Friday, April 04, 2008

Bears Running Scared?

OK, so the dust has settled...I lost the passwords to the wordpress site and my huff has subsided with deathly silence from the detrators from the old firm. So Asset Manager is back, independent and ready to go.

And what a ride we have been watching while we have been away! The markets have all but melted down and the hedge fund industry has change forever (OK at least until the next bull market).

One of the interesting things that we have seen from hedge funds is the bear raids that have been going on in the financial sector. I am assume readers will know of the rule change that helped all this is the US but if you don't let me tell you about the 'up tick' rule.

What is the ‘up tick’ rule? After the short-selling bear raids that caused the crash of 1929 and the endless knockdown of stocks that followed, regulators required that there be a buyer willing to pay more for a stock than the last sale, known as an uptick, before that stock could be sold short. Basically, a stock had to go up a bit before it could be brought down.

That rule stayed in effect for almost 80 years until July, 6, 2007, when the SEC got rid of it. Hedge funds lobbied for a repeal, and the feds conceded after a test proved life without the uptick would be just fine. Of course, that test took place during a bull market, where a bear raid would never happen, and not an environment like the one we have now where raids are rampant.

The SEC claimed smaller spreads, higher liquidity and greater transparency would prevent such drastic downturns as 1929, but spreads don’t matter, it is liquidity that counts and, courtesy of a brokerage credit crisis, that disappeared.

‘Bear Raids’ as they are known are where huge pools of capital (hedge funds basically) point these funds at companies and drive the price down hoping to buy cheaper and thus reap the profits. This they have been doing in spades on financials. The JP Morgan situation, where the bid for Bear Stearns was raised, caught out the hedgies, but something far more significant happened recently.

The only way to fight off the bear raiders is to have capital behind you, to buy your own shares or to show the wider community that you are solid. If you do that it is a brave bear who will attack you. Lehman Brothers raised $4bn in fighting funds. The fact that this was more than they, and the markets, thought they would raise was a wake up call to the shorts. It was also a wake up call to the hedgies because if other banks follow suite there will be deep pools of capital ready for a titanic battle between the bears and the bulls.

It is more likely that the bears will take their business elsewhere and target other sectors of the market, we feel.

Does this mean that it is all over and we can happily skip into the stock market with birds singing in our ears and the Sun warming our face?… Er no… there are still tough times to come and the battle will rage.

1 comment:

Roman said...

I do not think that the bears are running. I think its open season for them especially them one thats like to pump and dump.