It is wrong to sell something that you do not own. It is so wrong that it is common to say "I have a bridge to sell you" as a response to a financially stupid statement. It is the basis for our nation's most used joke line. A person attempting to sell the Brooklyn Bridge to someone can be prosecuted and punished. by SovereignJim
(libertarian)
Thursday, December 17, 2009
It is wrong to sell something that you do not own.
It is so wrong that it is common to say "I have a bridge to sell you" as a response to a financially stupid statement. It is the basis for our nation's most used joke line. A person attempting to sell the Brooklyn Bridge to someone can be prosecuted and punished.
It is wrong for me to sell something that is yours.
It is wrong for you to sell something that is mine.
So why in the hell is it legal to sell shares not owned by the seller but owned by you and me?
The act of selling shares not owned is called short selling. Legalized shorting is lauded far and wide by those in the business. They say making short selling illegal would be the end of the free market rather than saying the end of the fraud market. Why such praise from those engaged in it? It is simply because it is the most powerful tool they have to fleece the public.
I challenge anyone to present an argument that selling what in not owned is in anyway good or even neutral for the actual owners.
Shorting corporate stock shares is the most common use of fraudulent but legal selling something not owned. Let's create a simple but possible circumstance to demonstrate. Consider corporation XYZ where you and I each own 50%. The last trade for XYZ was 100 shares at a price of $100 sold by you to me over a public exchange. Thus it is accurate to say shares of XYZ have a value of $100 because I was willing to pay $10,000 for ownership of 100 of your shares. Now consider the case where a short seller offers to sell 100 shares of XYZ for $90 a share. Because I valued those shares at $100 I would buy them at $90 if I had the cash to do so. $90 is now the new value for XYZ.
Now suppose you needed some cash and decided to sell 100 shares of XYZ to raise it. The new value resulting from the fraudulent short sale at $90 implies that you will receive only $9,000 from your sale, not the $10,000 you received before. You have, in effect, had $1,000 stolen from you. Of course it is unlikely to happen as described. But that simple case makes a valid point. A short seller is stealing from share owners when he causes the price to be lower by his supply of non-existing shares. Selling shares not owned is a violation of the sovereign rights of property owners. The price of shares of a stock should drop only when someone from the collective ownership of the shares is willing to sell at a lower price.
The only people to object to my logic will be those engaged or wanting to engage in short selling and those paid to propagandized for it or by those with no respect for private property ownership.
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There are some good articles at "http://mises.org/" that help to explain the purpose that the often-misunderstood short seller performs for the free market.
http://bit.ly/6TfX8r
Quoting from a couple:
"Short sellers provide a vital service to our markets. By their risky bets, they often expose the overpriced companies." -- Gregory Bresiger
"Short sellers benefit others by revealing accurate information sooner than would otherwise be the case, reducing the mistakes people would have made from relying on the less accurate prices that would otherwise exist." -- Gary Galles
"If there is a "herd mentality" that is pushing up a certain stock's price, it takes disinterested short sellers to come in and restore sanity more quickly to the market." -- Art Carden
"Short selling is a beneficial process that allows anyone to participate in the market's evaluation of share prices. So long as contracts are enforced, even naked short selling can be a beneficial process that allows the quickest possible adjustment in mispriced stocks." -- Robert Murphy
"Short sellers provide a vital service to our markets. By their risky bets, they often expose the overpriced companies." -- Gregory Bresiger
Sorry Gregory but the not fraudlent selling of anything requires an owner to agree to a price unless it is a court ordered auction where only bids to buy are allowed. It is a long, long way from being vital.
"Short sellers benefit others by revealing accurate information sooner than would otherwise be the case, reducing the mistakes people would have made from relying on the less accurate prices that would otherwise exist." -- Gary Galles
Bull Gary! The so called "benefit to others" is at the expense of the owners. To imply that its a benefit as the objective of a short seller is self serving of the worst kind. Honest acts when one decides that a price is high is to sell calls or buy puts.
"If there is a "herd mentality" that is pushing up a certain stock's price, it takes disinterested short sellers to come in and restore sanity more quickly to the market." -- Art Carden
Herd and sanity are propaganda terms Art. Claiming that short sellers are disinterested is pure propaganda. The price established by the herd can be honestly set only by a herd owner agreeing with a buyer wanting to be part of the herd.
"Short selling is a beneficial process that allows anyone to participate in the market's evaluation of share prices. So long as contracts are enforced, even naked short selling can be a beneficial process that allows the quickest possible adjustment in mispriced stocks." -- Robert Murphy
"Can be" is not good enough Robert. Why should anyone be allowed to participate is setting a price other than owers and want to be owners? Claiming a beneficial process for short selling is simply a Madison Ave. phrase worthy only for a TV add. Who has any right to decide if a stock is mispriced other than a buyer and an owner seller?
The entire set of arguments for short selling are only excuses for violating the property rights of stock owners. No different than the excuse for auto theft of "But the car was left unlocked with the keys in it."
The argument is arbitrary and really not connected to reality.
Buying a stock has little "real" meaning. What do you receive for it? Purchasing stocks is simply consenting to allow an entity to do whatever they see fit with your money. In return you receive a piece of paper that entitles you to sell that same piece of paper in the future for whatever someone else will pay or not pay. That is all you own.
People have made and lost tons of money in stocks since they were created. But little real value has ever been created and transferred through a stock certificate.
If someone's desires real value, they should purchase that which they can touch and feel, if not, as they say "it might not be worth the paper it is printed on".
I have just finished reading a long essay claiming wonderful positive effects for short selling titled "Don't Sell Short Selling Short" by Gary Galles - Mises Institute.
He ignores a major event of October 1987 that proves beyond all doubt that his defense of short selling has the same merit as Das Capital by Karl Marx. I had no position in the market at that time but did closely watch the events on a Friday, Monday, Tuesday. The market behaved like a "China Syndrome" run away nuclear reactor of movie fame. Friday it collapsed in an manner stopped only by a market close and then reopened on Monday under massive control by Greenspan of the Fed which eventually halted the collapse. One needs to understand the hedged computer buying of S&P 500 index contracts with selling of S&P 500 stocks to appreciate the events of those three days.
There is a list of 500 stocks traded on the New York Stock Exchange called the S&P 500. During each trading day there is a continuous calculation and reporting of the sum of the last traded price for this list of stocks. It is called the S&P 500 index. There is also a continuous reported last traded price for S&P 500 index contracts which expire on dates in the future. Now consider the following facts that occurred on that Friday.
The index contract trading price is far below the actual index. This was caused by contract traders on balance expecting the market to continue its downward movement. The computer trading programs now spring into action. They quickly buy the low index contract and also sell S&P stocks that represent the index. They have locked in a profit because they receive more cash for the stocks sold than the cost for the index contract bought. This stock selling causes the market to continue its descent. When the contract expiration date is reached they sell the purchased contract and buy back the sold stocks which equals a zero sum cash set of transactions because the contract value that day must equal the S&P stock index value that day. The profit is locked in if the market go up or down from its value at the time of the computer programmed trade. The details of how this is accomplished are complex. If fact many of the paired contract purchase and stock sales are reversed before the contract expiration if the contract price becomes much greater that the stock index where the locked in profit is close to doubled and made over a shorter time span. This is all well and good as long as short selling is not involved.
A computer programmed trader executing as described above must stop making trades when exhausting the supply of owned shares if not being allowed to sell shares not owned. That is to say they must stop trading when short selling is not allowed. However short selling was and is now allowed. Thus such a collapse will continue until those selling index contracts on balance change their judgment about the downward move of the market. A major drop in the market will force additional stock selling as margin limits are hit. The loss of wealth by innocent investors and pension fund members was catastrophic as it was in market collapse of 2008. QED
