Stock Lending Today - An Industry Under Siege!

Short Interest Data

Data came out yesterday from the NYSE showing short interest data has reached its highest level since mid-September last year – the day Lehman defaulted.  The data release is always delayed so the numbers are actually from 13 March almost exactly months after Lehman.  The figures are still down over 1 billion shares from the September numbers and for most of the post Lehman period have been down 2.5 billion shares or more from that date, and still remain 2.5 billion shares below the peak in mid-July 2008.   Click on the picture below and you will see the chart for the past year.

Even though the numbers are still down from the peak – and the market levels declined while the short interest also declined rather than expanded – short selling is still under pressure and will no doubt get undue attention at the G20 in London this week.  There has been some suggestion that Monday’s massive rally was due in part to short covering in the face of Geithner’s plan on toxic asset relief and the cooling off we saw in markets yesterday might add support to this view.

So let me be sure I understand this – the market rallies decisively on Monday partly due to buying by shorts.  Everyone is happy (except presumably shorts that lost money).  To me that looks like an artificial price rise because it wasn’t based on fundamentals or even the Geithner plan.  If it was either of these, then presumably markets would have carried on rising yesterday or this morning.  Yet when short sellers make money from companies that post increasingly negative performance figures and therefore are showing fundamentally weak performance, everyone is against them.

Clearly what people really want is artificial price rises when it benefits them, and they want poorly performing companies to be protected so that their investments are artificially subsidised.  Now I get it.

Watch this Jim Chanos CNBC Interview.  He discusses the toxic asset plan amongst other things.  Quote “Accounting is Destiny, Joe”.  My grade 10 accounting teacher would be happy.

IOSCO Short Selling, iShares, Treasury Tim's Toxic Tonic ... and Me!

There is LOTS of news today, so my main job has been to stay in touch with everything, rather than having the luxury of being able to interpret, analyse and opine.

IOSCO Short Selling Report

The biggest news from a securities lending point of view is that the long-awaited IOSCO Consultation Document on the Regulation of Short Selling was released today.  The document contains its proposed principles it hopes will be used in fostering a more consistent international approach to short selling.  It has just come out this morning, so I haven’t gone through it yet, however the covering Press Release has identified Four Principles that IOSCO would like to see used by regulators around the world.

I don’t think there is much objectionable about these goals, so the devil is in the details which I will go through in the coming days.  I will also be looking for comments from other people, so please send them to me, or post comments on the site.
The Consultation Period deadline is 4 May 2009.

 

iShares

If you have been following me on twitter this weekend, you would have seen that private equity investors Hellman & Friedman may be assembling a group to bid on the Barclays iShares ETF business.  Unattributed stories around the sale of iShares is that Barclays is interested in funding the purchase, up to a rumoured 80% of the deal.  H&F bought Gartmore about 3 years ago through one of its funds.  You can read coverage of the story here. 

Treasury Reveals Toxic Assets Plan

(Finally) The biggest news in the markets today is the release of Tim Geithner's plan for helping relieve US banks from the albatross of toxic assets.  There will be far more learned commentary than mine forthcoming, so I am sitting back and absorbing the thoughts of others.

Global Custodian Video

You can catch my latest video for Global Custodian Magazine in their Multimedia section here.

Weekend Wrap: Naked Shorts, Emerging Markets and Podolsky

Did Naked Short selling bring down Lehman?  Bloomberg ran a long story earlier this week.  Market information from last year suggested that the utilisation of available stock to borrow never really exceeded 60%.  While that is certainly an extremely high number, other companies are often above that and survive.  Sears Holdings is above 80%.  Sears has long claimed abusive short selling yet remains in business.  What do you think?  Be sure to vote in the following survey:

I have always had a particular personal interest in emerging markets.  Check out this article showing a colourful chart produced by Lazard Asset Management and displayed at Seeking Alpha.  The best performing emerging market in the MSCI Emerging Market index?  Morocco – it was only down 11.08% last year.  That’s right, the best performing market lost over a tenth of its value.

Earlier this week I ran into Richard Greensted, a veteran commentator on the securities services industry.  It gave me the opportunity to talk to him about The Podolosky Diaries.   Richard describes it in the following way:  “A cautionary tale for our times: The fictional account of one hedge fund manager's decline and fall from grace”.  As I read it, I often find myself thinking: “I’ve been in that meeting” or “I’ve met that idiot”.  A darkly amusing diary that I highly recommend you read.

Citigroup Preferred Arb ... Not preferred any more

I was speaking with a hedge fund manager the other day about shorting stocks.  One of the key comments he made was that there is a myth that every directional short decision that hedge funds make is somehow mystically blessed and that they are always correct.  Thus, everyone should indeed fear the prescient hedge fund manager when a new short position is disclosed, for they are all-knowing and all-powerful. 

In reality, as with most things in life, your objective is to try to be right more often than you are wrong.  As he pointed out, a 55/45 election outcome in the US is a landslide victory, when in fact that is only a +/- 5 % swing from a dead-heat.

Given that fundamental trading decisions are not generally taken lightly, what could possibly go wrong?  First, there are external factors which might occur that are not possible to research.  Second, there is information which is not available to people outside the company.  Third, timing is always an issue.  Maybe you get in too early and you can’t ride the trade until your projections come true, or you short s stock and get recalled before it becomes profitable. Fourth, well ... you could just be wrong.

At the end of February I wrote about Citigroup’s new preferred share issue and the borrowing demand related to it.  So how has that trade gone? 

Read Tyler Durden’s story in Zero Hedge.  Utilisation on Citigroup stock has absolutely skyrocketed since the end of February as have the fees.

P.S.
I've had a few people ask me about the Global Custodian Magazine videos that I was doing earlier in the year.  I haven't done any for a few weeks, but taping begins again today.  We are on a  new schedule and will be doing them every two weeks.  Thanks for asking.

Prime Brokerage Predictions, AIG & St Patrick's Day

Prime Brokerage

Brad Hintz an analyst at BernsteinResearch has produced a report on Prime Brokerage and makes some unsettling predictions.  First off, Hintz expects that a quarter of hedge funds will shutter their doors within the next twelve months.  He anticipates asset values will drop by 18.2% (fairly specific estimate don’t you think?) this year.  The decline in assets under management will hit the prime brokerage business hard, and he foresees a 32% decline in revenues with profits dropping by 52%.

He feels the prime brokerage business also faces permanent changes in its relationship with the hedge fund community.  The rescue of Bear Stearns and the subsequent failure of Lehman has altered the hedgies’ view of  prime brokers and counterparty exposure has a new prominence. 

His predictions for the top Prime Brokers (in approximate rank order) in 2012 are as follows:  JP Morgan, Goldman Sachs, UBS, Morgan Stanley, Deutsche Bank, BNP Paribas, Credit Suisse, Bank of America, Barclays and Citigroup.  Given the turmoil, ructions, consolidations and takeovers in the financial community over the past year, it is a truly brave soul who names top providers three years into the future.

More on AIG

Please have a read of Paul E. Zimmerman's blog on the subject of bailed out companies and government intervention.  Feel free to pass over the kind words about me and go to the meat of his blog.  He expresses my thoughts far more eloquently than I could.  Paul covers a huge range of topics in his blog, they are interesting and well thought-out. That's why I take the time to read his blog.

Happy St Patrick's Day!

I know it's still early in the morning, but we have been partying since 12.01 and here are a few snapshots.  Yes, that is me in the snazzy green bow tie explaining the finer points of Central Counterparties to my adoring audience.  I am having some professional shots done, and this bow tie will feature in all future shots.  Click on the photos and they will pop-up in a separate box.

 

                        

Ok, so the truth is that these photos are from the recent IMN conference in Arizona. This party was sponsored and organised by eSecLending and everybody had a great time.  The dancers were fantastic, the band was fun and the drinks were  ... green.  The dance troupe are from the Bracken School of Irish Dance, the band is Round the House, and the photos are from Allyson Lewis of eSecLending.  I'm glad to see Allyson got my good side.

P.S.  Today is the Spitalfields Forum.  Don’t forget to follow the event on twitter at the following address:  www.twitter.com/dataexplorers. Interesting experiment, I hope it works.  I have been on twitter for a few days now and become a bit of an addict.