Equity Markets Are About As Rational
As the High School Rumor Mill
There are some things I miss about being a kid.
Like playing with Legos, blowing off chores, and letting someone else do the cooking (thanks for all the years of meals, mom).
But some things I’m glad to put behind me. For instance, in high school, I was often hearing about the latest “juicy gossip” about someone that invariably was not only false, but often amusingly so…
I’m guessing the kids that did that never grew out of it… and got jobs on Wall Street. You see, rumors about a company can affect markets, and often in a completely irrational way.
For instance, take a look at AIG in the past week:
As Rational as i: AIG’s Share Price In the Past Week
A juicy rumor! Apparently, word went around to Wall Street traders that the SEC was considering a short sale ban on certain stocks. Namely, companies it had a major ownership stake in courtesy of the bailouts: Citigroup, AIG, and so on.
Naturally, if you can’t short a stock, the bias shifts upward. So traders jumped into shares, sending the price and volume up. Anyone short the stock either had to sell to cover, or throw in more capital to cover his or her margins. So what we had here was a classic example of a short squeeze (good thing I’m not shorting Citigroup or AIG—yet).
But don’t fret, following the market close, the SEC released a statement, “There is no truth to the rumor that we are considering restricting the short-selling of stocks in which the government has a stake,” John Nester, Securities and Exchange Commission.
In other words, the rumors were unsubstantiated.
But for those seeking to profit from the failure of these companies by shorting them, the damage has been done, and the message was made clear. Sure; these bank stocks are floating on thin air, but short selling that illusion is best left to the pros…
Stay Sovereign and Stay Short!
Editor of The Credit Crunch Short Report