The close: Deja vu?
RTGAM
You have to feel sorry for the United States on a day like Friday: U.S. authorities made the bold moves to steady the teetering financial system, and yet U.S. stock market indexes lagged most of the rest of the world.
Not that the gains were slight, by any stretch. The Dow Jones industrial average closed at 11,388.44, up 368.75 points or 3.4 per cent - more or less erasing the horrendous losses earlier in the week. The broader S&P 500 made a similar rebound, closing at 1254.98, up 48.47 points or 4 per cent. Last Friday, before the current bout of financial mayhem struck the market, the index closed just below 1252.
But those gains were mere noise compared to what happened elsewhere, where investors took off their hard hats and danced on their heads. In Canada, the S&P/TSX composite index closed at 12,912.13, up 847.56 points or just over 7 per cent - the biggest percentage gain since 1987.In the U.K., the FTSE 100 rose 8.8 per cent. Brazil's Bovespa stock index rose 9.5 per cent and Hong Kong's Hang Seng index rose 9.6 per cent.
The interesting part about the U.S. rally was that although it was widespread, it was nowhere near as widespread as other rallies during the year. For example, it is not unheard of to see all 30 stocks in the Dow rise during a rally. On Friday, though, there were actually 7 stocks - or 23 per cent of the index - that were left out.These laggards included Wal-Mart Stores Inc., Procter & Gamble Co., Johnson & Johnson, Coca-Cola Co. and Microsoft Corp.
It seems as though investors turned their backs on highly profitable firms in favour of those whose future was uncertain just a day ago. Among stocks in the S&P 500, Morgan Stanley rose 20.7 per cent, Wachovia Corp. rose 29.3 per cent and Washington Mutual Inc. rose 42 per cent.In Canada, financial stocks also did well. Royal Bank of Canada rose 7.2 per cent, Toronto-Dominion Bank rose 9.6 per cent and Bank of Nova Scotia rose 5.6 per cent.
But bigger gains were made by materials stocks: Barrick Gold Corp. rose 12.3 per cent and Agrium Inc. rose 13.4 per cent. Among energy stocks, Suncor Energy Inc. rose 14.3 per cent and Canadian Oil Sands Trust rose 17.5 per cent after the price of oil surged to $104.55 (U.S.) a barrel, up $6.67. Where have we seen that price before? Ah yes, last week.
Market rally due to short-selling ban: Sprott
JOHN PARTRIDGE
Friday, September 19, 2008
Eric Sprott thinks most of the massive rally in world equity markets is due to temporary bans on short sales of financial services stocks already imposed by U.S. and European regulators.
“I suspect most of today's rally is because of the change in the short-sale rule,” the hedge fund manager said Friday in a telephone interview. Canada's key market regulator continued to deliberate whether to follow the lead of Britain's Financial Services Authority, the U.S. Securities & Exchange Commission and other regulators.
“You can see what stocks went up the most: they're financial stocks,” said Mr. Sprott, who heads Sprott Asset Management Inc. in Toronto, acknowledging that his firm has had “to take a bit of a hit here.”
Short-sellers borrow and then sell stocks in the belief that their prices will fall, enabling them to go back into the market later and replace the borrowed shares at lower cost and pocket the difference as profit.
However, the temporary bans have forced practitioners back into the market to cover their positions by buying up the stocks they have sold, thus driving up the prices demand for those shares.
Many market players and observers have blamed massive short-selling for decimating the stocks of several U.S. financial industry pillars, pushing them to the brink of insolvency.
In an emergency order issued late Thursday, the SEC said recent market conditions have made it concerned that short-selling of a wide range of financial stocks “may be causing sudden and excessive fluctuations of the prices of such securities in such a manner as to threaten fair and orderly markets.”
“Such price declines,” it added, “can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, without a fundamental underlying basis.”
The move against short-sellers is just one of an array of measures taken by the U.S. government and central banks and market regulators around the world as they seek to stave off the worst financial crisis since the Great Depression. Central banks have pumped tens of billions of dollars into the banking system and Washington has unveiled plans to help banks shift bad real-estate loans off their books as well as moving to protect the value of money-market funds.
Whether or not the Investment Industry Regulatory Organization of Canada (IIROC) plans also to impose a temporary ban on short sales was still unclear as Friday wore on.
The matter is still “under discussion,” Paul Bourque, IIROC's senior vice-president of enforcement, policy and registration, said in a mid-morning telephone interview, reiterating a statement he made before the opening bell.
Mr. Bourque's comment was echoed by Jean St-Gelais, the head of Quebec's securities regulator, the Autorité des marchés financiers. “We have to see if we have a problem in Canada, first,” he said after speaking to a conference on corporate governance and financial markets in Montreal.
The key is to co-ordinate efforts with the various regulatory organizations around the globe, he added. “Everyone right now is looking to take quick action but without improvising,” he said.
However, Mr. Sprott, who opposes the clampdown, figures Canadian regulators are almost sure to follow suit.
“They're on the team, aren't they, with the U.S. and the U.K.?,” he said. “The authorities are changing the rule book because the rules aren't working for them. I'm disappointed that they have had to go so far.”
“Legitimate” shorting of financial stocks is “a portfolio technique to support you in difficult financial markets, which we are in for sure,” Mr. Sprott added.
The hedge fund chief also said, however, that he firmly supports bringing back the so-called uptick rule, a 69-year-old regulation that the SEC dropped in July 2007.
Under this rule a short sale could be made only after an uptick, or rise, in the price of a stock, which meant that shorts could not pile into a stock in an unbroken freefall. The SEC felt the rule was a constraint on market liquidity and did little to prevent market manipulation. But critics say the removal of the rule has left the market a more volatile and risky place.
Mr. Sprott agreed. “I don't know why people got rid of that rule, it just seems ridiculous,” he said. “I'd like to see that enforced.”
As IIROC continued its deliberations, at least six Canadian banks and insurers whose shares trade in New York as well as in Toronto have already won at least partial protection against the shorts by being included on a list of about 800 financial services stocks covered by the 10-day ban imposed by the SEC. They are: Royal Bank of Canada, Bank of Nova Scotia, Manulife Financial Corp., Sun Life Financial Inc., Fairfax Financial Holdings Ltd. and Kingsway Financial Services Inc.
Meanwhile, Switzerland's stock exchange issued what it called “reminder” to its members Friday that so-called naked, or uncovered, short-selling is not allowed and said it will monitor the situation strictly. In a naked short transaction, a trader sells shares before actually borrowing them.
Mr. Sprott dismissed the rules against naked shorting most jurisdictions have long had on the books as a “joke,” because regulators have simply failed to enforce them. “I think the naked shorting of Canadian stocks has been quite significant,” he added.
The SWX also warned market players that “the spreading of rumours of a nature that violates the applicable rules of conduct is also forbidden.”
However, it also said that covered shorts, where the trader has actually borrowed the shares, “remain fundamentally permissible.”
As it happens, the volume of short-selling on the Toronto Stock Exchange has been declining since peaking at a total of just under 1.43 billion shares on March 31. As of Sept. 15, the total number of shares sold short on the exchange had fallen to just over 1.2 billion.
As well, fortnightly figures compiled by the exchange show that no bank or other financial services stock has cracked the list of the top 20 largest short positions on the exchange since July 31, when Canadian Imperial Bank of Commerce came in at No. 20.
The perennial leaders include such companies as Nortel Networks Corp., Rogers Communications Inc., Research in Motion Ltd. and Bombardier Inc.
However, I-Shares Canadian S&P/TSX 60 Index Fund took over the top spot with the largest short position as of Sept. 15, up from sixth largest at Aug. 31.
With files from reporters David Parkinson in Toronto and Bert Marotte in Montreal
© Copyright The Globe and Mail
JOHN PARTRIDGE
Friday, September 19, 2008
Eric Sprott thinks most of the massive rally in world equity markets is due to temporary bans on short sales of financial services stocks already imposed by U.S. and European regulators.
“I suspect most of today's rally is because of the change in the short-sale rule,” the hedge fund manager said Friday in a telephone interview. Canada's key market regulator continued to deliberate whether to follow the lead of Britain's Financial Services Authority, the U.S. Securities & Exchange Commission and other regulators.
“You can see what stocks went up the most: they're financial stocks,” said Mr. Sprott, who heads Sprott Asset Management Inc. in Toronto, acknowledging that his firm has had “to take a bit of a hit here.”
Short-sellers borrow and then sell stocks in the belief that their prices will fall, enabling them to go back into the market later and replace the borrowed shares at lower cost and pocket the difference as profit.
However, the temporary bans have forced practitioners back into the market to cover their positions by buying up the stocks they have sold, thus driving up the prices demand for those shares.
Many market players and observers have blamed massive short-selling for decimating the stocks of several U.S. financial industry pillars, pushing them to the brink of insolvency.
In an emergency order issued late Thursday, the SEC said recent market conditions have made it concerned that short-selling of a wide range of financial stocks “may be causing sudden and excessive fluctuations of the prices of such securities in such a manner as to threaten fair and orderly markets.”
“Such price declines,” it added, “can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, without a fundamental underlying basis.”
The move against short-sellers is just one of an array of measures taken by the U.S. government and central banks and market regulators around the world as they seek to stave off the worst financial crisis since the Great Depression. Central banks have pumped tens of billions of dollars into the banking system and Washington has unveiled plans to help banks shift bad real-estate loans off their books as well as moving to protect the value of money-market funds.
Whether or not the Investment Industry Regulatory Organization of Canada (IIROC) plans also to impose a temporary ban on short sales was still unclear as Friday wore on.
The matter is still “under discussion,” Paul Bourque, IIROC's senior vice-president of enforcement, policy and registration, said in a mid-morning telephone interview, reiterating a statement he made before the opening bell.
Mr. Bourque's comment was echoed by Jean St-Gelais, the head of Quebec's securities regulator, the Autorité des marchés financiers. “We have to see if we have a problem in Canada, first,” he said after speaking to a conference on corporate governance and financial markets in Montreal.
The key is to co-ordinate efforts with the various regulatory organizations around the globe, he added. “Everyone right now is looking to take quick action but without improvising,” he said.
However, Mr. Sprott, who opposes the clampdown, figures Canadian regulators are almost sure to follow suit.
“They're on the team, aren't they, with the U.S. and the U.K.?,” he said. “The authorities are changing the rule book because the rules aren't working for them. I'm disappointed that they have had to go so far.”
“Legitimate” shorting of financial stocks is “a portfolio technique to support you in difficult financial markets, which we are in for sure,” Mr. Sprott added.
The hedge fund chief also said, however, that he firmly supports bringing back the so-called uptick rule, a 69-year-old regulation that the SEC dropped in July 2007.
Under this rule a short sale could be made only after an uptick, or rise, in the price of a stock, which meant that shorts could not pile into a stock in an unbroken freefall. The SEC felt the rule was a constraint on market liquidity and did little to prevent market manipulation. But critics say the removal of the rule has left the market a more volatile and risky place.
Mr. Sprott agreed. “I don't know why people got rid of that rule, it just seems ridiculous,” he said. “I'd like to see that enforced.”
As IIROC continued its deliberations, at least six Canadian banks and insurers whose shares trade in New York as well as in Toronto have already won at least partial protection against the shorts by being included on a list of about 800 financial services stocks covered by the 10-day ban imposed by the SEC. They are: Royal Bank of Canada, Bank of Nova Scotia, Manulife Financial Corp., Sun Life Financial Inc., Fairfax Financial Holdings Ltd. and Kingsway Financial Services Inc.
Meanwhile, Switzerland's stock exchange issued what it called “reminder” to its members Friday that so-called naked, or uncovered, short-selling is not allowed and said it will monitor the situation strictly. In a naked short transaction, a trader sells shares before actually borrowing them.
Mr. Sprott dismissed the rules against naked shorting most jurisdictions have long had on the books as a “joke,” because regulators have simply failed to enforce them. “I think the naked shorting of Canadian stocks has been quite significant,” he added.
The SWX also warned market players that “the spreading of rumours of a nature that violates the applicable rules of conduct is also forbidden.”
However, it also said that covered shorts, where the trader has actually borrowed the shares, “remain fundamentally permissible.”
As it happens, the volume of short-selling on the Toronto Stock Exchange has been declining since peaking at a total of just under 1.43 billion shares on March 31. As of Sept. 15, the total number of shares sold short on the exchange had fallen to just over 1.2 billion.
As well, fortnightly figures compiled by the exchange show that no bank or other financial services stock has cracked the list of the top 20 largest short positions on the exchange since July 31, when Canadian Imperial Bank of Commerce came in at No. 20.
The perennial leaders include such companies as Nortel Networks Corp., Rogers Communications Inc., Research in Motion Ltd. and Bombardier Inc.
However, I-Shares Canadian S&P/TSX 60 Index Fund took over the top spot with the largest short position as of Sept. 15, up from sixth largest at Aug. 31.
With files from reporters David Parkinson in Toronto and Bert Marotte in Montreal
© Copyright The Globe and Mail