Shorting the Stock Market
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During the current phase of the credit crunch the leading banks like Barclays have been raising finance through rights issues. Whilst this is continuing to go on it is perhaps instructive to talk through the merits of short selling. For all of the fireworks over the last six months who have been the ones proved to be:
- correct, and
- truthful
Firstly, most of the Banks categorically denied they would need to raise capital. Secondly it then looked like they deliberately mislead on the size of the cash call required before finally stabbing their long suffering shareholders in the back with the ultimate climb-down. Looking at my colleagues, other financial journalists were suggesting that RBS would need no money, then around £5bn and then finally £12bn. One assumes they were being briefed by somebody.
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The short sellers held their nerve through it all and given all the comments from the various Bank Boards at the time it would have seemed that they were wrong. If they had been wrong and were forced to cover a short position in a fast rising market that would have proved to be a very expensive mistake indeed. Even now, after the last of the big Banks has had a drink most of the stocks are still down near the lows.
Genuine long-term investors should have no fear over short selling as they are supposed to be in the game for an extended term and are buying on yield, prospects, growth etc. Why worry if investors are spread betting on a market to go down? The fact that the stock has fallen only means that they could have bought at a better price not that their long term analysis was wrong. If the real value of banking stock is at the current levels then we would have got here anyway, in the long run, without the Shorters getting involved. If banking stock is truly very cheap at the moment why are the big investors not piling in forcing the price skywards? I believe that this is a good place to be getting involved for the long term but it may be a hard road with some serious bumps on the way.
Please do not misunderstand me, whilst I am not always the biggest fan of those who defend the spread betting companies, they are not to blame. Also, this is no defence of market manipulation, the law is just as clear on Short selling as it is on Insider buying. Deliberately manipulating the market is illegal and should be punished. Unfortunately, for the past six months the rumours have proved to be true but who will punish those who denied them?
"Shorting the Stock Market" written by RThomas, last updated 25-Aug-2008
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