All 2 entries tagged Wall Street

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September 27, 2008

Short Selling

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As per my basic finance knowledge, "short selling" is defined as selling a security, already being traded in any of the organised exchanges across the globe, without effectively owning it (hence it is usually borrowed from a market-maker/stock-broker), in the hope that it will fall in value, thereby allowing one to buy it back at a lower price at a later date to return the borrowed security to the broker/market-maker. Thus effectively hedging oneself from expected dips in the stocks being traded on any organised exchanges across the globe. 

The possibility of selling a particular stock via such a mechanism adds to liquidity in the market of the particular stock, thereby artificially increasing the supply and further exhaserbating the downward spiral in the value of this particular security. This is why we see a control on such instruments in the financial markets nowadays:

As a result of the financial debacles in the west, we see that the the Securities and Exchange Commission temporarily banned "short-selling" in the stocks of 799 companies as highlighted in the press release on BBC [linked here]

Does this mean that even the SEC Chairman knows that short selling does more bad than good in the market?

September 19, 2008

Worst Week for Wall Street

This is perhaps the worst week that Wall Street's experienced since the Great Depression. We have seen 

1.      Lehman Brothers go bankrupt. The biggest bankruptcy ever! 

2.      Fannie Mae and Freddie Mac bailed out by US Treasury - Together Fannie, Freddie provide nearly 50% of mortgages in US (4 Trillion dollars of mortgages outstanding) 

3.      Merill Lynch forcefully merged with Bank of America

4.      AIG, the biggest insurance company in the world bailed out by US Treasury. 

5.      Washington Mutual on verge of bankruptcy

6.      Yields on the 3 month US Treasury are a mere 3 basis points practically nothing

7.      Morgan Stanley considering merging with Wachovia!

8.      Already we have seen Bear Stearns collapse

What does this all mean to us? Reduced liquidity in the markets. Distressed selling and perhaps reduced appetite for risk. A spill over effect is already on its way towards the GCC countries as the markets are showing early signs of loss of stocks most notably property companies that have fallen by 50% in the last few weeks (Emaar, Aldar, Sorouh etc).

What this effectively means is that the US dollar will suffer tremendously. US dollar did recover recently against all other currencies, but for a brief respite as these events will trigger another recessionary period for the US and most likely the World economoy because of its interconnectedness in the global sphere.

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