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Friday, 12 August 2011

The European economy is ill, but it ought not to be. So, let’s kill the doctor that exposed the disease. Or, why banning short selling is a ridiculous measure.

We been broken down
the lowest turn
and been on the bottom line
sure ain't no fun
Hold on, Hold on, Hold on
The only way is up

Unfortunately, there are still people in Europe that think that ´the only way is up´ for the stock exchanges. And those people believe that the economy is good when all stock rates are rising, or at least when stock rates are rising.  

An objective observer could rebut that:
·     European consumption is lagging, even in the currently healthy Euro-zone countries, like The Netherlands and Germany.
·     Unemployment in the PIIGS-zone (Portugal, Ireland, Italy, Greece and Spain) varies from substantial to horrific.
·     The Italian debt rises to intolerable levels of €1.9 trn.
·     The exposure of banks all over Europe to sovereign bonds of the PIIGS-countries is sometimes gruesome.
·     The French economic growth imitates a donut.
·     The slightest rumour on (say) Societé General Bank could lead to an exchange rate-drop of 14% for this stock in one day.
·     And last, but not least: the Euro-zone finance ministers and government leaders showed on numerous occasions that they didn’t have the slightest answer to the Euro-crisis.
o    Instead, they asked the financial markets to go to sleep until September, when their decision making process starts all over again.

Summarizing: the European economy is ill. Seriously ill. But the European economy ought not to be ill. It can’t be. Because, if the European economy is ill, this might be the end of the Euro, as we know it.

I can only look in the light of these thoughts to the decision of Italy, France, Belgium and Spain to put a temporary ban on short-selling, aimed especially at protecting the financials in those countries.

Two days ago, I was a ‘witness’ via Twitter, when a false (?) rumour on Societé Generale seemingly led to a collapse of the exchange rate by 14%. The next day the stock recovered by 5.25%, but the damage was done. The total loss of this week for the stock was uptil now 16.5%.  

To put things straight: I think that spreading false rumours on single stocks in order to make them rise or drop, is a crime that should be punished substantially in the court of law.

But the question is, of course: Is all this financial misery of the last weeks caused by short-selling, due to rumours? Or is there something more structurally wrong with financials like SocGen?

Let’s therefore look at the performance of a number of large bank stocks including SocGen, since July 1st, when the last true peak appeared in banking stocks:

Performance, since July, 1st
Societé Generale (France)
-/- 45%
ING Bank NV (Netherlands)
-/- 33%
Deutsche Bank (Germany)
-/- 30%
Credit Agricole (France)
-/- 41%
Banco Santander (Spain)
-/- 25%

This has seemingly nothing to do with rumour-based short-selling, but it has everything to do with the financial and economical sickness of Europe and the lack of political will-power to do something about it.

And it has a lot to do with the exposure of these banks to sovereign bonds of all European countries and the growing distrust of the financial markets in these bonds.

But still, the decision makers think that the only way for the stock exchange is up, as rising stock rates supply ‘deniability’ for the financial problems in Europe. Their solution? Shoot the bears and kill the short-selling doctors that exposed the fragility and sickness of the patient, called Europe.

But will this bull-bazooka help the financials to find their way up again? I seriously doubt that: no financial problem, concerning the Euro-zone and the exposure of large, European banks to PIIGS-sovereigns, is solved yet. And there is yet no political will, to solve things quickly (i.e. before September). And the bears, with their well-developed noses for trouble, have sniffed that really good.

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