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There seems to be some bizarre hysteria blowing through the country at the moment: The fear of shorting stocks, and the companies that practice it. The newspapers seem to be all over the mechanism, and journalists seem to be failing in their duty to provide accurate information. Also in the firing line seem to be pension companies, who loan their stock and thereby allows this to happen in the first place, companies that do it, and even various characters who naively stepped in to condemn traders without first checking their own portfolios. 

Unfortunately it seems that a huge amount of misunderstanding is going about, and I fear it may be a similar as with science reporting (See badscience.net, from Saturday Guardian column of the same name). The media is full of journalists (many of whom will necessarily be english/media/journalism graduates) with very little understanding of technical subjects. They are asked to write pieces on subjects they may not have much knowledge or interest in, and then proceed to clamber about the subject with painful naiveté. Unfortunately, their naiveté goes on to misinform huge numbers of people, and hysteria results. 

I’ll give an example of one of most horrifically tenuous pieces of journalism I’ve read in a long while. The Sunday Herald tries to throw some mud at Alec Salmond who made headlines with his “Spivs and Speculators” comment. The Herald has this to say in a piece (link) trying desperately to throw some mud at the SNP:

One of the companies that “short-sells” shares, Morgan Stanley, last year received a £6 million grant from the SNP Government to boost jobs in Glasgow. It has also emerged that the Scottish Government is funding another business, Timberpost, which creates artificial intelligence for short-selling firms.

What can we conclude? Er, Alec Salmond’s government gave grants to companies who employ people and operate on the stock market, or develop software, in a perfectly legal way. I really struggle to understand how that is a problem, or implicates the SNP in anything. It does, however, speak volumes about a journalist who’s trying to eek out a story and latch on to a misplaced fear (largely of their own creation) of a perfectly legal practice.

Can we also (Sunday Herald journalists please pay attention) try and remember that the current ban on short selling applies only to bank stocks and not the practice as a whole. It is NOT inherently bad practice. Quite the contrary, it’s a valuable tool in markets that enables downwards pressure on stocks that may be overvalued for some reason. Look at the hype that surrounds IPO’s and companies that hit the headlines. What if you, as somebody taking a position on the market, disagrees and think there are fundamental problems? Shorting a stock is one of the fundamental ways to do this.

Also, let us not forget that the banks that have been torn to pieces had (it’s now clear) fundamentally poor business models when cheap credit dried up. High risk loans without sufficient deposits, or self-certified mortgages, or even (dare I say it) falling asset values. But house prices never fall, do they? Whilst there is clearly a wider crises exacerbating many of the problems, it’s clear there was and is a shake-out required. 

Pension companies (largely) invest for the long term. Certainly if I’m investing in a fund, I’m indirectly holding an asset (shares) for a period of time. Now that can either sit in the fund, and grow in value and no more. Or the pension company can lend it out and earn money from it, which in turn can be reinvested. It may even add to the yield that helps pay out income funds. There is no risk to the pension company, as the value is associated with the asset itself, and the loaner must return the stock. They’re just oiling the wheels, and making money for their investors in the process. If the value of the asset falls as a result of the shorting, so what? That’s the position the investors took, largely with a longer term view than a 5 year stock market chart in mind. Personally, I’m losing no sleep over the drop in value of my ISA’s, pensions and so forth. I’m taking a 30 year view. I’ll also phase money into bonds as time passes. Because putting all your eggs in one basket (the stock market) is a Bad Thing. 

Now I’m certainly no financial expert. I may have worked in finance for a good few years, and enjoy reading the financial pages of newspapers. There may have been dubious practices going on with some of the short selling. That’s not for me to judge. But what is for me to judge is some of the atrocious reporting going on associated with regards financial issues, not least the inappropriate demonisation of short selling as a practice.

So if relatively simple concepts such as shorting are being mis-reported, stigmatised and pilloried, what hope have we that the really significant financial news dealing with almost $1 trillion of government intervention, is to be accurately portrayed?

This entry was posted on Sunday, September 28th, 2008 at 8:25 pm and is filed under Media, Newspapers, UK. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.