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The Money Honey Bee




 

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At some point here, Daily show will become the best news show on television.

I assume the point of the sketch was to cast short selling as evil. Can someone explain this to me? What is wrong with short selling?

watch the sketch

Short selling is evil because it causes people to dress up like a bee and overextend a bad metaphor?

RedSeven, you can do better than that. Seriously. What's wrong with short selling?

The bee suit is actually all that stands between them and becoming the best news show.

No, I thought they mentioned the worst of it. Basically allows people to invest in failure. 401k's don't get invested in this. So what happens is some rich asses bet on stocks going down, then they do their best to make them sink. Sell some stock, spread some rumors.

Basically allows people to invest in failure.

So? If I went out right now and bought some stock, it would be sold to me by someone doing the same thing: believing that the price will go down, and that there are better uses for the money.

So what happens is some rich asses bet on stocks going down, then they do their best to make them sink. Sell some stock, spread some rumors.

Well, that's two things: short selling, and fraud. I didn't ask what was wrong with fraud. I asked what was wrong with short selling.

Even without fraud, you see short sellers investing in a stock you own, you cut your losses.

Even without fraud, you see short sellers investing in a stock you own, you cut your losses.

Okay. How is that different from owning a stock, and seeing people selling it? Seems to me, if you think they may know what they're doing, you'd sell also, or at least look at the company a little closer.

The people selling are probably losing money.

The people selling are probably losing money.

That statement is extraordinarily weak. You cannot back it up at all, so you hedge with "probably".

This thread reminds me of debating with fundamentalists. They know they're right; it says so right there in Leviticus, in between when to commit incest and exactly how to sacrifice a goat.

And even if you succeed in demonstrating the fallacy of their belief, they cling to it anyway.

Samantha Bee's metaphor 'Just because you robbed the grave does not mean you killed the guy' is incorrect. Because short sellers are not in the business of short selling shares they stole, they are in the business of short selling shares that they legitimately borrowed. But she is a comedian, so there are limits to what she can know.

Samantha Bee's metaphor 'Just because you robbed the grave does not mean you killed the guy' is incorrect.

Yes, but I'm afraid you'll have to go through far more tortured reasoning to argue that short-selling is ethical, won't you?

But she is a comedian, so there are limits to what she can know.

versus....?

'Yes, but I'm afraid you'll have to go through far more tortured reasoning to argue that short-selling is ethical, won't you?'

The reasoning for short selling is sound (IMHO), but you will feel tortured by it, because it disagrees with your sense of ethics...which is why I purposely avoided the issue of ethics. I was trying to be decent. But you brought it up. I do not care to discuss ethics right now, because I am trying to avoid mental tortures. There is enough of it in the world right now, without me contributing to it. Anyway if you want to ponder on what is ethical and what is not, there are ways of doing that by yourself for now, although it is pretty easy to jump to conclusions.

'versus....?' No one. There was no versus in what I said. You inserted it. To say that a comic cannot know much about short selling is not the most controversial thing to say. If she did, she would probably make money by being a short seller rather than making jokes about short sellers.

The reasoning for short selling is sound (IMHO)

The reasoning for hollow point bullets is sound, too. Or the Iran-Contra Affair.

it disagrees with your sense of ethics...which is why I purposely avoided the issue of ethics.

That's fine, but then, I would say, you're purposefully avoiding the point of the clip, too. The point is not short selling is illegal. From what I gather, the point is to illuminate a practice wherein traders can only profit if a company's stock value takes a dive. The intent of short sellers selling high (to drive a stock down) and the intent of investors selling high (maximizing the profit on an earlier investment) are two separate motivations. The argument that short sellers are helping to prevent or minimize bubbles does not follow from their motivation.

Let's say I really love tiramisu, but I feel my local Italian restaurant is overpriced. So what do I do? I go in incognito on Friday and Saturday night acting boorish and coughing my lungs out. After a few months of my antics, what's the outcome? Well of course, my neighborhood is now enjoying the restaurant's fine cuisine at a fair price, nobody's been laid off, nobody's been fired, nobody's taken a pay cut, suppliers' profits haven't suffered, and certainly no one's decided to cut his losses and go out of business. Right? Too bad I went in igcognito, or I'd be a community hero.

I think there's just an unpleasant but inescapable human "truth" that it's easier to tear something down than to build it. The fact that this particular "tearing down" happens to be legal does not shield it from ethical interrogation.

To say that a comic cannot know much about short selling is not the most controversial thing to say.

Yes, and neither is suggesting that big time short sellers cannot know much about the havoc they wreak.

'Let's say I really love tiramisu, but I feel my local Italian restaurant is overpriced. So what do I do? I go in incognito on Friday and Saturday night acting boorish and coughing my lungs out.'

When I saw this I knew your understanding of short-selling was distorted. What you do in the Italian restaurant would not just be unethical, but also probably illegal. You are acting purposefully to disrupt normal business activity.

That is not what a short seller does at all. He does not disrupt normal business activity at all. I will try to give you a better idea what short-selling is with respect to the tiramisu example you gave.

You think the tiramisu in your local Italian restaurant is overpriced and others will reach the same conculsion. So you borrow a few tiramisus yourself from the Italian restaurant owners and promise to return them the tiramisus later in same freshness and quality. Then you sell the tiramisus yourself at the same price that they are selling.

If your educated guess was on target, the price of tiramisus will drop, so you will be able to buy tiramisus yourself cheaper than what people paid to buy from you. You buy the tiramisus from the open market and give it to the people who run the Italian restaurant. The difference between the price people bought your loaned tiramisus and the price you paid for it in the open market is your profit.

Now suppose you guessed wrongly and tiramisus prices went up instead of down, then the money you made selling your borrowed tiramisus will not be enough to buy new tiramisus to return back to the Italian restaurant. So now you have to spend some extra money out of pocket to replace the borrowed tiramisus, that is how you loose in the short selling business.

Basically that is short-selling. Only they do it with shares not tiramisus.

This is not the best review of short selling.

There needs to be a show called: "TDS Review" that follows these topics in more detail.

Basically you undermine the investment aspect of the stock market when you aggressively short sell. Rather than invest, you play a game with a company's assets by gambling that you can sell at a high price and then get back in at a lower price: a profit for you and a loss for the company you've messed with.

Legal? Yup. Ethical? Nope. I'd wager most short sellers in a bear market don't bother with the step of re-buying.

gypsy sister, short selling does not undermine the investment aspect of the stock market. On the contrary it enhances it. Short sellers are not gamblers, they are speculators, there is a difference. Gamblers rely on random outcomes, the throw of an unbiased coin or dice, a shuffled deck of cards. Speculators rely on their sense of judgment.

Speculators in this context are trying to forecast the true worth of the company ahead of others. That is the nature of the speculation in the context of short selling. And they get monetarily rewarded for speculating correctly and monetarily punished for speculating wrongly. Have you heard of margin calls?

In any case, it pushes the stock price to its true value quickly allowing the real investors to make sound investment decisions. Which is what investors are prevented from doing if short selling is criminalized.

And what does it mean if investors can make sound investment decisions? It means our retirement accounts are made up of a sound portfolio. Conversely what does it mean if investors cannot make sound investment decisions?

Basically you undermine the investment aspect of the stock market when you aggressively short sell. Rather than invest, you play a game with a company's assets by gambling that you can sell at a high price and then get back in at a lower price

Unless someone, very soon, can illuminate the difference between this and normal trading, I'm going to become frustrated. And I don't mean the order in which the transactions occurred.

And unless I'm mistaken, stock is not a company asset. I thought (and I could be wrong) that stock represented ownership which the company sells for capital.

a profit for you and a loss for the company you've messed with.

I think you are making the same error RedSeven did earlier, when he mentioned short traders committing fraud. That's not what I'm questioning.

Since viewing this clip, I've done a bit of reading, and asked my brother, who has a masters degree in economics. I have a better idea now of what short trading is. And I still don't see what is evil or unethical about it.

Some of you will condemn me for that, saying that I must therefore be unethical or evil or both. But the truth is, the only arguments that have been made against it include fraudulent practices along with the short selling.

Well, it seems fraudulent practices can accompany normal trading, too. Remember Jim Cramer, complaining about CEOs lying to him? Aren't they playing a game, too? I imagine their stock options are more lucrative if the stock price is higher, so they commit fraud as well.

I'll stipulate to the fact that fraud is bad, okay? Now, without bringing fraud into it, please tell me what is wrong with short selling.

The people in high places who are trying to steer popular opinion away from short selling, when most people have no idea what short selling is, they are the ones playing the game. They are trying to direct resentment away from their failures towards people who are generally unpopular to begin with. It is their trick.

Unless someone, very soon, can illuminate the difference between this and normal trading, I'm going to become frustrated.

Can you give us a timeline on that?

Can you give us a timeline on that?

How much time do you need?

My brother runs a 'long/short' hedge fund that looks at tech stocks and some other sectors. The point of shorting stocks is to capatilize on your expertise and knoloedge about a company. If it is overvalued then you benefit by knowing that it is overvalued. In the same way that you benifit when knowing that it is undervalued. That's the principle behind it.

The laymens discription of the mechanics of it are as followes: You 'rent/borrow' a share and sell it. If the price of it falls, you buy a real share and use it to pay off the 'rent/borrow'. Since you already sold the 'rented/borrowed' share, you profit because you are paying back the rent with something less valueable than the debt.

But if the stock goes up, you eventually have to return the 'rented/borrowed' stock, which will now be more than you sold it for. You will then lose money on the deal.

From what he tells me, the same problems for oversight and fraud exist here as in the regular trading market.

So Abhilash Nambiar, you got me reading up on this subject.

The people in high places who are trying to steer popular opinion away from short selling, when most people have no idea what short selling is, they are the ones playing the game. They are trying to direct resentment away from their failures towards people who are generally unpopular to begin with. It is their trick.

You have something here. From S.E.C. Temporarily Blocks Short Sales of Financial Stocks:

The Securities and Exchange Commission issued a temporary ban on short sales of 799 financial stocks on Friday, a move against traders who have sought to profit from the financial crisis by betting against bank shares.

The temporary ban, intended to bring calm to the markets, follows similar action by Britain on Thursday.

The S.E.C. said the “temporary emergency action” would “protect the integrity and quality of the securities market and strengthen investor confidence."

In general, the reading I did confirms that most of the risk is to the investor who does the short selling. Your response to Teodomiro's tiramisu hits it right.

However, while the efficacy of short-selling has been born out by examples in healthy markets, there is something to think about in recession and depression environments:

Comments for Comments 1-1 of 1 Selling Short-Sellers Short Susan Lee The ''uptick rule'' and the dope of Massachusetts.

Posted by stratengineer | 03/20/09 09:48 AM EDT What is missed here is that it is extremely difficult for a company to issue new stock or convertible preferred when they need equity capital because of shortselling. Raising new equity capital may save a company from bankruptcy and preserve its long-term earning power, but if shortsellers can short the stock to one tenth of what its earning power merits, the company can't raise much cash to save itself. Shortselling a cash-starved business can be a self-fulfilling prophecy.

This is a good response to a succint article in support of short-selling (or in non-support of short-selling bashing): Selling Short-Sellers Short by Susan Lee.

Unfortunately we won't have solid defense or refutation of stratengineer's (the commentor) submission until long after the current situation is over. There is enough public anger that it's not too difficult to see a study of short-selling in times of economic woe on the distant horizon, authored by someone whose parents lost their shirts in the current economy.

Oh, pooh, here's the excerpted comment from stratengineer:

What is missed here is that it is extremely difficult for a company to issue new stock or convertible preferred when they need equity capital because of shortselling. Raising new equity capital may save a company from bankruptcy and preserve its long-term earning power, but if shortsellers can short a stock to one tenth of what its earning power merits, the company can't raise much cash to save itself. Shortselling a cash-starved business can be a self-fulfilling prophecy.

OK - crap, I only read upito where that "quote" happened - now there's a double on it. Any chance of an edit feature, Norm?

grumbles at self as she gets off internet

Gypsy sister,

Thank you for this post. I was starting to wonder why the playground was empty, afraid that I had missed the recess-over bell.

I don't have time right now to dig too deeply, as Friday Night Drinking, a.k.a. Poker Night, starts in less than an hour, but I wanted to make a couple of quick points before taking time this weekend to consider what you said.

Raising new equity capital may save a company from bankruptcy and preserve its long-term earning power, but if shortsellers can short the stock to one tenth of what its earning power merits, the company can't raise much cash to save itself.

(I realize that these are not your words.)

I'm not sure how short selling could achieve this result. It seems to me that if a stock is undervalued, then people would buy it, and the problem would self-correct.

You also mentioned that the SEC has, in the past, limited short selling, and this is true. I have also read, I think it was Wikipedia (thus necessitating further research, since that cannot be considered a debate-winning source, in my book), that some people believe that this exacerbated the situation we have today, since short selling provides a check for overvalued stocks.

Teodomiro,

I looked at Wikipedia for info, but I also checked another more scholarly source that I can't remember plus the Motley Fool. I didn't include all these in my post to avoid toooo much length.

The reason I quoted that post was because you had asked what was wrong with short selling, and this post was something that struck me as a potential problem in this economy. Also, there isn't much else out there to offer up.

Perhaps what stratengineer suggested is not possible, since the stock is on loan from a broker and the seller has to re-buy in order to close the deal. The poster was positing that if enough people jump on the short-selling bandwagon, the company's stock will be down enough that its reputation will be on the line enough that it will have trouble staying soluble in this economy.

It may also be that the real problem again is turned around to the seller, who may be confronted with a buyout maneuver that raises the value of the stock to above the original selling price.

Is it ever a possibility that the company goes under before the re-buy of the stock?

The NYT article fleshes out more on the SEC, if you're not hung over this morning.

I don't know much about short selling, so don't anyone interpret my questions as some kind of rhetorical device for putting forth opinions.

Let's assume that Abhilash Nambiar has offered a good analogy for short selling in his recasting of the tiramasu example and we bear in mind Teodomiro's admonition concerning the labeling of short-selling as fraud (i.e., only fraud should be labelled as fraud).

Does the practice of short selling make fraud easier to commit? Should we prohibit ethical practitioners because it is far too easy to practice short-selling fraudulently? Is the line between fraud and free speech clear? What are current laws concerning short-selling? If I'm asked about a stock, am I required to give a balanced opinion on the company issuing the stock, or can I shade my views to drive the stock down? I assume we're agreed that no disclosure of my role as a short seller would be fraudulent - does the law say so? Is the law enforced? Gypsy sister's points interest me as well - I look forward to more useful comments.

If I’m reading this right, I must clear up a possible misconception. I wasn’t criticizing you for using only Wikipedia as a source; I was preemptively criticizing myself for that.

Teodomiro, no worries; I wasn't thinking you were criticizing (or going to criticize) me for using Wikipedia. I did want to air my sources, but have seen enough in the Wiki that's crap, so I wanted to make my search more clear.*

The Motley Fool wasn't too bad for me, but maybe that's because I read 2 other sources 1st.

“Buy Low and Sell High” is a well-known adage. It seems to me that all short sellers are doing is reversing the order, i.e., “Sell High and Buy Low”.

Slight difference: in short-selling, the seller is borrowing the stock. It's all on paper, and not a good idea for a novice, in my view.

The practice also seems distantly related to the money-making chain letters of yore. Get in early to make the most dough: for short-selling, you'll sell at a higher price and have more down time (say 10 days) to let the price drop, so you can buy at the nadir and scoop the most profit.

*I caught a student plagiarizing via Wikipedia, and the stuff she stole was pretty bad.

Oops - this is a reply to the thread below.

sigh - staying up late doing work...

First, Gypsy sister:

I looked at Wikipedia for info, but I also checked another more scholarly source that I can't remember plus the Motley Fool. I didn't include all these in my post to avoid toooo much length.

If I’m reading this right, I must clear up a possible misconception. I wasn’t criticizing you for using only Wikipedia as a source; I was preemptively criticizing myself for that. I find Wikipedia to be a useful starting point for research, but the search shouldn’t end there.

I went to Motley Fool, and emerged frustrated (as usual) that I understood very little. Much of it was the specialized jargon that they use (and they’re certainly not alone; many fields create their own subset of the language). And I think that may be the problem underlying this whole thing. People hear terms like “short selling”, “derivatives”, and “put options”, and they don’t understand them. This leads to a general, vague fear of them. I don’t blame people for being suspicious. Other people are “playing” the stock market, and it seems to be hurting the rest of us.

But when ignorance transmutes to fear and then hatred, I must raise a caution flag. That was the reasoning behind burning witches. Which I think was wrong.

Yet that seems to be what’s happening with short selling. That NYT piece you linked to shows that well. Parts of it are reminiscent of arguments I’ve seen in this thread.

Both the S.E.C. and the New York State attorney general promised to intensify investigations into short selling abuses. “They are like looters after a hurricane,” said Andrew M. Cuomo, the attorney general. “If you pass a rumor in a normal marketplace, people are calm, they check it out, they do their due diligence. When you get the market in this frenzied state and they are on pins and needles, any false information is much more impactful.”

It sounds to me like Mr. Cuomo is confusing short selling with fraud, too.

The poster was positing that if enough people jump on the short-selling bandwagon, the company's stock will be down enough that its reputation will be on the line enough that it will have trouble staying soluble in this economy.

At the risk of losing credibility, I’m going to expose my own ignorance here. How can a stock price determine how well a company does? This is not rhetorical; I really don’t understand this. Other than the possible case where a company is issuing more stock to raise more capital. Or the drop in price causes people to stop ordering goods from my company (I’m thinking of an airline here). It seems to me that a stock price would reflect how the company is doing, but not generally cause it.

Is it ever a possibility that the company goes under before the re-buy of the stock?

That’s an interesting question. I suppose it must be possible, I just have no idea what would happen.

=====

Now, Tim:

Does the practice of short selling make fraud easier to commit? Should we prohibit ethical practitioners because it is far too easy to practice short-selling fraudulently?

I don’t know if it makes fraud easier or not. It is certainly done both ways. Earlier I made the comment that Jim Cramer complained that CEOs had lied to him, and that they may have been committing fraud as well, trying to bump up their stock options.

Is the line between fraud and free speech clear?

What a sensational question that is. That, I think, is at the very heart of this matter. That is what I wish Jon Stewart would apply his considerable talent and intelligence investigating, rather than the 3rd-grade-level sketch that started this discussion.

What are current laws concerning short-selling? If I'm asked about a stock, am I required to give a balanced opinion on the company issuing the stock, or can I shade my views to drive the stock down? I assume we're agreed that no disclosure of my role as a short seller would be fraudulent - does the law say so? Is the law enforced?

Go read the NYT article Gypsy Sister linked to above. I’m not sure I understood everything in there, so I don’t want to attempt an answer.

So to sum up my position at this point:

“Buy Low and Sell High” is a well-known adage. It seems to me that all short sellers are doing is reversing the order, i.e., “Sell High and Buy Low”. I consider these two statements to be equivalent; thus I do not consider short selling, by itself, to be evil or bad.

But people tend to fear what they do not understand, so there is a popular backlash against it, propagated by The Daily Show in this clip. Even politicians are getting in on the act, which means either that they agree short selling is bad, or that they recognize the need to bend to the will of their constituents.

It seems to me that this is a misdirection. The real reason these companies got into financial trouble is more complex. I suspect it has something to do with management’s unwarranted optimism that the markets would always go up, be it the stock market, or the housing market, or whatever.

Just in case this isn't confusing enough, what about options and futures trading? I've always had a negative feeling about short selling, but if it were banned, I suspect the same ugly abuses of the rumor mill would be applied to the options and futures markets.

I've sold covered calls to make a little extra profit on a stock I didn't think was going anywhere. If I had qualified with my broker, I probably would have traded uncovered calls and puts as well.

Used as a hedge, I don't have a problem with any of it. I can certainly see how they could be a motive for slander, but considering all the lying we've seen from corporate stock promoters (think Enron), I don't think it changes anything. It's a buyer beware market no matter how it's played.

Actually, now that I think about it, there may be an advantage to the market that short selling has that options do not - closing your position.

If you've sold a stock short, you don't make your profit until you buy that stock back. This may be part of the reasons technical analysis works sometimes. This could help to create a floor for the stock and keep it in a trading range it might actually fall below if the short traders weren't there to create a floor.

Also, as Gypsy Sister (I think) pointed out, selling short is a very risky activity. If the stock actually goes up, the shorts tend to panic and close their positions in a hurry which can result in a quick rally for that stock.

I hope any potential new regulations take all these things (and more) into consideration before limiting more freedoms. Every cloud has a silver lining.

The true intent of having a stock market in the first place is for companies to gain capitalization in order to produce whatever it is they want to produce. It isn't a device for a bunch of rapaciously greedy assholes to make a ton of money in morally questionable ways which seems to be its only function lately. We should have learned after the dot com bust that there is a lot of shady business going on in the market and it needs to be looked into and stopped. A big problem with the bust was that many of those companies had no business soliciting funds for capitalization because they had no business plan that required further capital. It was merely a scam for the founders to fleece those who bought stock. I personally met a few people in Seattle who made tens of millions on their IPO and then the company basically went belly up or it became a penny stock. They had little intention of ever carrying through on a business plan (unless you call that a plan).

I’ll never put a penny in the market as long as I live. Like most investors, I’m not looking to double my money. We just want security with a modest amount of growth. Unfortunately, most of these Wall Street pricks can’t think that small and are looking to make huge gains over the short term which means someone else is probably making a huge loss over the same period.

P.S. Samantha Bee is hilarious. Ask yourself this: what sort of mindless chimp would agree to do an interview with someone wearing a bee outfit?

The true intent of having a stock market in the first place is for companies to gain capitalization in order to produce whatever it is they want to produce. It isn't a device for a bunch of rapaciously greedy assholes to make a ton of money in morally questionable ways which seems to be its only function lately.

Indeed. That's why I asked how a stock's price could affect a company's bottom line. It seems to me that the company couldn't care less what people are doing with their stock certificates; they have their capitalization, and should sink or swim on merit.

What is 'the company' if not shareholders?

What is 'the company' if not shareholders?

The Company is the engineers designing the product, the workers making the product, and the sales people selling the product.

And a call center in India to support the product. :)

And who do they do all these things for?

By golly, you've got me there. There are no employees. There are no factories, warehouses, trucks, none of it. It's all an illusion. There are only shareholders.

Thank you for illuminating the deep, dank cellar that is my mind.

You're welcome.

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