Righto, so this morning the FSA has banned shorting certain financials, and to the suprise of a lot of people (mainly consumers) the markets are rallying in a big way.  We are seeing gains of over 100% for some banks, even Bradford and Bingley (BB.) saw a swing of almost 60% this morning after not having moved from their bottom for over 2 weeks.  This morning we’ve also seen a mass exodus from gold, which is usually seen as a stable place to put money (although if you look at the 2 day intra day of gold its been bouncing around – which is worrying behavior).  The media is starting to use phrases such as “recovery from worst financial crisis since…” and so forth.

Dear oh dear… right, the markets are a “free market economy”, so the market sets the value of assets and companies, by banning shorting financials, in one sense it can be seen that the FSA has said “these financials cannot go down in value”, or another way to look at it, is that even if you hold physical stock of these financials, they cant now decrease in value (on the short term anyway), as one of the main mechanisms has been banned.  This means that the price can ONLY go upwards, a shortage in volume on the market will drive the demand higer and higher – causing this rally and upsurge in the financials.

Now, dont get me wrong, in many ways I think this is a good move by the FSA.  They have created huge amounts of money for the financials in the short term (very short term).  I would imagine the logic is that once there has been enough of a rally the ban shall be lifted.  This is essentially just buying time, if the FSA don’t lift the ban on shorting, then the markets will find another mechanism to drive down the price and reflect the true/perceived value of those stocks.  In the short term traders are out to make money, this rally wont last, the financials were valued low for a reason, a lot of them are over leveraged, and their balance sheet value is greatly exaggerated.

It is indeed a very interesting time on the markets, especially for a novice like me, I am learning a lot through observation, and have been able to predict a few events before they happen in an intuative type of way.  This is crucial for markets success.

Please, I want to hear your thoughts, and get some debate going – you know how to get hold of me

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