Short-Sellers Spoil Wall Street's Party

by John M. Curtis
(310) 204-8700

Copyright August 1, 2011
All Rights Reserved.                                         

             Raining on Wall Street’s parade, the nation’s biggest hedge and private equity funds continued short selling, delaying an expected post-debt-ceiling bounce.  While Wall Street predictions don’t come easily, the market’s inability to bounce a day after the putting a debt-deal together disappointed investors, hoping for an equity rally.  Reading the lowest manufacturing report in two years spooked the market, giving the shorts some breathing room before long-term investors take the market upward.  Unregulated hedge and private equity have spoiled Wall Street’s parade on more than one occasion.  With everyone expecting an instant bounce from avoiding default, the shorts prevailed, continuing a popular trend of betting against long-term stock market growth.  Only with sustained growth can publicly traded companies have enough cash to hire new employees.

            Wall Street looks for any excuse to justify buying and selling frenzies.  With the debt-deal still not approved by both House and signed by the president, Wall Street looked for any reason to sell-off.  When the Institute for Supply Management reported that manufacturing grew at the slowest pace in two years, it’s all that was needed to continue the sell off.  Today’s pause could easily give way to a furious rally, jumping the Dow Jones Industrials and other major averages by over 2%.  “One has to carefully consider this economic data point as a indication of a continuing slowdown which will perhaps bleed into earnings,” said Chad Morganlander, portfolio manager at Stifel, Nicolaus & Friedman in Florham Park, New Jersey, diverting attention away from Wall Street’s short sellers.  When the market roars back, Morganlander’s prophetic statements are easily forgotten.

            Today’s stock market volatility, swinging wildly from 150 points down to ending only 10 points in the red, shows that short sellers have nearly finished.  When lawmakers vote to approve the debt-ceiling legislation, markets will turn up.  While traditional summer rallies don’t last long, Wall Street will find plenty of positive news to keep it going.  “Were moving toward the lower end of (a trading) range, so investors are getting more nervous,” said Michael Sheldon, chief market strategist for RDM Financial in Westport, Connecticut.  Sheldon’s referring to the inflection point where short sellers turn long and major funds bargain hunt and buy back in.  Wall Street knows that the smart money won’t sit on the sidelines.  Hedge and private funds like to be ahead of the curve, buying back after stocks were hammered.  Whether it’s tomorrow or the next day, a buying frenzy could happen quickly.

            For the past month, politics have dominated Wall Street, where the GOP hoped to damage Obama politically, giving him a hard time on the debt ceiling.  Never before had there been so much resistance to raising the debt ceiling.  Republicans figured out that Barack’s Achilles Heel is the economy.  Holding the economy hostage, the Tea Party threatened to default the U.S. government, believing that today’s budget deficits damage the country.  While there’s some concern about deficits, lawmakers also know that sluggish growth won’t last forever.  Those betting against the U.S. economy have been sadly disappointed.  Recovering from a once in 100-year financial meltdown hasn’t been easy.  Fed Chairman Ben S. Bernanke, working with the Treasury, has bent over backwards to stimulate the economy.  Pointing to sluggish job growth doesn’t tell the whole story as the economy recovers.

            Republicans wanted the debt-ceiling crisis to highlight Obama’s economic failu/res, heading into next year’s election.  They don’t like to admit the severity of recession caused by excess military spending under former President George W. Bush together with the end of the housing bubble.  When Barack begins to withdraw troops from Iraq and Afghanistan, the U.S. treasury will see real savings.  As Barack’s national health care kicks in the next few years, it’s going to create the largest job expansion in the nation’s history.  Millions of new jobs will be created to accommodate an estimated 40-million new subscribers to national health insurance.  Slashing budgets now is a shortsighted strategy to deal with today’s high unemployment and soaring deficits.  As more citizens go back to work, the government can expect more income tax receipts and lower deficits.

            Compromising on ending excessively low tax rates for upper income earners, Obama was able to cobble together a flawed debt-ceiling bill.  While there’s nothing wrong with slashing waste, fraud and mismanagement, there’s something counterproductive about tossing public employees out of work.  Whether they work for government or the private sector, workers contribute to the consumer spending.  Picking on any one group hurts the nation’s GDP.  When former President Clinton helped fuel the U.S. stock market in the late ‘90s, hedge and private equity funds didn’t dominate Wall Street.  White House and Congressional leaders have more work to do to fix a broken regulatory system that allows short selling private equity and hedge funds to harm long-term stock market growth.  Regulating short sellers is needed to keep the market—and economy—moving forward.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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