Short Selling Takes Down U.S. Stock Market

by John M. Curtis
(310) 204-8700

Copyright September 22, 2011
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           Furious short selling by unregulated hedge and private equity funds sent the Dow Jones Industrials spiraling for the last two days after Fed Chairman Ben S. Bernanke signaled a new round of quantitative easing.  While nearly anything triggers a sell off in today’s market, cyclical profit taking has been exaggerated by unbridled short selling, where some of the nation’s biggest funds profit from market downturns.  Sovereign debt problems in the Eurozone contributed to the global instability that leaves the Fed no choice but to stimulate the economy.  Bernanke’s decision to begin QE3 telegraphed to investors that share prices must be discounted sharply.  Market corrections have the effect of discounting shares for the next bull market.  Long term investors, those depending on retirement income or prospects of cash reserves don’t like sell offs for obvious reasons:  They like to see their capital grow.

             Today’s private equity and hedge funds routinely short markets during profit taking and market sell offs, driving markets down even further.  “The probability of going back into recession is higher now that at any point in the recovery,” said Wells Fargo Bank economist Tim Quinlan.  Expectations of a “double-dip”: have spooked markets for months, leading to the sideways movement.  From day to day, Wall Street’s spin machine justifies market sell-offs or buying frenzies, leaving long-term investors scratching their heads.  President Barack Obama and his Treasury Secretary Tim Geither have done nothing to rein-in short selling unregulated hedge and private equity funds.  Talk of regulating short selling occurs time to time in Europe, hoping to stem punishing market sell-offs.  Not part of Barack’s July 20, 2010 Financial Reform legislation, short selling must be regulated.

             Losing nearly 8% of its value in two days, the Dow Jones Industrials needs institutional curbs to prevent unregulated hedge and private equity from accelerating market profit-taking.  Whether the economy goes into recession or not, Bernanke’s Sept. 21 announcement about QE3 should come as no surprise.  While newly minted GOP presidential candidate Texas Gov. Rick Perry warned Bernanke about more quantitative easing, the Fed chairman must pull out all stops to prevent another recession.  Recessions or stagnant growth mushroom deficits and stifle economic growth.  Obama must do more than just raise taxes on rich to stimulate the economy.  No economy can thrive without domestic big-ticket manufacturing or assembly, especially of pricey electronics like flat-screen TVs.  Inducing the car industry to manufacture or assemble in the U.S. has paid rich dividends.

             Creating more U.S. jobs is the best way to prevent recessions and assure economic recoveries.  More government works projects won’t bring back manufacturing and assembly jobs into the U.S. Companies, like Apple Computer, must show more innovation on how to bring back jobs to the U.S.  Manufacturing in cheap Asian labor markets adds to the bottom line but doesn’t help solve U.S. unemployment problems.  Apple wants big profits and consumer want cheap products but the country needs more jobs not lip-service about the current dilemma.  White House and Capitol Hill have failed to show the leadership needed to begin to shift foreign manufacturing and assembly back to the States.  Obama’s recent jobs proposal met some criticism from former President Bill Clinton, who thought the timing wasn’t right to hike taxes on the rich, an understatement on GOP-dominated Capitol Hill.

             Short selling hedge  and private equity funds to themselves a favor but harm long-term investors.  If publicly traded companies are ever to have the cash reserves needed to expand payrolls, they can’t have wild stock market sell-offs.  Obama’s best bet to keep the cash-flow into public companies is to regulate short selling.  As long as prolonged market downturns take place, there’s simply not enough cash for companies to add to payrolls.  Bringing manufacturing and assembly jobs back to the States would go along way in denting the unemployment problem.  If Obama’s health care reform comes to fruition in 2014, millions of new jobs will be created in the health care industry and related  fields. Today’s 422-point plunge or 3.51% plunge in the Dow reminds investors that something must be done to prevent another recession.  More manufacturing jobs will improve the unemployment rate.  

             Today’s wild swings in the U.S. stock market damage the economy by harming publicly trade companies and long-term investors seeking stable returns and more predictability. White House and Congressional officials must look carefully about how to manage currently unregulated hedge and private equity funds that routinely short the market.   Bringing manufacturing and assembly jobs worked well in the auto industry and must now apply to the electronics and large appliance industries.  U.S. companies that manufacturer overseas or foreign manufacturers must be given the strongest possible incentives to transition manufacturing and assembling back to the States.  Whatever Bernanke does to stimulate the economy, elected officials must deal with real impediments to growth.  Without addressing short selling or bringing back jobs to the States, there’s little else the Fed can do.

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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