As the market rots, the vultures are cleaning up

To survive in this market, it's not just about being the smartest and the fittest, writes David Hirst.

To survive in this market, it's not just about being the smartest and the fittest, writes David Hirst.

IT IS hard to argue in favour of vultures, and "vulture capitalists" seem to be indefensible. Throw into the lingo "short sellers", a phrase many are only now starting to comprehend, and an image emerges of the filthy rich dragging down the value of individuals' superannuation funds and shares.

It seems it is possible to manufacture a monster, and monsters must be investigated.

Perhaps we should once again take a lesson from nature. To many the vulture is the most loathsome beast on earth. In countries where they exist, they provide an efficient waste disposal system that consumes rotting flesh. They save millions.

If vultures didn't exist they would have to be invented.

Vulture capitalists and shortsellers achieve the same, healthy objectives. Indeed, the short-sellers go one step further in providing the pool of money that will pour into the market when the cleansing process is complete.

How the market determines when it is time to buy is one of its mysteries but, famously, it happens when there is blood in the streets.

Vanity Fair recently argued that Bear Stearns was murdered, but if that is the case it was through a planned execution, not the actions of short-sellers; an inside job done within the small world of the broker banks.

Yesterday's Financial Times said that "despite the snappy rally in bank stocks in the US, which may have been partly fuelled by short-covering . . .

money market traders expect banks to face rough sailing till the end of 2010".

There are other, unnatural, forces at work during this "snappy rally", so don't sell your Snappy Tom pet food stocks if you figure human consumption of it, like spam, will take off.

The vulture capitalists, or money market traders, get out when they know the economy is going sour. Experience has taught them not to immediately go short, for while the smart money knows the party's over, it also knows the public, the herd, is the last to learn.

In the US, big investors were getting out as early as 2005, some probably before. They knew they would miss some froth, but no one gets fat on froth. And re-entering the market to short it too early is exceedingly dangerous.

The dotcom bubble was well peaked years before it burst.

Someone going short on hightech stocks too early, even when the technicals screamed to do so, would be reminded for life of Bart Simpson's expression, "eat your shorts".

Shorting the market is extremely tricky and dangerous.

The person who is short is taking a huge risk. When will the herd find out and get out? This has been compounded by the vast amount of money available due to former Federal Reserve chairman Alan Greenspan's politically motivated, rather than financially wise policies, the pressure to meet extravagant return expectations, the massive increases in pension and superannuation funds, the inexperience of traders, and the fact that this is other people's money and therefore easier to spend.

The money made from shorting can far exceed that of building a portfolio, as a stock can fast and furiously. But the next recovery is partly in the hands of those who have been short.

The experience of fund managers has changed dramatically this year. Some believe inside trading at the highest level has been going on, that information is released to certain favoured banks, particularly broker banks, so the traders who have carefully calculated their short positions are stunned by amovement in the opposite direction.

When you have $500 million of other people's money riding on a short that bucks, someone has to cover huge sums. If the market is defying logic and the law of natural selection, you get scared. Traders with many years of experience who don't scare are at least deeply confused by trading patterns.

A perception that it is not a level playing field would destroy the market and the game would be played only by those in the know, or fools.

Eventually middle-level traders will retire from the market, and throw in the towel.

All the smarts in the world won't beat inside information. While a select few who are party to inside information will prosper, the market will die. The herd, already badly burnt, will soon learn that if the "Mr Almost Too Big To Fail" players can't prosper, they have no chance.

In the fool's gold euphoria of this "snappy rally", much has been made of JPMorgan's results. The New York Times is, however, adding a note of extreme caution that readers of this column will not find surprising.

The "mortgage contagion may be spreading from subprime to prime mortgages, which were given to people with the best credit histories", the Times report said."

Prime looks terrible, and we're sorry," JPMorgan chief Jamie Dimon said at a conference call with investors. "We can say it eight times. It looks terrible."

As this column has noted many times, Americans, until recently, would do practically anything to protect their credit rating. Good credit came to imply wealth. All it really meant was that middle-class Americans made sure they never missed payments. Thus when the money was being handed out they were "prime" targets and it is here, not in the subprime, where the damage has been done. This is just starting to hit the banks' books.

Batten down the hatches tighter, and note that in after-hours trading onWall StreetMerrill Lynch, Google andMicrosoft all got hit for 7%.

David Hirst is a journalist, documentary maker, financial consultant and investor.

His column "Planet Wall Street" is syndicated by News Bites, a Melbourne-based sharemarket and business news publisher.

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