASX200 shares - which for the time being includes CNP and CER. The current rules restrict short selling to no more than 10% of the outstanding shares and in the event of a takeover, no short selling is permitted.

At the very least there are some technical reasons shorting should be allowed, for instance to hedge derivatives, etc. but aside from this, the share market exists to allocate capital to companies who can best utilise it. It's a process known as 'creative destruction' where strong companies are rewarded and weak companies punished or destroyed. As unpopular as this may be, short selling speeds up the destruction process. Right or wrong, welcome to capitalism.

I do believe though that there are issues around regulation. We need a completely transparent market with accurate reporting of EXACTLY what has been shorted. This is not currently taking place and in my opinion, this responsibility should be removed from the ASX and entrusted in an independent organization – either newly created or existing. The ASX is a company which makes revenue from volume and thus has a conflict when it comes to regulation of activities than generate more activity. I hope the government will resolve this issue quickly.

I also think, like most others, that if it can be proven that individuals or organizations have deceptively circumvented the short-selling rules, they should be punished. I remain skeptical as to whether this will take place though.

There is also the issue of margin calls. It seems like the situation we have seen in the last few months has been exacerbated by excessive short-selling triggering further selling from margin lenders and a spiral downwards. I wish the regulators luck on this.

When we were in a bull market, nobody really seemed too worried about short selling because we were all making money. Now the tide has turned and many, many people have lost a lot of money. The issue here really is that people are looking to blame someone for their losses, a lot of which have come about because of their lack of knowledge, excessive leverage or high risk appetite. For those of you outraged by this assertion, please think it through and you will probably find, like me, that you fit into one or more of these categories.

I have made and lost a ton on AFG and I’m sitting on an unrealized loss on CNP but I knew what I was doing and I knew the risks involved. If I wanted a 7% return on capital and a boring life, I would have stuck the cash in an ING account. In hindsight, I wish I had, but I have no one to blame for my losses but myself. I could join a class action against Coe & Co. or Andrew Scott or blame the Hedge Funds but at the end of the day, it comes with the territory.

That’s just my 2c worth. Hope it helps.