Do You Believe in Magic? (Part2)

Apparently the SEC believes in magic, too.

Their top economist is stepping down after the agency rejected his staff’s study and adopted short-selling restrictions. In spite of there being no evidence that short sales can take down otherwise healthy companies, the SEC restricted them because, as they said, they “undermines confidence.”

I’ll tell you what undermines confidence: having politicians artificially support stock prices. If I can only buy a stock at a price that some bureaucrat determines is fair, I’ll just keep my (and my clients’) money at home.

Short-selling is the free speech of the financial markets. It allows participants to express a negative opinion. And just like free speech, it’s most unpopular when things really stink.

But it’s not black magic. You can’t cheat an honest man and you can’t undermine a sound balance sheet. In time, the truth of every business comes out. If you short a solid company and they keep on reporting growing stable and growing earnings, you’re going to lose money.

That’s why sound companies never fear shorts. And a free market doesn’t fear the Dark Arts.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

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