Tuesday, 23 September 2008

Piggy in the Middle

Contrarian investors have long been avoiding financials, believing the debt bubble in the UK has long (at least as far back as 2003 according to the Economist and the IMF) been waiting to burst. Their healthy scepticsm has saved them from the majority of the pain since the credit crunch started in August 2007. However, AIG's recent problems have demonstrated how far the risks of contagion from the financial fallout could spread.

Contrarian sources such as Moneyweek and mainstream publications like the FT have been recommending ETF Commodity Securities commodity trackers as very simple ways to benefit from rising commodity prices. In particular, oil, gold, silver and lean hogs (pork) trackers have been recommended at different times. Certainly the rise of the oil price and to a lesser extent the gold price has been well documented in the media, justifying the recommendations.

Unfortunately, lean hogs trackers have to date performed less well. The argument for the price rising is a strong one: as the price of the grains (especially wheat and soybeans) used for pig feed rose so far, farmers were sending their pigs to slaughter earlier (to save money on feed). This caused a glut on the market and pork prices fell accordingly. In fact, pork prices fell so low that farmers were actually losing money for every pig raised. The situation got so bad that a group of farmers released a protest song - a butchered (sorry) cover of "Stand by your Man" paraphrased as "Stand by your Ham". If this isn't a contrarian indicator I don't know what is!

At the time of writing, the price of pork is still falling but the high supply situation must surely change at some point. Even if this takes a while, one of the benefits of commodities is that (unlike bank shares) it is genuinely impossible for the price to fall to zero.

AIG are the backers for a number of ETF Commodity Securities agricultural trackers. A recent announcement from ETF Securities states that in the worst case scenario, they will be forced to redeem all outstanding agricultural trackers at current value. This would be a bitter pill for contrarian investors to take, especially after having correctly predicted problems at large financials like AIG.

Thursday, 18 September 2008

FSA Bans Short-Selling of Financials

The FSA has just announced a ban on short-selling financial stocks starting midnight tonight. The ban , which affects all public financial companies, is expected to last until 16th January 2009.

This move raises a number of questions. How soon before the housebuilders ask to be included? Their shares have been hit just as badly as some of the banks. What about other sectors? Are they not entitled to this protection?

Back in March, the FSA accused short-sellers of spreading false rumours about HBOS in order to trash the shares and make a nice profit from Howard & Co's misery. It had to abandon the subsequent enquiry due to insufficient evidence but maintained that the rumours were false, and spread deliberately. However, if the rumours were false, why did the Government have to ask Lloyds TSB to take over HBOS this week? Surely if the shares were suffering from a temporary short-selling attack it is the Government's duty to stop Lloyds from snapping up HBOS at a bargain price, slashing jobs (not in Scotland or anywhere else with a by-election) and making a huge profit.

Unless, that is, the short sellers' suspicions were right. It seems there's one thing everyone hates more than the average short seller - a short seller who is right.

Short-selling helps the market get as near as you can get to a democracy. Without it, the stock market is less like the analytical, responsible machine it should be and more like a religious cult.