9/20/2008

Massa, Love Dem Shorts

The always trustworthy Atlantic (ho ho that's rich) is running an article by one Meagan McArdle that defends to the death (sort of) the practice of shorting as somehow good for markets and as a noble tool for "hedging" an investment. I comment on this piece only because Reynolds has referred his readers to it as if McArdle is some sort of oracle.

Been at this game for about 25 years as both broker and manager and let me fess up to you Meagan: I shorted for clients without the stock to back it up at least a thousand times and naked shorting has been illegal for at least twenty years. I was able to do this because I had a great reputation on the floor as being "good for it" so I never had to show anyone the goods. I always knew this was a part of organized efforts to bust a stock, sometimes a perfectly good company stock. What you don't seem to understand is that massive shorts are almost always "covered" by buy stops and/or similar positions on other stock on other exchanges. Writing puts with a stop is also done. The real true short risks next to nothing...unless the stock is thinly traded (too few shares outstandidng) and I've never seen any big spec ever play a stock or commodity like that. Shorts have been a speculation vehicle for at least twenty years but rationalized (falsely) as a hedge. Hell, if you want to hedge there are a hundred ways you can do it without going short, but rarely does an investor go short, he just bails out and lives to buy another day. Bear Raids, in which large groups of short sellers with massive capital, get together by phone and plot to short a stock to near zero for no reason other than that they can. Soros? The pig of all time. He single handedly broke several South East Asian countries until big bad China stopped him cold when he tried that stunt there. Massive shorting needs to be controlled by position limits, period. Don't like it? Try your shit in real estate or freight forwarding futures.

Now to be completely honest: there is a place in the markets for honest shorting, taking an opposite position to a build in a certain stock that you believe is shit. The problem is the massive organized shorting. This was also claimed to be a problem in the crash of '29 but all the academics and analyists failed to find that shorting was a cause, and in fact came to the conclusion that banning shorting would wreck markets.

2 comments:

Charles Pergiel said...

Hoo, boy! You said a mouthful there, bubba. I understand most of it, but some of the jargon escapes me: '"covered" by buy stops'?

How would position limits help? Couldn't you just get more co-conspirators?

Do you have any more information about George Soros activities in SE Asia?

Howard said...

Covered means an opposite position either above or below your speculative position....long 100 S&P futures at 105 might be "covered" by 100 sells at 102. You can do this with stocks or futures.....lots of guys cover on a different exchange in order to mask the trades.

Position limits only help quash an individual trader on a single exchange. You are right.

You can Google Soros.