The actions of the SEC of banning short selling and forcing short sellers to publicly report their short positions are a disaster waiting to happen. The new rules will cause liquidity in the stock market to fall even more than it already has and will result in uncertainty at a time when we desperately need both.
Imagine you are a hedge fund manager or any large money manager and part of your investment strategy is to hedge to reduce risk. By banning short selling and more importantly forcing you to report your positions, you will effectively reduce your short selling or eliminate it, which apparently is the goal of the Treasury and the government.
But go back and imagine you are that hedge fund manager, and you cannot hedge. What do you do?
I think you have two options:
1) You reduce your long positions to reduce risk and exposure to the market
2) You buy commodities as a hedge
Or you do both. There is ABSOLUTELY NO WAY, you just keep your long positions and take on more risk. And further, you cannot report your short positions because people will try to squeeze you and even if that didn’t bother you, companies would see who was short them and they would freeze you out and not talk to you.
So, this guarantees less short selling, which will actually lead to less buying of stocks and more buying of commodities.
And by arbitrarily changing the rules with little or no warning for political reasons, this unsettles the market and causes more uncertainty.
So in one single stroke, the government has set up a situation of a loss of liquidity and a loss of confidence exactly when we need it most. So, I hope you enjoyed the big rally on Thursday and Friday. We got a nice two-day feel good short squeeze and then Monday’s back to reality lesson.
Who else has banned short selling and how did it work for them?
The last government to ban short selling before us was Pakistan. They banned short selling on June 23rd. The Karachi stock rallied 1,300 points in three days. What is the end result today? The Karachi stock market is down 26% in less than three months. That would bring the Dow below 8000, if we ended up with the same result.
And this is to say nothing about the awful $700 billion mortgage fund…
Say goodbye to the dollar rally and hello to even more dramatic swings in the markets, courtesy of the U.S. Government. Thanks for making the crisis even worse!