“When historians study this period in financial history,” notes Dan Amoss, “we’re likely to discover that the SEC’s disastrous decision to ban short selling had the effect of destroying many hedge funds that had been making sound fundamental trades (with far too much leverage, in hindsight).
“Since these funds couldn’t sell short many stocks as a hedge, they were forced to liquidate many sound long positions. So in recent weeks, I’ve seen valuation anomalies that I never thought I’d see in my career -- for example: oil service, coal and fertilizer stocks with sound fundamentals selling at 3-4 times earnings.
“Also, the financial stocks were hit during the short selling ban, because fund managers who wanted to buy into the sector couldn’t ‘pair trade.’ Pair trading involves buying a stock you like and selling short a stock you don’t like in the same sector. Now that hedge funds can pair trade in the financial sector, we’ll probably see an increase in the speed at which we differentiate the winners from the losers.
“Insolvent banks need to be shut down or and/or absorbed into stronger banks as soon as possible to restore some sense of trust in the banking system. With a stock market that’s now less manipulated by the government, this healthy process can pick up speed.”
“Since these funds couldn’t sell short many stocks as a hedge, they were forced to liquidate many sound long positions. So in recent weeks, I’ve seen valuation anomalies that I never thought I’d see in my career -- for example: oil service, coal and fertilizer stocks with sound fundamentals selling at 3-4 times earnings.
“Also, the financial stocks were hit during the short selling ban, because fund managers who wanted to buy into the sector couldn’t ‘pair trade.’ Pair trading involves buying a stock you like and selling short a stock you don’t like in the same sector. Now that hedge funds can pair trade in the financial sector, we’ll probably see an increase in the speed at which we differentiate the winners from the losers.
“Insolvent banks need to be shut down or and/or absorbed into stronger banks as soon as possible to restore some sense of trust in the banking system. With a stock market that’s now less manipulated by the government, this healthy process can pick up speed.”
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