Stock Lending Today - An Industry Under Siege!

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.

Cramer's Outrage of the Day is ... Outrageous!

 

I have been intending to include this CNBC video for a few days now.  It's from Jim Cramer.  If you don't know him, how can I describe him?  Former hedge fund manager, SEC Commissioner wanna-be, maybe-he-once-had-it-but-now-he's-a-lunatic-kind-of-guy, and CNBC "maven".  I admit that if you go back to the late 1990's I really enjoyed watching him, found his commentary interesting, signed up to TheStreet.com and Real Money.  I now think he's a caricature of himself and a number of people I know use his commentary as contrarian indicators to investing. 

Anyway, in this video he aggressively challenges the SKF - the ProShares UltraShort Financials ETF - and the removal of the uptick rule.  He maintains that the US markets would be on a "much firmer footing" if the SKF was eliminated and the uptick rule returned.  To his mind, these are the demons that have undermined the markets.  He also suggest that banks including Citi, Bank of America and JP Morgan shares are trading as if they are insolvent due solely to short selling manipulation.  I say again, these bank stock have less than one day's trading as short interest.   Watch for the latest NYSE data which comes out later today to see if there are any dramatic changes.

If you want to make an argument as to why your share price should be higher, try making the argument using facts and data, as Citi has just done.  That way the market - long buyers and short sellers - can decide.  Citi shares were up yesterday.

John Wilson addresses shorting of UK banks in his blog at the end of February:  "Bank short sellers deserve an apology".  The thing about useful stuff is: Bank short-sellers deserve an apology

When comparing Jim's view and John's view, I'm with John.  You decide.

P.S.  I'm interested in your comments on Twitter.  I've had a couple of people suggest that I start up a stock lending Twitter.  Are you interested?  Do you use Twitter?  Let me know what you think.

Stop Short Selling Now!

I came across yet another blogger demanding a ban on short selling.  I suppose it's inevitable when you see the markets crashing towards a Dow 6,000 level. And you see more government money going into AIG and then are astounded by Eton Park's profit from their HSBC short position of somewhere between £140 and £160 mm.

However, in an attempt to get US retail investors riled up he uses Apple as his example and alleges that poor unwitting retail punters' shares are being used by dastardly short sellers to drive down the price of the stock.  I spend a lot of time responding to blogs like this.  (OK, maybe I have too much time on my hands)

I pointed out that AAPL short interest peaked (from a  reporting point of view) on Oct 31 with 28 mm shares sold short.  The closing price that day was $107.59.  As of the most recent reporting date Feb 13, only 19 mm shares were short.  The price closed that day at $99.16.  Short sellers were net buyers of 9 mm shares during that period and yet the price still declined.  That tells me it is long investors selling more than new long investors were interested in buying.  It doesn't say that short sellers were driving it down and the fact that it is less than one day's average trading volume means that it has minimal impact overall in any case. 

I also noted that more high profile stocks like Citi, Bank of America and JPM all had short interest less than one day's trading volume.  I think companies and investors should spend less time trying to deflect blame on to short sellers and instead focus on sorting out their fundamentals.  As of the time I am writing this blog, my comment still hasn't been published.  The hit rate for my comments is about 50%, so we'll see how confident the writer is in his argument.  Changing the perception on short selling, one blog at a time!

Head for the hills - or at least the fields!

If you are employed in the financial industry, and are based in London or New York, you have probably had a pretty tough time.  If you are a little down about it, DON’T watch the video this morning from CNBC Asia which features Jim Rogers.  Jim suggests that Wall Street and its brethren around the financial world are headed for a difficult decade and tells us that farming is the future.

Jim’s suggestion that NY will suffer badly is backed by CDS spreads on NY City as covered by this article from Tyler Burden at Zero Hedge.

In the Press

Finally, I had an article published yesterday in the current issue of Securities Industry News entitled “Crisis Puts SecLending Risk Practices to the Test”.  I like the magazine, and Chris Kentouris, Senior International Editor, is possibly the nicest journalist in the business.

Milestone - 100th Post!

Today marks the 100th post on Stock Lending Today.   I started the blog in order to share my thoughts and views on the securities lending industry and related subjects.  My feeling was that there was a need for the community to be able to communicate on relevant issues without having to wait for industry events, trade organisation communications, or the trade journals.  Little did I know that stock lending would become so famous - or should I say "infamous" - in the months following launch. 

Until the turmoil that started with sub-prime last year, the only other time the words "stock lending" appeared on the BBC was in connection with the Maxwell pension fraud whereby undocumented, uncollateralised stock lending was used to pilfer assets.  Not a great issue to be associated with, and again the news regarding short selling is also unfavourable company.  Never mind that all the academic evidence points towards short selling being a valuable part of the financial markets.  Forget even the regulators who have reluctantly acknowledged the importance of the securities lending business.  The need for a scapegoat is a basic human need, right after food, shelter and sex.  Hopefully the IOSCO Task Forces will add some meaningful discussion and debate.

Stock Lending Today now has 76 subscribers around the world - thank you!  Also, tomorrow the site should reach the 10,000th page hit.  I'm really happy with that, and as you can see from the chart below the trend is increasing.  The regular dips reflect weekend hit levels.

The other development that I think shows securities financing people want to improve their connections is the growth of the Securities Lending Traders Network.  This group on LinkedIn now boasts over 500 members from over 100 different companies and located in 26 countries around the world.  Most satisfying for me is that I often see the first person from a company join, and then a few days or a week later, their colleagues joining up.  The range of discussion and debate and the number of participants continues to grow.

The blog will only be successful if it reflects what you want me to write about.  So let me know what subjects you would like to see me cover. Also, I get a lot of emails sent directly to me which I appreciate.  But why limit your interesting and often witty comments to just me?  You can post your comments on the screen and do so anonymously.  Give it a shot - people will be interested in reading what you have to say.

Thanks very much for all your support and kind words since launching and keep contributing.  If you like it, why not tell others about it?  Finally - I recommend you join SLTN.  It's free and you can connect to people globally.   As the title suggests, this industry is still under siege, and better, more open communication can only be a good thing!

 

To Underwrite or To Not Underwrite ?

The announcement by the UK regulators last week that firms won’t be able to protect against potential losses by shorting stocks underwriters and sub-underwriters is potentially a costly new restriction.  I understand the concern that firms are receiving underwriting fees to undertake the exercise and that there is a possibility of undermining the sale of the stock, but surely firms must be able to hedge against risk.   In fact, if firms can’t hedge their potential risk, why undertake the transaction in the first place?  A Bloomberg story on the subject carries the quote:

“Laying off risk through short-selling can push a stock price lower and can be damaging to the client,” said Tom Troubridge, head of the capital-markets group at PwC in London.  

Maybe there is a reason the stock price should be lower in the first place?  Nothing is free, and if there is a greater risk of loss when underwriting an issue, it will be reflected somewhere – higher fees or lower target prices or elsewhere.  I think this is another example, like the ban on short selling, that looks good on paper to the public, but practically has a negative impact on the markets overall.

I am up late every Sunday night into Monday morning so that I can get my fix of American football, so it’s not my favourite day for maths.  Hence I was perplexed when reading Guido Fawkes’ blog this morning that was looking for an explanation of the Bank Bail-Out in the UK.  Check out this article, and if you can explain how the government is expecting the numbers to work out, please let me know. 

Sorry to have my first post of the week predict bad news, but it can’t be helped.  My man Finbar Taggit is predicting worse news on the job front this week than we had last week.  

And let's share in the emotions of Bill Fleckenstein who is leaving the hedge fund world in words that were picked up by CalculatedRisk:

"on a personal note, I no longer want to run a short-only hedge fund, as it is very stressful, nerve-wracking and generally not very much fun." 

Good luck this week:  I’m a Stock Lender – Get me out of here!