Reason vs. “Vampire Investing”

Tim Coldwell, who comments below on bank shares going up without reason, is right as usual. In fact, I think he may be the first person to have even used the word “reason” in this situation.

If there is any reasoning going on on the Street, it is a switch from a day earlier, when The Pack thought that all financials were worthless, to post-AIG save, when they suddenly realized this was not true, and that the government was probably going to win in preventing (short term) financial meltdown.

As readers of our newsletter will already have guessed, I was impressed, and a bit surprised, that Chis Cox put a stop to all shorts trading in financials for a couple of weeks.  No doubt, this came as a result of his conversation with John Mack, whose shares were next to go under attack, and from Hank Paulson.

This raises lots of really interesting questions about market dynamics in general.

The boys at the top seem to be admitting a failure in our economic system, about which I’ve been warning for a while, under the term “vampire investing.”  What is the future of a society or country in which a highly educated, highly motivated group of people find a way to extract money from all kinds of transactions, without adding value?

This is no different than a tax; it is just a private tax, paid to some unknown trading desk.

And the answer to the not-rhetorical question above is simple: eventually, this drag on transactions puts the company or country at a distinct competitive disadvantage.  (It is no excuse, but it probably increases pressure to deliver undeliverable profits, and paves the way to unnatural acts like bundling mis-labeled CDOs and selling them to small towns in Norway.)  It’s like a tire with a leak; the system eventually goes flat.

This is different from supply and demand and other market dynamics, and watching short teams gang up on banks in an orchestrated series of orderly attacks brings exactly the kind of example everyone can agree upon.  Why allow this kind of behavior at all?

Yes, there are reasons.  But those reasons are much less attractive this weekend morning than they were a week ago, or five years ago.  Allowing jackals to pull apart working institutions within minutes, hours or days of an attack, is not the smartest aspect of a regulatory system.  And, as if the publication of short positions isn’t enough flag for the rest of the shorts, and the following investment community, there are the efforts to insert often-false and always-negative information into the news flow about the target company.  This, too, does not serve any standard supply and demand theory.

I would go so far as to assert that, even if the stocks are the target of the discussion, and not the companies themselves or the products and services they provide, it is difficult to make the case for a good deal of the shorting that goes on on the Street.

I don’t expect that Cox is up to this task, but no doubt he will not be the person asked to fix the problem.

Whoever they are, one hopes they begin by dealing with reality, on the street, vs. some outdated theory of supply and demand.

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