Friday, September 19, 2008

No Shorts

As in selling short, the process of selling borrowed stock with the hope that they will be able to buy them again at a lower price, thus making a profit on the downtick of the market rather then the up. But, a new rule went into effect in London that just says, "you can't do that." From the FT:
the ban, which was announced by the Financial Services Authority in a surprise move Thursday night which starts next Tuesday, will prevent investors from creating or adding to short positions in banks, insurers and other financial companies. Short-sellers – particularly hedge funds – who profit from falling prices have been blamed for the plunging shares of HBOS and other banks.

The new rules prompted UK bank shares traded in New York to soar, with most jumping more than 10 per cent within minutes of the announcement and Barclays rising more than 20 per cent. Traders said the ban was likely to cause a relief rally in financial shares on Friday, which coincides with a so-called “triple witching hour” when large numbers of options expire.
This explains what happened yesterday, and will likely continue on today with the SEC jumping on board with their own temporary ban 10 day ban on 799 stocks. But to me this seems like an unrealistic temporary bubble that is caused entirely by short-sellers (and there are a lot of them) having to dump all their money out of their short sells in 10 days, and moving them into stocks. Of course the price of stocks is going to sky rocket! But what happens after that? It does buy some time for things to get worked out as far as the nationalization of the investment banking/insurance/monetary system (pause to gather your boggled mind) by central banks and world governments, but then once things go back to normal all that is going to shift back to who knows what.

Over at the Oil Drum which I read regularly, Nate Hagens has a very very pessimistic view of this and explains everything in detailed terms.

EDIT: Madness. Russian markets up 28% now. They halted trading even. 

UPDATE: London, and most of europe, makes the biggest 1 day gain ever. That is as if the Dow goes up 1,000 pts, which it could. But when things are so unstable, for markets to be going up this sharply still strikes me as very unsettling. 

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