THE CURMUDGEON CHRONICLE - #256

THE CURMUDGEON CHRONICLE ©

AN IRREVERENT VIEW


Time Line: March 2, 2009
Date Line: Flemington New Jersey

If the Administration is concerned about the falling Dow it can provide an immediate fix that won’t cost taxpayers a penny. All it has to do is eliminate short selling and its cousins, (swaps, derivatives, etc,) and send them to the places they belong; the crap tables in Las Vegas.

There is a legitimate purpose for short sales; stabilizing a market for a new securities issue. In that instance an Underwriter over-allots securities in the distribution and protects itself with an option, (granted by the issuing company), to purchase shares at the offering price to cover its short position.

The “stabilizing” arrangement allows the Underwriter to cover defaults by dealers who do not take their allotments, and to purchase shares in the market to maintain the offering price. When the offering period ends, the Underwriter buys shares from the issuer to cover the short position.

The process is disclosed to the market; is controlled under the securities laws and is used to facilitate the distribution, not to gamble on a price drop in the shores offered.

I doubt that the enormous loss in securities values would have reached the panic level without the hedge funds and other such operators, selling the market short. The same kind of greed that ruined the mortgage markets is at work in the broader securities market. It has targeted banks, insurance and other financial institutions despite the underlying values. It must be stopped now.

You hear reasons for the decline in a share price ranging from anticipated business weakness, to the color of the CEO’s underpants. On balance, a 10% decline in net profits should not mean a 70% decline in the value of a company. Nevertheless, that is the case with some of the venerable and solid companies traded on the NYSE.

Despite the fact that analysts have forecast a 12% decline in profits, there is no reason for Pfizer to trade at $12.00 instead of a price related to its $48.00 pre-implosion values. The short interest in Pfizer is now up by 29.6 million shares from September 2008. Assuming that the short sales were made at an average of $21.00 the short interest profit is now $266.4 million. The total short position in Pfizer is over 90 million shares. I wonder what the price would be if the shorts had to be covered within 60 days.

The people who lost the $ 266.4 million had Pfizer in their 401K accounts. Their holdings decreased in value; fund managers sold the positions at a loss, or if lucky, at a nominal gain. Why did they sell? Because they are ranked and paid on “performance” and a portfolio made up of shares owned at prices 60% below acquisition prices reflects poor performance.

Concerted sort selling was first named a “bear raid” many years ago. Bears are interesting creatures, best observed by humans when they are in cages or from a distance. I don’t want them in my front yard or in my brokerage accounts. They create a mess in both places.

Howard Stame0072