Posted on 08/31/2010 4:23:43 PM PDT by unspun
“I absolutely DO know what I’m talking about. I trade for a living.”
Whoopee. You and a million Japanese housewives day trade on your computers, now you’re all financial experts.
Now let’s have you expand your mind a millimeter with a thought experiment you evidently haven’t thought of, Mr Crickets Chirping. There are thousands of listed companies a fraction of the size of Apple, companies that aren’t selling an immensely popular consumer product.
These companies burn cash as they attempt to develop new products, particularly true in the biotech industry. It may take years to bring a product to market or get FDA approval. They survive by selling new shares, or by taking on debt against their capitalization. Now what do you think happens to such companies when their stock gets driven to near zero in a prolonged short attack? Do they just sell some more of that “product that appeals to consumers” that you imagined in your previous post? Apparently in Crickets Chirping Land only popular consumer products firms sell stock.
A market is comprised of ALL its participants, regardless of who they are, how much trading capital they have, or what motivates their trading decisions. Any theory of market analysis that has any validity must be able to account for actual market action. That means it has to account for the behavior of any and all participants—including governments, central banks, investment banks hedgefunds and evil multibillionaires.
There is a large cohort of traders who are consistently profitable over time, in spite of news events, natural disasters, government intervention and attempts at manipulation. Some of them are billionaires, but most have much smaller amounts of trading capital, and have absolutely no ability (as individuals) to move the market.
Traders can be consistently profitable using precisely the same techniques that professional gamblers use to consistently make money: Money management, risk management, self discipline and trading based on the relative probabilities. Markets are not deterministic, but neither are they random. It is usually possible to determine when the probability is far higher that the market will rise and not fall, or fall and not rise. Just as it is usually possible to determine when you probably have a winning hand, and when you probably don't.
I dunno. I’m thinking we all need to move to sourcery’s land, where driving a company’s capitalization to near zero is a painless affair with no consequences.
Companies just go merrily along doing business as usual. Their creditors don’t get spooked. Their suppliers don’t demand cash. Now that’s the place to do business. Unicorns crap rainbows there, too.
Short sellers add liquidity to the market, both because they provide supply of shares to those who would like to buy, and also because they bid for shares from those who would like to sell (when they decide to cover their short positions.)
But more importantly, burn this into your brain: Every transaction requires both a buyer and a seller. You can't sell short without a couterparty who is willing to buy, and you can't go long without a counterparty who is willing to sell. Price doesn't move AT ALL because anyone goes long or short, but rather because the equilibrium, market clearing price changes. And that's a function of the collective psychology of all market participants, and not a function of whether or not someone decides to short. Were that not the case, markets where shorting cannot occur would not suffer major declines or crashes. For example, have you checked the price of real estate lately?
The old rules against shorting did not prevent the crash of '73-'74, nor the crash of '87, nor the '98 unpleasantness, nor the Y2k dot.com bear market.
Most companies that rely heavily on equity financing that fail do so because their business plan fails, NOT because they were raided by short sellers. Shorting generally does NOT work without some basis behind it. There has to be an exploitable weakness first. Do you have statistically-significant evidence otherwise? If not, you're just arguing from emotion, and not based on empirical evidence.
“Stock price changes affect the wealth of traders, not companies. The difference is crucial. If you don’t understand the difference, do yourself a favor and don’t trade.”
Do yourself a favor. Read this classic and learn that there is more to the world of securities than just day trading:
http://www.amazon.com/Security-Analysis-Benjamin-Graham/dp/0070239576
The initial post concerns reform of the markets, not day trading. You’ve been posting nothing other than a simplistic rationale about trading. I’m pretty sure it’s because you know little else about finance.
A few months back there was an incident known as the "flash crash". I think somebody exploited a weakness there and it showed. It wasn't because of somebody buying longs in the market. People (investors) get hurt in these kinds of chicanery.
That Ben Graham book is one of the very first books on "investing" I ever read.
Here's one that's far more valuable: Trade Your Way To Financial Freedom (by Van Tharp—hokey title, but well worth the read). You are very unlikely to be able to be a profitable trader by trying to follow the precepts of Ben Graham—or of any other guru or trading methodology—unless and until you master the material in Van Tharp's book. Most will also need to master themselves and their emotions.
You have no evidence for your assertion.
There is a whole bunch of carping going on here when there is something extremely important to be learned.
Just how many companies have been driven into the dirt by the subject at hand?
why is it in anyone’s interest to drive any viable business into the dirt.
Not everyone on Wall street is a dirt bag seeking their own aggrandizement at the expense of others.
The investment and banking industry should be driven by integrity, and doing what is right by and for ones customers. Yea I know! Yew topia. Spelling on porpoise.
I thought the cigarette industry was the only one killing off their customers.
I was not in favor of the bank bailout.
So why and how does one get a handle on the activity that appears to be so prolific but which I don’t see all that often, (that does not mean it isn’t happening) I’m not a short or long type. I leave that to those more knowledgeable than I.
The real reason such activity takes place, other than making a buck.
Excellent question!
When I passed the Series 7 back in 1982 there was an uptick rule. It was enforced until Chris Cox’s tenure at SEC. Why do you suppose the uptick rule was enacted? Do you know?
No one is suggesting that shorting be abolished. The discussion is and has been about re-instituting the uptick rule and prosecuting FTD. So while your little excursions into trading theory may entertain you, they are essentially irrelevant.
“The old rules against shorting did not prevent the crash of ‘73-’74, nor the crash of ‘87, nor the ‘98 unpleasantness, nor the Y2k dot.com bear market.”
This is indicative of your confusion. Those are market crashes. Reinstituting the uptick rule and prosecuting FTD are for the protection of individual securities, not something to prevent market crashes.
“Most companies that rely heavily on equity financing that fail do so because their business plan fails, NOT because they were raided by short sellers. Shorting generally does NOT work without some basis behind it.”
“Most.” “Generally.” Of course that’s true “most” of the time, and “generally.” The reforms are intended to address cases when it isn’t “most” and “generally”, when there is market manipulation using tactics that once were or currently are prohibited.
“Do you have statistically-significant evidence otherwise? If not, you’re just arguing from emotion, and not based on empirical evidence.”
Good idea. I’ll wait for you to post your “statistically-significant evidence” proving your case, otherwise you are just arguing from emotion.
“why is it in anyone’s interest to drive any viable business into the dirt.”
Well for a naked shorter, the profit margin of doing so is 100%.
Does that seem like a sufficient reason?
I have nothing to prove, since I’m not advocating any change in policy. Justification of policy changes rests with those making the proposal.
Using a term such as "manipulation" imposes a value-judgement that has nothing to do with reality. The use of that term serves merely to make an emotion-based argument in favor of limiting the freedom of market participants to engage in trades because some consider the result "unfair." It's no different than arguing that the results of a game that was played according to the rules should be invalidated because you didn't like the result.
To be valid, the full utility of the rules of the game must be considered, both the good and the bad. Restricting short selling has consequences, some good, some bad. What's the net effect, and how do you know? Any analysis that doesn't honestly attempt to analyze the question fully, looking at the full net effects, is intellectually dishonest.
“A few months back there was an incident known as the “flash crash”. I think somebody exploited a weakness there and it showed.”
It is unlikely that the flash crash was intentional. It appears to have been triggered when computers went down at some main exchanges. Large sell orders already set to go at market got instantly rerouted to subsidiary exchanges. The small exchanges lacked the liquidity to handle those large market orders. Once you blew through a small number of buy orders there was nothing to support the price.
“I have nothing to prove, since I’m not advocating any change in policy. Justification of policy changes rests with those making the proposal.”
Nice try, but you’re going to have to pony up statistical proof to bolster your own case when you require that of others.
You found the exacting terms “most” and “generally” to be sufficiently accurate for your own argument.
If I understand naked shorting, it is selling short what you don’t own at all, ie no skin in the game. So how do you meet the call, should there be one, if you don’t own it, and how do you profit 100% on something you don’t own?
IIRC I flunked the series 7 twice in 1987. Not by much but it wasn’t horseshoes or hand grenades.
“Using a term such as “manipulation” imposes a value-judgement that has nothing to do with reality. The use of that term serves merely to make an emotion-based argument in favor of limiting the freedom of market participants to engage in trades because some consider the result “unfair.” “
I was using manipulation in reference to the uptick rule, which for decades had limited market participants in order to prohibit... manipulation.
You remember why the uptick rule had been in effect for years, don’t you? I asked you in a previous post but you appear to have forgotten to answer. It used to be part of the Series 7 exam.
But then again, day trading stocks doesn’t require you to master the arcane lore of the NASD. So perhaps you don’t know what the uptick rule is or why it was instituted.
looky
Thanks bitt. I don’t really keep up with all the trading, investing stuff now, seems like a bad time for ‘money making’ plus I hate to lose more than I care about making a small amount, lol.
My Teacher’s Credit Union actually gives me better interest rates than some CD’s! Beautiful homes are sitting and not selling now. I really fear something happening to lifetime savings, don’t trust the government. Even have thought of paying cash for another nice home just so the money can’t be lost.
That may sound dumb to those seriously involved in all this but my 4 kids would at least have some solid ‘things’ to sell off at a future time. I do not trust those in charge!
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