Preferred stock investors have been caught in the volatility surrounding many common stocks lately. There have even been cases where the market prices of a company's preferreds, which pay a relatively high fixed dividend, have been more volatile than the same company's common stock, which pays a relatively low variable dividend.
Such inconsistencies signal that something has pushed the normal function of the market off of its tracks. In many cases since last fall, this abnormal market behavior has been caused by predatory short-sellers.
It got so bad that the SEC had to suspend short-selling of many US bank stocks for several weeks prior to the implementation of the TARP program in October 2008. But the Fed's stress test program for big banks has provided another opportunity for prediatory short-sellers to distort the market.
Just so that we're clear, I believe that short-selling, as a practice, has some value and does lend some effeciency to the market in that the practice can signal what buyers are thinking about a company's future prospects (although the extent to which you believe those signals can some times require more than a little bit of clairvoyance).
But the promotion of market effeciency is not what went on last fall and, in the run-up to the Fed's stress tests, the same bad behavior on the part of some (large) short-sellers is again rearing its ugly head. When short-sellers launch coordinated attacks on a specific company and spread rumors around Wall Street to drive the price down (for their own personal gain but the devistation of others), we are witnessing dishonorable conduct more than market effeciency.
Just in time to be too late, the SEC will be implementing some new rules for short-sellers soon. The SEC has put together a collection of experts and other stakeholders to help make some decisions regarding the practice. The group is evaluating six specific proposals to limit the 'cascading failure' that can result from a coordinated short-seller attack. We should know the results in early-June.
Preferred stock investors are typically longer-term investors. They invest for reliable dividend income more so than a chance to strike it big when a company's common stock goes on the upswing. Common stock investors are placing a bet on that upswing and do so knowingly. As unfair as predatory short-selling is to common stock holders, it is preferred stock investors who are particularly blind-sided by the practice since they were never intending on attaching their fortunes to the common share price whatsoever in the first place.
For the benefit of preferred stock investors, I'm very anxious to see the SEC put an end to predatory short-selling and we may see them do just that in the coming weeks.
Many Happy Returns.
Such inconsistencies signal that something has pushed the normal function of the market off of its tracks. In many cases since last fall, this abnormal market behavior has been caused by predatory short-sellers.
It got so bad that the SEC had to suspend short-selling of many US bank stocks for several weeks prior to the implementation of the TARP program in October 2008. But the Fed's stress test program for big banks has provided another opportunity for prediatory short-sellers to distort the market.
Just so that we're clear, I believe that short-selling, as a practice, has some value and does lend some effeciency to the market in that the practice can signal what buyers are thinking about a company's future prospects (although the extent to which you believe those signals can some times require more than a little bit of clairvoyance).
But the promotion of market effeciency is not what went on last fall and, in the run-up to the Fed's stress tests, the same bad behavior on the part of some (large) short-sellers is again rearing its ugly head. When short-sellers launch coordinated attacks on a specific company and spread rumors around Wall Street to drive the price down (for their own personal gain but the devistation of others), we are witnessing dishonorable conduct more than market effeciency.
Just in time to be too late, the SEC will be implementing some new rules for short-sellers soon. The SEC has put together a collection of experts and other stakeholders to help make some decisions regarding the practice. The group is evaluating six specific proposals to limit the 'cascading failure' that can result from a coordinated short-seller attack. We should know the results in early-June.
Preferred stock investors are typically longer-term investors. They invest for reliable dividend income more so than a chance to strike it big when a company's common stock goes on the upswing. Common stock investors are placing a bet on that upswing and do so knowingly. As unfair as predatory short-selling is to common stock holders, it is preferred stock investors who are particularly blind-sided by the practice since they were never intending on attaching their fortunes to the common share price whatsoever in the first place.
For the benefit of preferred stock investors, I'm very anxious to see the SEC put an end to predatory short-selling and we may see them do just that in the coming weeks.
Many Happy Returns.
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First of all, I understand the stress to which a buy-side investor is subjected when the value of his investment is collapsing. I've been there far too many times. But I have to admit, I'm on the other side of this argument because the argument against short-selling tends to be far more political than factual.
In fact, I have yet to see a credible study on this topic. Short sellers can no more destroy a good company than buyers can save a bad one. Remember, no one complains when the big money tries to drive a stock up because the public has a buy-side bias. Hence, arguments against short-selling tend to devolve into the market equivalent of "tyranny of the majority."
On the other hand, there have been studies done on short-selling bans. The results are always the same: bans on short-selling increase market volatility because they remove the rallies caused by short-covering.
And one final point: short-sellers can act as the proverbial "canary in the coal mine" by exposing a company whose business model is compromised; or, as in the case of Enron, it was the short sellers who exposed the company as an outright fraud.
There is always opportunity in adversity. As a CDx3 investor, I have come to see the sell-offs in Doug's Bargain Table picks as an opportunity to get in cheaper and obtain a higher yield.
Thank you Doug for a great service!
Hello Carl-
I agree with your points entirely. My issue is limited to 'predatory short-selling' where a group of short-sellers maliciously attack the common stock price of a targeted companies by spreading false or misleading information in order to drop the price for their own benefit.
This is the focus on the SEC's forum and the group that the new rules are intended to deal with. If the SEC is successful, we should be left with a more effecient market.
Thanks for the comment,
Doug K. Le Du
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