To all short sellers: Please address the following:

1. If selling short drives prices downward, do they not also hold rising prices down?
2. Oil cracked $150, then plummeted to under $100 in less than 2 months. What role did the shorts play in this price action? What role did the shorts play in the Monday rise in oil price?
3. Is it beneficial to give a financial incentive for individuals to identify problems in companies?
4. Name 3 advantages of the existence of shorts.
5. Name 3 disadvantages of the existence of shorts.
6. How do shorts lock in their gains? What happens to the stock price when they do?

I will put forth the following: All of the individuals whining and crying about short sellers are those individuals who have portfolios going into the toilet right now, which is clearly affecting the function of the neurons misfirings in their brains.

It's true, misery loves company. If your portfolio is getting hit, bitch about short sellers and that may make you feel better-for a while. The problem is, after all the bitching, the situation remains the same and you have made yourself look like an uninformed ass in the process. And after all is said and done, it hasn't added one cent to your coffers. Better for you to spend your time re-grouping.

The above 6 points aren't part of some simple stock shorts 101 test. The questions hit at the very essence of short selling, when you actually take the time to answer them. Short selling is akin to Newton's third law of motion...every market force has an equal and opposite force. The only difference is that you can't go below zero in stock price whereas the ceiling is limitless. This illustrates the risk that the shorts take, and the risk when "oversold" hits zero. But I digress slightly. . .

If you honestly answer each of the above questions, there is no way you can go about claiming that the shorts are evil, immoral, unpatriotic, and should be banned.

Yes, I think a temporary ban of shorts to limit panic selling and capitalizing on rumor mongering is prudent. After all, if a company is truly bad enough to go to zero, then delaying things by a week or a month will only delay the inevitable. If the company isn't fundamentally flawed, a delay of short selling will prevent an oversold condition hitting zero, thus preserving the company. Yes, I believe anyone that intentionally tries to manipulate stocks by spreading rumors (long or short) should be prosecuted to the fullest extent of the law. There are rules on the books, and they should be enforced, plain and simple. I do not oppose circuit breakers that will halt the markets in the event of panic selling. Again, it is another prudent device in place to help us when we aren't being rational, and it allows us the time to round up those buyers (Buffett like types) to come in when no one else has the stones to buy.

Short seller haters never make the above distinctions--never. They never distinguish between legitimate short selling and illegal activity. "Shorts" and "illegal" might as well be synonymous.

Short seller haters try to make people believe that perfectly sound companies, those with solid books and great business models can somehow be easily taken out by a rogue short seller. HOGWASH!

The shorts are no more "bad" or "wrong" than long sellers. It is all about what side of the trade you are on. By the way, in regards to the price of oil, shouldn't all of you short haters be thanking the shorts from keeping oil from rising past $150? Or, shouldn't you thank the shorts for the decrease in oil price? Oh, I get it. The shorts are bad only when I lose money out of the deal, am I reading that right? You people need to pull your head out of the sand, or whatever orifice it may be residing at this time. Maybe you should just say "thank you", and then get on your way and trade. There is rarely substance to the blanket anti-short arguments. Bitch all you want about the illegal activity of spreading rumors for profit, in which I am in agreement with you, but the act of short selling isn't the root problem. Taking away the shorts takes away information from the market, plain and simple. Maybe those long sellers should hang tough as these evil short sellers are pushing the price down and not sell themselves. That's another point never addressed by the short haters . . . it compounds their market view so it is easier to ignore. Also ignored are stocks that have been shorted and publicly lambasted, yet are resilient. (Maybe because the management wised up and made changes?) Short interest levels are also ignored, but only when the short interest does not suit their market view. Otherwise, it is shouted from the mountaintops.

Just admit it, short haters. Your portfolio is in shambles, and you're looking for someone to blame. A little honesty goes a long way.

--Jonathan

p.s. and yes, I have read Tom Armistead's Moral Hazard--A Danger to our Financial Ssystem (sic)

Comments: View Comments |  Monday September 22, 2008