Tuesday, May 18, 2010

Big Potential News!!! - Germany to Ban Short Selling

From Reuters:

BERLIN, May 18 (Reuters) - German Finance Minister Wolfgang Schaeuble plans to ban short-selling from midnight, coalition sources told Reuters on Tuesday

The big question IF TRUE is why now???? Is there something going on behind the scenes and this is to preempt something? Is Germany about to make a big announcement?? There has been rumors of Germany leaving the Euro which I have strongly discounted. Trying to figure out the derivative as figuring out what is motivating this seems very important. IF TRUE this short selling ban doesn't seem to be as a result of panic like all previous short selling bans. The DAX is up close to 3% in the past two days and down only about 6% from its highs in March. There has to be something else going on???

The way these things often work is a large rally and than crash afterwards. I am not sure you get the large rally in the U.S. if there is actually a reason Germany is doing this before some big annoucement.

I have no idea. Ideas WELCOME!!!

The market looks broken. Seems like it may be better to short and ask questions later. In the end this can't be good.


Abhishek said...

Markets have become a very risky place both on the long and short side with governments coming up with new “bailouts” and “regulations” almost each day it seems.The new German ban on “naked short selling” effective from midnight has led to US markets declining along with the usual suspects like the Euro and the Pound.Oil seems to have decisively broken its trading band of roughly between $70-$87 since the last 6 months, probably indicating that the the markets might have made an intermediate high.Read more at http://greenworldinvestor.com

Mrs. Watanabe said...

I agree with banning the purchase of naked CDSes (buying CDSes without holding the underlying debt). You can't buy life insurance on someone else... same principle.

As for banning short sales of bank stocks... someone will just come up with another way to do whatever they want to do, whether it's a synthetic instrument, traded in another country, short an index and long the non-bank stocks... whatever... useless, as is all the work from all the politicians the world over.

Market Seer said...

I agree with the banning of purchase of naked CDS but there are two major problems.

1) If I own U.S. debt and want to buy protection how do I buy it? Whoever sells that protection sells against what? So even for legitimate instances where I buy protection because I actually own the bond the other side of the trade is naked. It is not like stocks. In your life insurance example (and actually now you can buy life insurance on someone else, comapanies do it on employees) the life insurance company that would sell life insurance to you is basically entering a naked short sell.

2) And this is the biggest problem for today is the how the government did this. If your the pitcher in a baseball game and it is 3 balls and 2 strikes in the third inning the umpire can't come out and say, a strike out is now 4 strikes. You can do it between games but can't do it during the game without causing massive problems and creating an unfair situation. So here the German government annouced six hours before the ban went into place. The markets are going to go nuts because they are not prepared for it.

I happen to be against CDS totally. There is no reason for it to exist. BUT there is a right way and wrong way to go about it. This is the wrong way and potentially going to cause massive problems.

Justin said...

No Kaspar, in your comment:

"In your life insurance example (and actually now you can buy life insurance on someone else, comapanies do it on employees) the life insurance company that would sell life insurance to you is basically entering a naked short sell."

..the life insurance company is actually the long position. If you die (ie.e fall in price) they lose out.

Mrs. Watanabe said...

I guess I should have said that you can't ordinarily buy life insurance on someone else.

You need an insurable interest.


Market Seer said...

Justin - Why is betting you live longer have to be a long position compared to being a short position?

I understand what your saying but in many ways it is just semantics.

I am selling an insurance contract. For humans I want them to live as long as they can. I am not long an asset on the side and simply betting that the actuary tables and premiums will insure a profit. For CDS it is an insurance contract. I want whatever insurance I am selling to last as long as it can. I am not inherrently long an asset on the other side. I am betting that the premiums (cds spread) pays off compensating me for any loss I may occur.

When Germany is saying they will ban naked short cds they are really referring to speculators buying or being long cds or inherrently shorting the bonds.

It is all semantics just depending on what perspective you are looking at it.