Those cheeky scamps at the Australian Securities & Investments Commission surprised everyone yesterday by ending early the ban on short selling of financial stocks.
Based on the reaction to the news you would think that short sellers have been sat on the ears for the last six months doing nothing, waiting for ASIC to remove the ban so they can charge headlong into the market.
It’s of note the major banks plus Macquarie were all down yesterday. Macquarie in fact lost 6%.
According to Chris Weston at IG Markets, “I don’t think [bands] would have been 3 per cent down if the ban were there. There is no way that Westpac should have been down by 3 per cent.”
Of course he’s right on that score. Based on what we’ve seen of the banking industry it should be trading for less than $1 – roughly the price of most of the stocks in the Australian Small Cap Investigator portfolio.
The idea that hedge funds are going to start short selling something purely on the basis of the ban being lifted shows the mainstream media have little idea about the markets.
The fact is the Australian government has so far successfully bailed out the Australian banking system. To the tune of billions and trillions of dollars in indirect support.
The odds of Australian banks going into freefall yesterday, or even today are pretty slim.
Not that they don’t deserve to. As we’ve written before, we’ve got no idea why anyone would ever want to invest in a bank again. Anything where you need a PhD to understand the balance sheet just isn’t worth the time or the effort.
But back to the hedge funds, or absolute return funds, or whatever you want to call them…
The fact is, contrary to popular opinion, hedge funds aren’t always short selling the market. And also, despite their name, neither are they always hedging themselves against the market.
In fact, it’s more likely they are taking on more risk rather than hedging against risk. But that’s beside the point.
The reason many people invest in hedge funds is because they can invest in a multi-directional market. They aren’t restricted to always being long, or always having X% of the portfolio in stocks.
Hedge funds are more likely to try and anticipate market moves in a directionless market, or follow the trend – long or short – when the market is moving. On top of that, the funds are likely to look at more complex investments which again, doesn’t necessarily mean the fund is selling short.
We’ll see tomorrow exactly what impact short selling had on the market when the ASX releases the numbers on its website. We don’t know whether it will be more or less than the number of shorts recorded on the financials from Friday.
But we’re prepared to bet that most of the reason for the fall in bank shares was because many investors sold out from long positions just on the fear the resumption of short selling could have a negative impact.
We’ll keep an eye on the Macquarie share price, which is down another 1% in early trade today. We wonder if Macquarie CEO Nicholas Moore was consulted about the lifting of the short sell ban prior to the decision…
Seeing as he was one of the driving forces behind its imposition in the first place.
The comparison has been made with the US and UK markets where they removed the short selling bans five months ago, only to see the financial stocks hammered.
The comparison is irrelevant. At that time, there was a strong bearish sentiment among investors. Investors believed share prices were going to fall and so they sold the shares. They rightly thought the banks were on the verge of collapse. And without government bail outs they would have collapsed.
The current market, while not bullish, is certainly much closer to neutral than it has been at any time over the last nine months.
Any hedge fund that is blindly short selling stock because they can is asking for trouble and will get bitten if share prices rise.
That’s why, for any hedge fund manager, the real fear isn’t what the corporate regulators could do to them, it’s what the market could do to them.
Holiday Plans
“Gabriel could you take a look at the AUDGBP for Money Morning readers tomorrow?” your editor asked our Swarm Trading technical analyst Gabriel Andre yesterday.
“Why? Are you planning a holiday back to England or something?” Gabriel replied.
“Er, yes… but I’m sure Money Morning readers would be interested in the pound sterling FX rate anyway.”
“Hmmm!’ Gabriel shrugged.
Anyway, scroll down for Gabriel’s take on the beleaguered pound, and whether it’s worth buying pounds now or waiting a while longer…
Other Stuff on the Markets
The S&P/ASX200 slipped 0.63% yesterday. And ASIC brought forward the end to the short selling ban.
US and UK markets were closed for a bank holiday overnight. While the German and French markets ended flat and slightly higher respectively.
The price of gold in Australian dollars last traded at $1,225.77, while in US Dollars it eased slightly to USD$956.10.
The Aussie dollar held up versus both the USD and Yen, trading at USD$0.7807 and JPY74.11.
Crude oil closed trading at USD$61.25.
For the biggest movers on the market yesterday click here…
Nothing major to be announced on the Australian economic calendar today. But in the US there’s the Case-Shiller House Price Index and Consumer Confidence stats.
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