The thing about useful stuff is

When share prices fall, it's not always short selling Thursday, January 22, 2009

The dramatic falls in UK banking share prices in recent days have prompted people to immediately conclude it is directly related to the FSA's removal of the short selling ban on UK bank shares. The Chairman of the Treasury Select Committee has already contacted the FSA in this regard and prompted the Chair of the FSA to comment in a radio interview this morning that the ban could be re-introduced at any time and without warning, albeit conceding that there was no evidence that short selling was the cause.

The Short Stories blog, which monitors stock borrowing and short interest in stocks, highlights the relatively trivial levels of shorting that appears to be going on.

Clearly the timing suggests some causality between the declines and shorting but one other culprit exist - the Government recapitalisation and insurance plans revealed to the markets on Monday. That such action appears necessary has prompted increased jitters, with the consequence that existing investors appear to be dumping their stock in fear of what lies ahead. So perhaps those levelling criticism and anger should be actually focussing their comments on existing shareholders who are voting with their feet and heading for the exit.

Labels: banks, Short selling

posted by John Wilson @ 11:28 AM Permanent Link ,

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25 year old home owner found guilty of leverage Thursday, September 25, 2008

The media coverage of the financial crisis has introduced the public to bits of City jargon, commonly with a derogatory slant e.g. "short sellers" being bad and "leverage" being a dodgy scheme that caused banks to collapse.

Oddly, most home owners are as "guilty" of being heavily leveraged via the mortages. They have typically used a small deposit for a home and borrowed the rest, with the sum borrowed linked to their apparent ability to repay and their home pledged as security for the loan.

Speculation on the residential property market has been widespread, and for many years it has been seen as and genuinely been a one-way bet. Thanks to low interest rates and easy terms, people have been able to borrow ever greater sums thus giving them more purchasing power [in absolute terms] which has inflated the market. Large profits have been made by property buyers for relatively small financial investments of personal equity, the rest being borrowed on leverage of 9x or more.

Unfortunately, as interest rates have gone up so repayments have become a greater burden to householders; as property prices have fallen so the value of ther security has dropped. In such a climate, the impact is dramatic for individuals. In some cases, it will result in the home being repossessed and the home owner's personal equity in a property being wiped out, coupled with supplementary claims from the lenders for shortfalls on the security provided which failed to cover the loan.

Whilst on a massively greater scale and with far greater implications for the economy, the many leverage similarities between banks and individual homeowners are yet to be fully acknowledged by press, politicians and religious leaders alike or maybe they simply avoid unpopular themes. More significantly, it was and is the widespread belief that the property bubble is bursting, which is expected to lead to greater repossessions and losses on property related loans, that has contributed to the dramatic loss of market confidence.

Labels: leverage, LTV, markets, property, Short selling

posted by John Wilson @ 8:54 AM Permanent Link ,

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FSA Short Selling rules - a route to making money Wednesday, June 25, 2008

FSA's headquarters, 25 The North Collonade, Canary Wharf, London, E14 5HS

Image via WikipediaUnder new rules introduced by the Financial Services Authority last Friday, all short positions of more than 0.25% taken in a company during a rights issue have to be disclosed to the market by 3:30 p.m. the following day.

Widely believed to have been introduced by the FSA to assist banks during their fund raising exercises via rights issues, it has already failed to prevent the share price of HBOS failing below its right issue price. Indeed the new rules may have contributed to the fall. I make this assertion since one of the investors forced to disclose a material short position in HBOS was Harbinger Capital, who are well regarded. As a consequence, other investors may well have been prompted to follow their lead.

So, as to the title of this post. Assume you are are well-regarded fund or investor. You could benefit from a shorting a position in a company with a rights issue, having that advertised via the disclosure rules, waiting for other investors to follow your lead thus sending the price even further down and then closing your position at a profit - note the new rules only require disclosure once and so subsequent changes up/down need not be made. As a consequence, your investment "prophesy" is both fulfilled and performance achieved, thereby re-enforcing your pre-eminance as a wise investor.

Odder still is that whereas before talking down a bank stock might have gotten you in trouble with the FSA, now you can simply say nothing, short a stock which is a fairly clear signal of your views and use the FSA as your publicist.

Might this count as market abuse - better introduce another knee jerk rule change then!