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Short story

What challenging and interesting times we live in. Many of my IFA clients of old who have time to follow the rather excitable press ask me in rather dramatic terms if we are “approaching the end of the world”. I try not to get on my soap box and point out the more pertinent issues that may seal the world’s demise such as climate change and lack of sustainability. But for the purposes of this analysis, let’s stick to financial matters.

By now everybody will know about recent events involving the commercial and retail banks, namely Lehman Brothers’ bankruptcy and the struggle for survival of some of Wall Street’s most powerful investment banks such as Morgan Stanley and Goldman Sachs. The LloydsTSB takeover of HBOS, if it happens, will create a new super-bank, with a third of the UK mortgage marketshare. Around 40 per cent of us will become customers of this new super-bank by default. My compliance brain keeps reminding me of the FSA’s chatter about the importance of financial capability. Is not increased size one way to hit the regulator’s financial capability requirements as long as the books are correctly balanced?

Those with long memories will recount several near misses in the banking sector in modern times, including the secondary bank crisis of the 1970s when the problems were averted by the Bank of England. In the US, small banks disappear every year, although deposits have normally been secured by a compulsory insurance scheme.

The FSA recently announced the 34 financial stocks that will be banned from short selling for 120 days. This is good news for the markets as many highly levered stocks will benefit. I have sat at dinner with FTSE 100 chief executives bemoaning the fact they know their stock has been shorted, causing undue price volatility which has nothing to do with the underlying valuations or P/E.

But is it fair amid current market turmoil that just the financial and banking stocks are given this short-term protection from shorting? According to reita.org’s expert panel, 60 per cent feel that shorting of UK commercial property stock is a major factor in creating today’s price volatility. Reita went on to say while short selling was unsettling in the short-term for UK commercial property, in the long run it had no effect, due to the differences in the way commercial property and financial companies are run.

If you are interested in why shorting is so annoying to companies, “short” investors “borrow” stocks to sell them, with the intention of buying them back later at a cheaper price when the stock price falls. According to Morgan Stanley, around 4 per cent of the FTSE 100 is loaned for short-selling “across the street”.

But is shorting so wrong? It is a little harsh to label these investment profess- ionals as spivs, as did a prominent politician. Shorting requires a highly skilled knowledge of the markets and some of the brightest money men and women run hedge funds that hold short positions. It is often said that it is easier for a fund manager to sit on a long position in a collective scheme such as a unit trust than be in and out of holdings on a regular basis. Many top fund managers run both long and short money and guess which the fund managers say is more exciting to run?

In times like these, when the dividend yield on the FTSE 100 is higher than yields on 10-year gilts, are we not taught in investment school that this is the signal to buy equities? Only the foolish or brave-hearted should re-enter the market right now but I may well put my toe slowly back in the water and start moving my Sipp holding from cash.

Kim North is director of Technology and Technical

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