Charlie Aitken explains the Macquarie short strategy

September 19, 2008

Charlie Aitken from Southern Cross Equities sent the following comments to his clients on September 18 as Macquarie Group shares were falling out of bed.

This brings me to Macquarie Group. This week we have attempted to point out the seriousness of the developments in New York and London. We have also attempted to point out concerns some investors have about MQG and their place in the new financial world order. I have consistently written that we are not trying to kick Macquarie at the bottom, we are simply reporting investor concerns, some, but not all, which are valid considering the changed world order we all now operate in. Our view at $42 on Monday was you would be able to buy MQG shares very cheaply over the next 12 months. They were $26 by Thursday. We attempted to provide a balanced view of the market concerns surrounding the stock.

There are clearly much darker forces at work attempting something far more sinister in Macquarie. They are attempting to harness "the power of panic" to accelerate the fall in the share price. There is a genuine attempt on in the view of many market participants to destabilise Macquarie and create the self-fulfilling downward spiral that has taken out many other leading global financials.

The playbook is well known to everyone except regulators it seems. You create share price weakness by bidding up the highly illiquid credit default swap (CDS). The press and brokers focus on this highly manipulable CDS swap price and report the risk of MQG defaulting is rising. It's chicken and egg. Then the rumours start about "a run on Macquarie's cash management trust" and the stock takes another leg down. Financial planners and retail investors hear about "the run on Macquarie CMT" and actually do take money out, which people hear about and the share price takes another leg down. The satellite stocks come under pressure from people who want "nothing to do with Macquarie" and the stock takes another leg down.

The press then gets sucked into printing some of the clearly false rumours and the stock takes another leg down, and before you know it the perfect shorting and selling storm is attacking Macquarie. That is how you harness "the power of panic" and it seems there are a group of investors who have perfected this sinister short-selling technique. The key is to do it when there are global comparable headwinds for the given stock under attack and clearly that is the case with Macquarie this week.

The point I am getting to is it is one thing for me to question the future profitability of Macquarie and the business model going forward in the new world we find ourselves in, but it's completely different to spreading false rumours about solvency, manipulate CDS spreads to create fear, and attempt to start a "run" on the bank. I have even heard rumours that a group of hedge funds are targeting getting Macquarie shares to $10. The rumour is that they are the same group of hedge funds who cracked Babcock & Brown. But Macquarie is no Babcock and I think Macquarie management is highly aware of the "downward spiral" attack they are under.

I won't be writing any more on Macquarie from this point. Our view on the headwinds they face are well known, the shares have fallen very sharply, but I do not want to be even a peripheral part of a sinister campaign of Chinese whispers and manipulation to bring down a great Australian institution. It's just not right; we have made the point we wanted to make about changed business conditions for the Macquarie Group but this sinister stuff we want absolutely no part of. I wish everyone at MQG Group well in this fight against the forces of evil. I am sure you are all smart enough and well capitalised enough to take on this campaign. The very last thing any Australian should want is this sinister campaign to undermine Macquarie to succeed.

Call me "home biased", but this is just not right and why nothing is done about "rumourtage" shorting by Australian regulators is beyond me. As at today, Australian financials can still be shorted. That means a huge pool of global financial shorting money may well just decide that Australia is the only place they can have to some fun. Remember, Australian financials are expensive in a global context.