Increases in Shorting, Only for Some

As mentioned in a Bloomberg article, research by BeSpoke Investment Group has found that more than $1.4 trillion of global equities are now on loan. This is a third higher than at the start of 2007. Short selling on the NYSE rose to 4.6% of total shares in June, the highest level since 1931. As the market has sold-off, both short positions and subsequent short profits have increased. In fact, short positions in Frannie Mae (FNM) and Freddie Mac (FRE) generated profits of $1.4 billion in July alone.

In addition to recent credit and housing issues, and the higher energy and commodity prices that are fueling inflation and reducing profits, short positions are also increasing in response to extra interest in 130/30 funds. These funds, which often have up to a 30% short position to provide for a higher long exposure, have been on the rise as retail investors look for ways to generate hedge fund-like returns. In fact, investments in such funds are expected to climb to $2 trillion by 2010, from a mere $140 billion last year. This is in addition to other hedge fund replication strategies that also utilize shorting of various securities and products to mimic hedge fund returns.

Of course, just as the SEC is placing restrictions on short selling, other countries are either initiating or increasing access to short selling in a effort to curb rampant long speculation and help contain markets before they reach bubble territory. After the current credit crisis is over, and money begins to flow once again into the financial companies and other securities, don't be surprised if we begin to hear calls from regulators and others looking for ways to pop the bubble and reduce speculation.

Ironically, such calls were happening just a few weeks ago in the crude oil markets (and will no doubt begin again in earnest if prices return to over $140 a barrel). When all is said and done, we may end up with trading that restricts short selling in beaten down industries, while encouraging it in those industries with higher valuations. I am not quite sure that helps the markets reach efficient levels, but it is certainly good news to the next Enron.

Comments

[glassbox]

David, you and quite a number of columnists here at SA have a bias - the bias is very clear in your very last phrase.....which seems to suggest that the lack of short selling will contribute to an 'Enron' type build up - in a rather calavier manner which is quite unfortunate as it does not add to the rigorous debate of this site. I hate to say this, but I've given up taking anything the columnists are saying about efficient market when no one has come out to talk about shareholder's rights and the rights of the longs. Shorts are only interested in pushing their short agenda and just want to justify their rather non-value adding activity by saying it makes for more efficient market. If they are so interested in improving efficient, why not target it the positive way - enhance shareholder's rights and corporate transparency? The bias is bordering on hypocrisy.

[old news]

OMG, an intelligent writer at seeking alpha! it's hard to find you guys among all the gibberish at this site

[User 112599]

Bottom line - long term there is NO value-added benefit for the nation, the economy or the individual company in short selling. Eventually even for the shorty. Nothing is created, produced, invented or otherwise added to the marketplace. The negative impact is loss of confidence leading to the downward spiral we experience now (and have again and again in the past). But the temptation is obvious.
Transparency and openness is often short term pain but ultimate gain!

[mycousinearl]

glassbox and User 112599 are just a couple of losers who have obviously been on the wrong side of the market lately and are looking for someone to blame for their lack of investing skills. The two of you need to grow up and quit whining about what other investors are doing. Maybe then you'll both be able to make some money too and someday move out of your respective parent's basements. Losers.

[glassbox]

mycousinearl, anyone who talks like you is definitely the loser. BTW, I've been 'short' the market - i.e. I've been holding cash all this while and just recently bought some. You see, there is an alternative to going short - just hold cash!

[mycousinearl]

glassbox, you need to change your username to glasspipe, because you're obviously smoking something.

[jjason]

To mycousinearl, Short selling should be made illegal. Glassbox and user112599 are right.

Too bad you and many others do not think about what is productive and what is not productive.

[mycousinearl]

jjason, I think you should look into doing standup. Because you obviously have no future in the financial markets. Ta-dum, Pssssh!