Tuesday, July 22, 2008

I Think I Agree With Cramer

Investing – for the purposes of this post let’s define it as buying stock in publicly-traded companies in the hopes of making a profit – is a spectator sport.

Sure there are exceptions; activist investors, corporate raiders, quarter end mark-uppers. But those are outliers. If you or I or a long-only Portfolio Manager buy a stock, we think and hope that it is going to go higher and if we don’t like what is happening at the company the most likely course of action is to sell the stock.

Jim Cramer from his perch at RealMoney continues his crusade to reinstate the uptick rule and enforce the ban on naked shorting. His article today titled “Shorts Are Not and Should Not Be Equal” highlights one very important construct, which revolves around the fact that for some portion of the hedge fund community, short selling not even close to being a spectator sport.

Sure, spreading false rumors, ganging up with your friends, asking deceptive questions of conference calls or manipulating research firms are all some form of illegal or unethical behavior but it happens. If there were no asymmetrical protections for companies against short sellers, only the common stock of the largest would not be at risk at some point. Hedge Fund assets were $2.7 trillion in Q1 08. Trillion. Cramer goes on to say:

“I think the shorts are now heavily favored because they can instill fear and panic that the longs don't have the ability to do. They can destroy businesses -- the ultimate goal -- and the longs can't.”

I’m not sure we need the uptick rule but this naked shorting has to stop. The idea that it is possible to sell more stock than a company has issued is lunacy.

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