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Don't fight the FED. they say, the reason is simple, they have the keys



February 10, 2009 – Comments (1)

no matter how much you want to think this is a free market, its not. When the FED. wants to, they can put a stop to shorts in a drastic hurry and they usually do it right when the majority of people are so sure that shorting is a no brainer.##############################Fund managers react angrily to FSA plan to name all short-sellers

Ian King and Tom Bawden

Fund managers reacted angrily yesterday after the Financial Services Authority (FSA) said that it may force UK stock market investors to make public almost all information about their short-selling activities.

Short-sellers, including many hedge funds, borrow shares whose price they expect to fall and then sell them in the hope of making a profit by later buying them back more cheaply and returning them to their owner. Last September the FSA placed a ban on the short-selling of shares in 34 financial companies, which expired on January 16. At the time it also ordered any investor who was short of up to 0.25percent of a company's share capital to disclose it to the market. Now it is considering widening the disclosure requirement to the 3,000-plus stocks traded across British exchanges.

Investors would have to disclose any short position representing 0.5 per cent of a company's share capital and every 0.1 per cent after that. The FSA's discussion paper, published yesterday, also recommends that the disclosure level should be just 0.25 per cent for companies undertaking rights issues.

Shares in several companies were squeezed sharply higher immediately after the FSA announcement hit the screens. Invensys, the engineering group, British Land, the property company, Xstrata, the mining group, Wolseley, the building products supplier, and Argos and Homebase owner Home Retail Group — all of which have been targeted by short-sellers in recent months. All the companies rose by between 8 and 15per cent. Among mid-caps, DSG International, the owner of Currys, Morgan Crucible, the materials group, Debenhams, the retailer, and Sports Direct International, were also squeezed higher.

Related LinksFSA may extend rule on short-selling disclosure FSA calls end to ban on short-selling

The FSA's proposals follow calls from some MPs for tighter restrictions governing short-selling. John McFall, chairman of the Treasury Select Committee, urged the FSA to reinstate its temporary short-selling ban on financial stocks last month.

Sally Dewar, managing director of wholesale and institutional markets at the FSA, said there was strong justification for the rule to be not only reintroduced but extended to all companies.

She said: “We believe that enhanced disclosure across the whole market is the right way forward. We also consider it to be important that we align our proposals with those being developed on an international basis and we are working towards this.”

The FSA has set up a consultation period, to close on May 8, after which it will issue a Feedback Statement. It said that this would set out its conclusions on a longer term policy for short-selling.

However, Tim Steer, a fund manager at New Star, the investment group, called the FSA's proposals “bloody ridiculous”, adding that they would be counterproductive and that everybody would suffer as a result. Mr Steer said that forcing hedge funds to disclose their short positions would “leave them with one hand tied behind their back”, cutting their profits, leaving them with less money to invest and reducing market liquidity.

Simon Morris of CMS Cameron McKenna, the City law firm, opposed the FSA's proposals. “This is rather a blunt instrument. The FSA is clearly hoping that the disclosure obligations will discourage abusive and other negative short-selling. But inevitably, these measures risk reducing the benefits that short-selling has on liquidity and price correction,” he said.

Andrew Shrimpton of Kinetic Partners, which advises two thirds of Britain's hedge funds, also criticised the proposals. Describing the proposals as “excessive”, Mr Shrimpton said they would be costly and time-consuming — and urged the FSA to adopt the same system as the US and Hong Kong.

Under those systems, the local stock exchanges calculate and publish each company's aggregate exposure to short-selling, but individual investors are not required to disclose their short exposures to companies. Andrew Baker, chief executive of the Alternative Investment Management Association, also called for a US-style approach.

1 Comments – Post Your Own

#1) On February 10, 2009 at 5:50 PM, DemonDoug (31.27) wrote:

Free markets are ones that tend to go higher.

More gov't intervention = lower markets in the long term.

Sure, short term you can cause a very small short-covering rally.  That's what happened last year.  But if you ban or even just  hamper shorts a bit, you drive a lot of liquidity out of the market.  Decreased liquidity = decreased demand = lower prices.

Meanwhile the S&P 500 is very highly overvalued, by 25% at least.

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