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Those Short Sellers Are Ruining Everything!

13 March 2009 2 Comments

There has been lots of talk regarding short selling and just how much it has contributed to the huge declines in some stocks, specifically the bank stocks like Citi and Bank of America.  Jim Cramer has been very vocal about the destruction caused by ultra short ETFs as well.

Earlier this week, there was talk about re-implementing the uptick rule which states that in order to short a stock it must occur after a move up in the price of the stock.  Many believe that this was at least one of the factors in helping the market rally this week.

The problem with this entire argument is that the only reason the bank stocks and other similar performing stocks are down so much is because of short sellers.  Fundamentals have no bearing on these stocks?  Also, the argument makes it seem that these stocks were driven down by short selling in a straight line, meaning buyers did not have any opportunities to buy these stocks.  The reality is that even though the stocks were slaughtered, the huge down days were mixed with also large up days.  There were days when these stocks were up 10% in the middle of their down trend.  What happened to the short sellers on those days?  They were killed.

The bottom line is that in the short term, trading can defintiely have an impact on stocks.  Over the long term though, these stocks will always move towards a fair valuation.  If you believe Citi is a great company to be owned, then you should be happy that short sellers have driven its stock so low, because then you can buy it even cheaper!

Instead this is just another example of everyone blaming someone else for their own issues.  If bank stocks are getting killed, it has nothing to do with the enormous losses they are taking, it must be the short sellers!  If my home is worth half of what it was two years ago, then it isn’t my fault, it’s the bank’s fault for giving me the loan!

They can implement the uptick rule.  It makes no difference.  Crappy companies will continue to get slaughtered.  Huge funds liquidating their shares has the same impact as someone shorting the stock.  Also, remember when the SEC banned shorting the financial stocks last October?  Yeah, that did a lot of good.

As always, the free market is the only unbiased opinion out there.  Barney Frank, Jim Cramer, President Obama all have agendas.  You want to cut through the crap?  Look to the free market for truth.

2 Comments »

  • philip said:

    I agree that in this case the short sellers are part of how the market works and to stop it would mess up what the market wants and needs to do. However, what about some of the speculative pricing that forced oil up to over $140 a barrel, do you think that was all free market actions? What could we have done or not done to prevent that wild swing that was not logical?

  • Chris said:

    It is not black and white, the crappy performance of companies put a target on their back inviting short sellers which drove the price down by shorting more shares that are even in existence that brought more fear onto those companies resulting in even crappier performance.

    It is a self fulfilling prophesy. Who would do insurance with AIG? Or open a new account with CITI right now? The damage may have been controlled if we had the rules we had in for 60 years.