The past week was a tumultuous one in the Global Financial Markets. Financial Tsunami must have been the most used word this week. One after the other, the so-called icons of Wall Street started collapsing like nine pins. First, it was Bear Stearns followed by Freddie Mac, Fanny Mae, Lehmann Brothers, Merrill Lynch and then AIG. For once, the Americans were caught with their pants down.
Everybody, from the person on the street to office colleagues, friends etc were totally engrossed with the events that took place in the USA. I was also following the developments closely on TV. The happenings at Wall Street was being telecast by the minute. The day before the FED came out with a bail out package, the stocks of some of the financial companies were getting thrashed down by the Short Sellers. As a panic reaction, the SEC banned Naked Short Selling. This took the wind out of the sails of the short sellers and they were forced to cover up. The Short Sellers, as a tribe are one with a view quite opposite to the one held by the majority of the investors. I get fascinated by the way Shankar Sharma, considered to be one of India's leading Bears, comes out with his opinion during such demoralising times. He just goes on and on about all that is bad about the markets and this just sends shivers down one's spine. If anybody gets a chance to hear him, please listen to him, it is amazing.
In these times of utter dispair, one famous quote by John Templeton, which was shown on one News channel should act as a soothing balm to all troubled minds. It goes like this
" Bull Markets are born in utter dispair
They rise with skepticism
They mature with optimism
Then end in mania".
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“Short-sellers have been the historical scapegoats for weak markets and that trend continues” - Michael Panzner.
Short selling as a mechanism first started way back in the year 1602. Vivid memories are still fresh in our minds on what happened to "Bank of England" when in 1992 George Soros sold shares worth 10 Billion GBP on a single day.
Why short sellers are considered a necessity
- Prevent runaway enthusiasm.
- Help price discovery
Looking at some of the the recent examples where short sellers were blamed for the pounding that the shares took
- Citigroup
- Lehman
- AIG
- Bear Sterns
How does the list look like? Is it because of the short sellers or it is because of the business practice that the companies were following?
I leave the judgment to the reader. No companies can be taken down 50%-90% just because of short sellers. If one does not have the stomach to take the capitulation then we blame it on the short sellers.
Now the same is being said about the prices of commodities, especially oil.
Assuming that short sellers were responsible for taking prices down let us look at the recent example where 799 shares were put on "no short selling" list, did it help the shares prices? No. Of the 4 companies listed above, 3 disappeared from the face of the earth while the 4th is struggling to stay alive (Citi).
Short sellers are essential players in a true financial market, or you might consider them an "essential evil".
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