Weekly Newsletter – December 18, 2023 – The End of Naked Short-Selling
This week, Federal Reserve Chairman Jerome Powell finally made comments signaling that interest rates were sufficiently high, and that rate cuts were anticipated in 2024. Immediately, algorithms kicked in, and both the equity and bond markets turned positive. Sectors experiencing dramatic upside moves include banking, REITs, utilities, and pipelines (all dividend payers), while consumer discretionary and staples saw negative trends. The bond markets also rallied, causing prices to rise and driving down yields.
This week also witnessed the single worst day of performance for US hedge funds since March 2020. Coincidentally, US hedge funds launched a lawsuit against the SEC, focusing on disclosure. The SEC aims to create a more transparent market by publicly disclosing short sale data. Hedge funds oppose this disclosure, fearing it will harm their trading strategies. In my opinion, this information should be public. Short selling can be an important characteristic of a healthy market, but naked shorting can and will destroy companies and investor confidence. Regulators need to be more proactive in stopping this practice. Recently, South Korea and Thailand banned this trading strategy. In Europe, only 0.5% of the stock float can be shorted, and Australia (similar economy to Canada) only allows sales to occur if the investor holds the securities in their investment account or can prove they have borrowed that stock. Meanwhile, in Canada, our regulators remain passive, allowing this predatory trading strategy to break the backs of many companies.
However, some individuals are fighting back. Recently, a group known as Save Canadian Mining was formed to lobby the government and regulators. New lawsuits have also been initiated by some companies against our regulators to halt the practice. Additionally, individuals have successfully sued a Canadian bank, arguing that by enabling this predatory trading practice through their system, it caused financial damage, resulting in the bank being ordered to pay damages.
Hopefully, we are finally witnessing the end of the short-selling strategy that has led to the demise of many Canadian companies. Consider these facts: the commodity markets (gold, copper, silver) are all at or near their all-time highs, while the underlying companies in Canada are at or near their all-time lows.