Short selling argument rears it's head again

Daily Financial Analysis / Simon Denham / 10 March 2009 / Leave a comment

Daily Comment Tuesday 10th March 2009

Nice to see the argument over short selling is rearing its head again. The FD of Aviva (down just over 50pc since the turn of the year) describing it as not in the public interest as it drives unreasonable volatility. Nothing in there about the fact that shares are where they are because of decisions made by the senior management, end of argument. I note that since the shares of Aviva dumped out of bed on the 5th of this month that Directors of the company have bought (wait for it)... about £50,000 worth of stock. Hardly a ringing endorsement. If Directors really believe that the short sellers are wrong they should be out there hovering up as much as they can afford. I have not heard of massive board purchases in Bank stocks recently either.

So far the only people proved right over selling stock have been those selling. Not only that but the continued duplicitous statements by some boards/spokesmen is far more damaging for shareholders in every company than the activities of a few shorters. When markets fall 'short only' funds do well and (in case nobody had noticed) the markets are well down so far this year. When a bull market returns these funds will struggle, as do the 'long only' funds at the moment.

With expectations from a huge majority (according to polls) that the FTSE has between 10 and 30pc still to fall it might come as some surprise that our clients are very long indeed at the moment and buyers are continually entering the picture on any weakness. The sub 3500 level in the FTSE 100 is particularly popular with large numbers of punters coming in and the fact that we are continually bouncing off the level seems to indicate that just for the moment enough of the big boys agree to hold us up.

Confidence is shot to pieces and with the G20 due to meet this weekend (talk about the blind leading the blind) sentiment is unlikely to get better! The fact is that although we are all in the same boat various countries have wildly differing problems and the solutions for some are certainly not the solutions for others. Gordon Brown and President Obama exhorting the big exporting countries to increase fiscal liquidity is unlikely to fall on sympathetic ears and for all the pious words over protectionism the actions of various member states do not actually back these up.

Markets this morning seem just a bit more optimistic with the FTSE and the Dax ignoring the sell off in the States lat night and coming just on the side of the angels. The weakness in Gold might also be something of a short term bull indicator for equities as investors start to offload the yellow metal in favour of return. Gold has fallen 35 dollars from the high on Friday and the odds on another attempt on the $900 level have shortened significantly.

The FTSE has been forming something of a falling wedge formation over the last week or so and there is good headroom for a move above 3600 if we can get over the pessimism that still engulfs every announcement. One hesitates to sound even remotely positive these days BUT a break above 3620 might well be a very strong signal for a move to more favourable waters.

News is very light today (which given that there is not much good stuff out there these days might be considered a bonus) might restrict activity to some extent and we will have to wait till later in the week for any further insights on the state of the various economies.

With Sterling once again coming in for some serious battering it might be advisable to remind traders that this is the direct consequence of printing more money. More pounds, with no increase in the economy to support them, just devalues the existing currency in circulation. If the plan to create liquidity in the banks works then the BOE will earn the plaudits but with the only two recent examples to go by, Japan on one side and Zimbabwe on the other, the perils are plain to see.

The only saving grace for sterling is the probability that virtually everyone else is going to do pretty much the same thing (only under a variety of guises).

Sterling did not actually approach the lows of January (1.3500 versus the dollar and around 1.0200 versus the Euro) but there is only so much that it can do in one day. As mentioned many times in previous comment the momentum for the pound is still very bearish BUT it must be said that, for all the bad PR over the past few months, it is still holding up above the aforementioned lows. There seems to be minor support at 1.3750 to 1.3770 which is holding firm at the moment but on the other hand (to be fair) 1.3860 looks tough to break through as well. A move to the upside might well find short term allies if the Sterling shorters are weaker than in times past. Back above 1.3900 and there might be some fast covering buying to drive us higher.