July 16, 2008 10:27AM
You’re So Short
By Cheryl Casone
If you have been anywhere near the gang on the street lately, all anyone talks about it is shorting stocks: shorting Lehman, Wachovia, and the financials are popular moves right now, while shorting oil and commodities as well. It’s become one big gambling machine.
Of course, if you are a “trader” and not an investor than sure, this is your language. But, I worry that short term trading is becoming a long term negative for the rest of us. Did you read the Vanity Fair article about the collapse of Bear Stearns? Here’s the link:
http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808
I won’t comment on the role the competition may or may not have played in the Bear story, but the depth of the article and the background on the collapse of the investment bank is worth the read.
Goldman Sachs is being questioned on the Bear collapse, and the SEC is proposing new rules (which are actually old rules they are choosing to enforce) in the wake of the Bear debacle. Is shorting a stock wrong? No, I don’t think it is. Is selling the same position several times over a moral hazard? Perhaps it is. I’ll let the lawyers figure this out, but I feel like the market has gotten layers away from the basis of what investing is supposed to be. Finding good quality companies, and investing in their potential and future returns. Certainly trading a derivative or a short or long position several times, creating a multi-layered instrument that is nothing more than a handshake by computer that does not equal true ownership is taking things too far. What do you guys think?
Comment by fjfar80
Jul 16th, 2008 at 11:49 am
I think the entire derivatives universe has taken a large step away from the original intention. The modern derivative market was created (in the market sense) in 1848 with the Chicago Board of Trade and it was initially used by farmers to mitigate their risks. Modern equity based derivatives didn’t really enter the scene until the 70’s and again they were primarily used to mitigate risk. Today, I think derivatives have taken on a life of their own and rather than being used as instruments to mitigate risk of an associated investment; speculators are using derivatives as an income tool without any associated investment. Thus, I think they have seriously been abused and the equity markets were never intended to have such a large undercurrent of derivatives, since the equity markets were created to provide funding for companies. Think about it…markets were intended as a place for companies to obtain funding and of course for investors to buy a stake in those companies. Today, the markets have almost become a gambler’s paradise…where you can bet on stocks dropping and/or gaining a few points here and there. I have to give the markets credit for dealing with derivatives, but perhaps we have reached a point where some changes need to be made.
Comment by chuck
Jul 16th, 2008 at 12:11 pm
Cheryl I enjoyed u and Liz Mcdonald last night on the Factor. I was please to hear that you express the economic fundamentals are sound. By the way I’ve already Liz’s advice on saving. I’ve been savor for a long time. I would love to debate u on a show. No kidding. Next u should do Happy Hour.
Seriously what would be some cool companies to invest into with market being volitile. I bet the stock market stresses u out from time to time? Becouse of its violent swings on the pendulum. I would go crazy if I was investment banker in this market. Worse I would be worry if I had to lay some employees off. But I enjoy being the observer on the sideline and I have learned a lot about business and how it works. But the market is more interesting than the presidental election. Real question when will the market get its groove back? I don’t know but I’m in it for haul–I’ve been in the market now for ten years and I learn not to worry about things becouse the market sorts itself out.
Comment by Jonathan
Jul 16th, 2008 at 1:05 pm
Hey Cheryl. You make several good points. As someone who has sold short on stock at different times in the past, i see nothing wrong with it. As long as it is done legally, i think that the market as a whole does benefit from shorting. Short sellers are often times the subject of controversy during bear markets, and rarely talked about when things are well. Yes, the big players on Wall Street do engage in “naked” shorting, as well as shorting with big money through very complex and expensive derivative trades. They have both the connections and the money. No doubt they pump the market, and what they say and do goes. However, i think that most short sellers are traders who trade for their own gains, and do not have the money or abilities to engage in any large scale type of market pumping. Most just try to make it through the markets. There has been a large increase in shorting recently, legally and otherwise, and i hope that people will take time to understand the what short selling is before they make fast judgements on the “moral” effects. Great article, and very timely. Thanks Cheryl!
Comment by Justin
Jul 16th, 2008 at 4:15 pm
The shorts are about to get hammered. You’ve got to be a contrarian in these situations. When everyone is in on the short action, it’s time to move on. We’re going to see a rally here over the next few weeks. Banks are going to cheat on their earnings and write downs, sparking major buying in oversold financials and a general turn around in the broader market. The Dow will rally to 11,800 or maybe even higher, much like the rally that followed the bear stearns bail out. Commodities will see a correction and provide a great opportunity to buy. It will be time to short financials again when they are up 15%-20% off their lows. Everyone will think they’ve hit a bottom and will jump in. Then the next round of bad news will hit, and the shorts will ride them suckers down much lower than where they are at now.
Remember people, we are investors in it for the long haul. Don’t sell your commodities short. They will come back and the bull market will continue to rage on well into the next 5-8 year period. This is where to make your money. Stocks are a losing bet. Look at the fundamentals people. There is a genuine commodities shortage right now globally. Booming demand plus weak supply from decades of underinvestment spells bull market. Factor in a weakening dollar with no bottom in sight, and commodities will protect your wealth from the tax of inflation.
Comment by Rick
Jul 16th, 2008 at 11:05 pm
Hi Cheryl, although this doesn’t directly relate to your “short” post, I didn’t know how else to contact you with this compliment. I saw you last night on O’Reilly Factor and you were BRILLIANT! A great deal of this IS fear driven, people ‘feel’ like we are in a recession, yet there is no data reflecting anything close to an official recession. Yes, the economy is much slower (how could it grow much further than it did?), but it has been so easy for the press to sensationalize today’s situation. (Ex.: Instead of reporting that the # of foreclosures in a particular area went from 10 to 20, they’ll state that it was “AN INCREASE OF 100%!!”)
And you are so, so correct: this is a great time to get into the stock market. The greatest companies are now on sale by about 20% in price, which doesn’t happen very often. It just doesn’t happen very often. And now is the time to accelerate any type of long-term savings program or buying pattern if you are a long-term investor. You must have faith that everything will be OK. We’ve figured so many things out in the past, this is NOT the end of the world, we know that communism failed, that Japan Inc. didn’t take over America, that the nuclear winter didn’t happen, that the S&L crisis didnn’t sink us permanently. Faith. Faith in the future. Without faith, you can’t be a long-term investor. You must beat that fear feeling into the ground with your faith hammer. Market declines might not be fun, but they are TEMPORARY. They’ve always been temporary. Economic slowdowns are TEMPORARY.
You are so spot on, Cheryl. I’ve been in the business for a while, and your words ring true with me. If you ever, ever, need additional story ideas or input for your next appearance, I am very happy to pass anything along to you.
You are welcome back in Dallas anytime! -R.S. http://www.salmeronfinancial.com
Comment by Get Shorty
Jul 16th, 2008 at 11:53 pm
Short People got no reason
Short People got no reason
Short People got no reason
To live
They got little hands
And little eyes
And they walk around
Tellin’ great big lies
They got little noses
And tiny little teeth
They wear platform shoes
On their nasty little feet
Well, I don’t want no Short People
Don’t want no Short People
Don’t want no Short People
Round here
Comment by chuck
Jul 17th, 2008 at 10:32 am
I’m looking forward to reading that VF story on Bear Stearns. When it comes to business coverage Vanity Fair has the best journalist on the business beat.
As for Goldman Sachs what tickles me about Sachs is thier wild predictions on the barrel oil prices. Like thier predictionsn on $200 a barrel never came to fruition. If you work for Goldman I wonder if predictions like this make one foolish? But with the Sec cracking down on rumors on the Street then maybe employees for Sachs will like to keep thier mouth shut. Becouse rumor has power on the street. Anyway this summer’s volitile market I believe is far from over. I believe investors are wondering when the bottom of the real estate bubble is going to come. Which seems to takes forever. I’m waiting to see the dollar gets its own groove back and bounce back. Honestly the best advice I would give? ride this market out. Don’t worry about it market forces will sort things out not politicians.
Comment by Moe
Jul 17th, 2008 at 2:07 pm
Wait a minute. A few thoughts here:
Saying that participating in derivatives contracts “does not equal true ownership” is just plain inaccurate. Your ownership is the derivative, silly. If you wanted to own the actual underlying, you would do that. And implying that this practice is somehow scurrilous is truly funny. And ignorant. Are derivatives (and indeed, derivatives upon derivatives) widely misunderstood and probably overused? Yes. Could they be integral in fueling a massive collapse? Yes.
I had to chuckle at the post that commented that the market didn’t “intend” to have such a large concentration with derivatives. Change doesn’t “intend” anything. Behavior doesn’t follow an intention, either. Market’s aren’t sentient, suddenly realizing that too many puts or CDS have been traded. Forgive me, but let’s all go rent “Jurassic Park” again for an object lesson a 13 year old can follow. Try not to unreasonably personify something like a market.
Secondly, oh Newshounds, things in the market that the average Joe doesn’t understand are NOT sinister. Unwise, incredibly complex, not useful, or whatever else they may be, they’re not evil or bent on world destruction. And the term “speculator” has been thrown around with the same gusto as “inside trade.” It’s all sounds so racy, doesn’t it?! I understand you have to run a story, but realize that you’re ginning up lots of fear, based on anything but lots of facts.
Comment by charles
Jul 18th, 2008 at 8:46 am
Cheryl you have a pair of the best legs on television. When I stumbled across you while flipping the channels I immediately put the show on DVR to record. To see those gorgeous legs on that stool is quite refreshing.
Comment by Kyle Brown
Jul 21st, 2008 at 5:53 pm
What the shorts did to XM/Sirius Radio is worse.
http://www.orbitcast.com/archives/analyst-predicts-larger-losses-for-sirius-xm-shares-tumble.html
Whats funny 3 days before that press release FCC head Kevin Martin, was going to vote Yes on the merger, then the stocks dived to what they said about them now XM/Sirius are both back to where they started