Tweet
By Jonathan Hoenig
Forget the big hedge funds or commodity pools. If you're looking for the true market manipulators, look no further than our own government, which 10 days ago staged one of the biggest artificial short-squeezes in history.
On Sept. 19, the SEC banned short selling for 799 financial stocks, causing the prices of even fundamentally weak companies to spike dramatically in just a few hours' time.
Corus Bankshares (CORS: 3.07*, -0.68, -18.13%) jumped by nearly 45% in one day.
Wachovia (WB: 1.85*, -7.00, -79.09%) rose by almost 65%.
Federal Agricultural Mortgage (AGM: 2.88*, -0.10, -3.35%) gained 75%.
National City (NCC: 1.48*, -2.07, -58.30%) climbed over 52%.
If the government's aim was to prop up prices, then the effect didn't last long. It wasn't more than a few days later than many of the stocks returned to the lower levels at which they traded before the short-selling ban took effect. (The stocks continued to tumble early Monday.)
When I wrote last year about trying to manipulate markets, I made the point that while you can usually push a security's price up without too much difficluty, the price inevitably falls back to where it was before you started trying to push it up.
Indeed, markets are miraculously efficient, meaning that even government coersion can't ultimatly keep them from trading where they normally would absent artificial constraints.
Now, after a marathon weekend session, the congressional bailout plan has finally arrived. And like the short-sale ban, the bailout plan and the emergency liquidity from the Federal Reserve could easily have short-term effects on prices on prices as traders jostle to reallocate themselves based on this artificial influence distorting prices. But ultimately, unless the government is willing to simply nationalize every floundering financial firm, many of those benifiting from any artificial pop -- whether it comes tomorrow, the next day, next week or next month -- will return to lower levels that reflect any inherent economic weakness.
One of the real tragedies of all the intervention is that it has damaged the quality of market prices as effective indicators. These days, you're never sure if a stock's move is "real" or just the effect of one of the government's attempts to prop up prices.
Reality exists. And as objective traders, we can't ignore a price or piece of information simply because we don't like what it might say. Be it falling home prices or soaring defaults, the government's attempt to force prices into a more politically agreeable direction is a collossal waste of constituents' money and time.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
http://www.smartmoney.com/tradecraft...tocks&cid=1122
Forget the big hedge funds or commodity pools. If you're looking for the true market manipulators, look no further than our own government, which 10 days ago staged one of the biggest artificial short-squeezes in history.
On Sept. 19, the SEC banned short selling for 799 financial stocks, causing the prices of even fundamentally weak companies to spike dramatically in just a few hours' time.
Corus Bankshares (CORS: 3.07*, -0.68, -18.13%) jumped by nearly 45% in one day.
Wachovia (WB: 1.85*, -7.00, -79.09%) rose by almost 65%.
Federal Agricultural Mortgage (AGM: 2.88*, -0.10, -3.35%) gained 75%.
National City (NCC: 1.48*, -2.07, -58.30%) climbed over 52%.
If the government's aim was to prop up prices, then the effect didn't last long. It wasn't more than a few days later than many of the stocks returned to the lower levels at which they traded before the short-selling ban took effect. (The stocks continued to tumble early Monday.)
When I wrote last year about trying to manipulate markets, I made the point that while you can usually push a security's price up without too much difficluty, the price inevitably falls back to where it was before you started trying to push it up.
Indeed, markets are miraculously efficient, meaning that even government coersion can't ultimatly keep them from trading where they normally would absent artificial constraints.
Now, after a marathon weekend session, the congressional bailout plan has finally arrived. And like the short-sale ban, the bailout plan and the emergency liquidity from the Federal Reserve could easily have short-term effects on prices on prices as traders jostle to reallocate themselves based on this artificial influence distorting prices. But ultimately, unless the government is willing to simply nationalize every floundering financial firm, many of those benifiting from any artificial pop -- whether it comes tomorrow, the next day, next week or next month -- will return to lower levels that reflect any inherent economic weakness.
One of the real tragedies of all the intervention is that it has damaged the quality of market prices as effective indicators. These days, you're never sure if a stock's move is "real" or just the effect of one of the government's attempts to prop up prices.
Reality exists. And as objective traders, we can't ignore a price or piece of information simply because we don't like what it might say. Be it falling home prices or soaring defaults, the government's attempt to force prices into a more politically agreeable direction is a collossal waste of constituents' money and time.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
http://www.smartmoney.com/tradecraft...tocks&cid=1122