MONEY MATTERS: Short sellers profiting from these uncertain times

There was a time when the values of investments were determined simply by the number of investors who thought an asset was good value at current prices and had potential.

Earlier long-term investors were the sellers. 

Now the situation is much more complex. Many methods have been developed to allow speculators to make profits when prices fall. 

This has led to the development of an army of short sellers whose mission in life is to drag values down at every opportunity, from which they can profit. 

The main tool of the short sellers is the bad news story, which they try to circulate as far and wide as possible. Their natural allies are the sensational sections of the media that like to publish alarming storylines. 

The short sellers want investment values driven by perceptions not fundamental facts.

If they can make up a plausible story as to why an investment might fall in price they promote that perception. 

This creates an ongoing battle between the business and asset builders and long-term investors who want to support them, and the short sellers, hedge funds and negative speculators. 

This was well demonstrated last week. The Australian Financial Review published a front page story that said a respected London economist and a successful hedge fund manager were predicting a house price crash in the capital cities, especially Sydney. 

The two had just been on a tour of Western Sydney. They said people were commonly falsifying their income on loan applications to enable them to borrow huge amounts, thereby artificially inflating prices.

There was a housing bubble that would soon burst, with prices falling by up to half. The banks would be hit with massive bad debts.

In subsequent days these experts acknowledged that before publishing their report they had set up a range of investments that would profit when the story was circulated. 

Bank share prices fell sharply, creating profits for short sellers. 

Mortgage insurance companies fell too, another good profit. 

Credit default swaps to insure bank debt became more expensive, providing profits for hedge funds. 

In the following days local real estate analysts provided logical arguments to refute the claims, but by then the profits had been banked.

Sydney house prices are certainly expensive, but it is unlikely they will collapse dramatically with widespread loan defaults. 

It may also have been a negative speculation campaign by big international traders that caused the early January share slump. 

Old stories about China slowing and US rate rises were recirculated when most professional investors were on holidays and media outlets were understaffed.

Famed hedge fund operator George Soros announced we were on the verge of another global collapse like 2008.

Global share markets including Australia’s fell sharply and have only partially recovered, despite little if any new bad news or problems being identified. 

For shares the true fundamental picture is revealed when companies issue their biannual reports. Investors see the details of their financial position including sales, profits and debt levels. 

The company reports for the December half year have been strong so far, apart from the miners. 

The activities of short sellers and negative speculators make life difficult for do-it-yourself investors. For example, many hold shares in the big banks, which have suffered recently at the hands of short sellers. 

It may be smarter to use managed funds where the analysis and investment decisions are made by professionals who have greater research capabilities and do the job full time.

Public and industry super funds may be better options than self managed super funds.