Man Without Qualities

Tuesday, July 30, 2002

And What Are They Up To?

Senators Edwards and Clinton are tying their wagons to the belief that they can talk about "fiscal responsibility" without saying they want to raise taxes or cut spending. And what do they do when people start pointing out all that money investors lost in the dotcom and telecom disasters she and her husband presided over, for example? Also, this negative approach will have to contend with an ending recession, assuming that continues. Maybe it will somehow work, but it all seems rather incoherent.

"Short sellers" sometimes attempt to "talk a stock down." That is, they spread negative information about the stock in the market to push its price down. They hope that the stock will remain low enough for them to cover the "short" positions they buy in the stock. But, "the shorts" often face a nasty problem: after initially responding to the flood of negative information, the stock's price often snaps back abruptly on the basis of its "fundamentals." That effect often puts "the shorts" in the position of figuratively and uncomfortably taking it in the shorts.

The recent snap back of the entire stock market appears similar in some key respects to the above sequence, but played out on an enormous scale. First, the significance of some important negative information (in this case, a few companies with falsified books) was wildly exaggerated. In fact, less than one percent of all corporate profits reported last year by American public companies were ever subject to suspicion. It is very hard to find a sense of true proportion in Democratic statements or much of the popular media coverage. The Democratic leadership, in particular, did much to exaggerate and inflame market-depressing information. Then they added the specter of new, oppressive and depressive regulation, which even they did not dare to implement. Probably the most significant aspect of the passage of the corporate governance bill just signed by the President is its indication that the Democrats won't have an opportunity to pass even more damaging laws in the near future. The media have been happy to play on the sensationalism. That whole period resembles the period in which "the shorts" attack a stock. In this case, the Democrats appear to want the anxiety-producing effects to continue to Election Day. And, as the statements of Senators Clinton and Edwards indicate, they are investing a lot in this approach. But the snap-back in the market over the past few days resembles the way a single stock reacts when the market finally figures out what the shorts have been up to.

The Democrats may find out just how uncomfortable it is to be a short seller once the market readjusts to fundamentals.

What about that new corporate bill? Will the Democrats be able to draw energy from that source? Well. that's not what Bill Lerach says. He's the San Diego lawyer who is lead attorney in an investor class-action lawsuit against Enron Corp., and he comes dismisses the bill as "the reenactment of the current law with a great deal of huffing and puffing. ... Not a single word will help a cheated investor get a penny back." Mr. Lerach is just part of a large chorus of people who just can't find major benefits in that bill. But a lot of people sure are finding plenty of costs.

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