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.
