The issue of short-selling has come back on to the agenda in the last few days with news that Fortescue Metals [ASX:FMG] CEO Andrew Forrest has led an all-out attack on funds that he believes have been short selling Fortescue shares.
For the uninitiated, short-selling is where your broker borrows shares from an institution and gives them to you so that you can sell them on the stock market. The intention being that you believe the share price is going to fall. Once it has fallen, you buy the shares on the market and give them back to your broker who in turn gives them back to the institution.
It’s a fairly simple concept, but it is largely the domain of institutional investors rather than private investors. There are many people in the investing community who see short-selling as heresy or immoral, others argue that it all helps to improve price discovery in the market and reduce volatility.
Personally we don’t really care either way. However, there are a couple of issues that should be considered. First is the issue of transparency. The Australian Securities Exchange is forever trumpeting on about how wonderful it is and how transparent all dealings with the ASX are, yet despite this, it is unable to provide any vaguely accurate statistics to investors about how much short-selling there is in particular shares.
The crazy thing is that it would not be that difficult for the ASX to do this. Quite simply all it would have to do is remove the process of stock lending from the broking firms and instead place that responsibility with the ASX. The broker would then simply place a “Short Sell” order in their system which is then highlighted as such by the ASX. Those institutions whose business it is to lend out stock (such as NAB and ANZ) would still have a role to play, only they would be lending stock to the ASX rather than individual brokers.
It isn’t hard; it’s just whether there is the will.
Jekyll & Hyde Fund Managers
The other issue that we do find a bit puzzling with short selling is why an institution or anyone for that fact would want to lend their stock out in the first place. Most stock that is being lent out is typically held by fund managers who have invested in those shares on behalf of investors. You would think that they have a vested interest in the share price rising - you would think.
It seems bizarre then, why they would lend stock out to another institution in full knowledge that the shares are to be short-sold, potentially (although not always) having a negative impact on the share price.
Get Your Aussie Dollar While It’s Cheap
It has almost happened in the blink of an eye. As we write this morning, the Aussie dollar is trading below 82 cents. The performance of the Aussie dollar is a perfect example of how financial markets are constantly looking forward.
What happened last week, last year or today is almost irrelevant compared to the consensus market view of what is going to happen in the future. Exchange rates can be impacted by a wide range of things, but one of the most important is interest rates.
Since the Aussie traded almost at par with the US dollar back in July it has fallen by nearly 20%. What has happened to interest rates during that time? Not much as it happens, apart from the 0.25% cut by the RBA this week. The big difference now is the expectations for further interest rate cuts in Australia and possibly rising interest rates in the US which will reduce the interest rate differential between the two countries.
As with many markets, investors do have a tendency to overshoot both on the upside and the downside. Has this happened with the Aussie? We’ll get our resident technical guru Gabriel Andre to have a look at that for us on Monday.
Cheers.
Kris.
