The short selling debate just won’t go away. It has almost reached hysterical proportions. The recent ban on short selling and massive fall in the stock market should have proved once and for all that short selling does not cause stock markets to fall.
The investment director of 452 Capital, Peter Morgan has had a letter published in today’s Australian Financial Review. He makes to main points.
The first is his disbelief that fund managers would lend out stock to investors who they know will use it to short sell. He particularly has a beef with superannuation funds that do this.
He writes, “I have never really worked out how the super fund makes a gain from this two-sided buy/sell trade, but in return for lending these shares out the super fund earns what really is a paltry fee that is usually used to reduce administrative fees.”
We have no argument there. But we will make this point. If an institutional super fund really is investing for the long term benefit of its clients, then lending out stock on a short term basis should not be problematic. Short sellers typically keep open a position for less time than those that are long.
This is because there is a cost to maintain the position, and if the stock pays a dividend then the short seller has to fund this from their own funds in order to pay the institution it has borrowed the stock from.
We will disagree with Peter Morgan on one point. And that is the last paragraph of his letter where he states, “… given we are in the greatest credit crisis since the Great Depression, it is probably only a matter of time before an unsuspecting member of a super fund actually funds a short seller that terminally wounds his employer and he or she ends up unemployed.”
That’s the point at which the debate has become hysterical. An experienced investor like Morgan would be fully aware that jobs are not created or destroyed on the basis of a company’s share price.
BHP Billiton won’t fire people or stop projects because its shares have fallen from $50 to $27. ANZ Bank won’t close down branches because its shares have fallen from $29 to $14.
As any self respecting investor knows, share prices are merely a reflection of how ‘valuable’ the market considers a company to be. If they ‘value’ it then they will buy it and the price will rise. If they don’t, then the opposite will happen.
Therefore the only reason a company will fail is if it has made bad business decisions or if economic conditions have affected the company to the extent that it is no longer viable. Naturally short sellers will take advantage of this and may contribute to pushing the share price down. However, they would not be the cause of the company going bust, but rather an effect of the poor condition of the company.
If any company takes the foolish decision to tie debt arrangements into the market capitalization of the company (eg. Babcock & Brown) then they deserve everything they get.
Child Care, Autos… What Next?
“Swan: May Have to Invest in Economy to Strengthen Jobs” the Dow Jones Newswire tells us. Oh dear. According to the newswire service, Treasurer Wayne Swan has told ABC Radio “if growth were to slow much further, then we would take additional action, whatever steps are necessary to protect Australian growth and Australian jobs.”
That would be in addition to their “investments” in child care centres and auto manufacturers we assume. Surely by now they must have worked out that government investments of this sort have the opposite effect.
Propping up rubbish companies not only rewards bad management and bad businesses but it punishes good management and good businesses by preventing the investments flows and new customers from reaching them.
The biggest disaster out of the current financial mess is not how many unsustainable businesses go under, but how many good businesses will be prevented from leading the economy back to recovery thanks to government meddling.
I.O.U. $47 Million
We mentioned a week or so ago the debacle that is the BrisConnections share register. Well, it turns out it has a new ‘largest’ shareholder, a Mr. Nicholas Bolton from St Kilda. He owns a whopping 47,643,166 shares which he bought for $47,600.
Of course, that’s not the problem. The problem is that whether he knows it or not, Mr. Bolton has to stump up $47 million by April next year in order to pay for the second installment.
Then if he’s still in the game he’ll need to pay another $47 million the following year for the final installment.
According to the report in The Age newspaper, this whole crazy deal was put together by the pointy heads at Macquarie. Not surprisingly they walked away with a cool $100 million for their efforts.
Imagine what they get paid when they do a good deal!
