Mother of All Short Squeezes? 21 comments
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Tuesday’s action by the SEC in amending Regulation Short Sales (RegSHO) listed 19 banks and financial companies for which naked shorting was effectively banned for 30 days. Such a limit was long overdue but why limit the restriction to just 19 companies and just 30 days?
Naked short selling (selling shares short that are not first borrowed, which is required to execute a legal short) is endemic and the SEC has turned a blind eye to it since the agency was created. This recent action is a knee-jerk reaction but a clear example of too little way too late. The question is will they have the stomach to do what it necessary and give all stocks the same naked short protection? But like anything else, the devil is in the detail.
As you can see from the chart below, the ban and rally created one mother of a short squeeze this week with the 17 companies trading on the NYSE rallying nearly 20% in just three days. However, since May 1, 2008 this group is still down 24.8%. (Before this past week’s rocket ride, the group was down 37.2%.)
Not surprisingly given the government bailout plan announced this week, Fannie Mae (FNM) and Freddie Mac (FRE) enjoyed the biggest lift jumping 89.5% and 74.5% between July 15 and July 18. But as of the July 18 close, they were still down 61% and 72% in the last four months (since March 20).
In their monthly Short Interest Report on July 16, Bespoke Investment Group updated their short interest numbers showing that short interest as a percentage of the float continued to increase during the second half of June with the average short interest hitting 6% for the S&P 500. Over the last year, short interest has increased 48% for the 500 stocks. Bespoke also found that the 10 percent of stocks in the S&P 1500 with the highest short interest (150 stocks) gained 15.1% in the two day period ending July 17, 2008 compared to just 2.2% for the 150 stocks with the lowest short interest. Now that’s a short squeeze rally!
click to enlarge
Figure 2 – Chart showing three-day stock performance for 17 of the 19 stocks that the SEC identified in its naked-short prohibition order amendment to the Regulation Short Sale (RegSHO) rules Tuesday. Two of the companies trade on the pink sheets so we graphed the other 17 that trade on the NYSE. As a group, these stocks jumped nearly 20% in the recent three-day period! Chart by VectorVest.com.
We checked Buyins.net, a website that tracks naked short selling statistics that became available as the result of RegSHO that became law on January 1, 2005. Buyins.net has to contend with a regular barrage of hack attacks presumably from short sellers who don’t like what they are doing.
We looked at their list of stocks that are fail to delivers [FTDs] (stocks shorted without first having to borrow the same number of shares, which is what you and I have to do before executing a short sale).
At the top of the list is Medis Technologies (MDTL), which has remained on the SEC’s fail to deliver threshold list for 742 days. In other words, it has been the target of naked short attacks and these shorts have not had to deliver shares that they have shorted for a total of 742 days! We counted a total of 244 stocks that have stocks that are classified as fail to delivers in excess of the maximum supposedly allowed by the SEC of 13 days.
Brokers, market makers and some other big players have found ways around this inconvenient rule. Brokers and money-makers should have some time to deliver borrows, but 742 days?! There is something seriously wrong in stock regulation/enforcement land and as long as it is allowed to continue, stock markets will experience increased short-driven volatility.
Disclosure: None
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This article has 21 comments:
Like naked shorting should be legal in the first place.
KISS everyone. More regulations = less 2003 markets and more 2001-2002 market environments. What we need to really grow is tax cuts. Study tax cuts and market gains and it is clear when you lower taxes, the markets rally. When you raise them.....DUH. ;)
And why other companies like WB, or NCC on that list?
Should I assume that a company like Morgan Stanley or Goldman are more vulnerable to naked short selling than a WB, or WM?
Please...
On Jul 20 10:14 PM sharp10 wrote:
> How convenient that the SEC decides to come out with this right before
> most banks are due to report.
>
> And why other companies like WB, or NCC on that list?
> Should I assume that a company like Morgan Stanley or Goldman are
> more vulnerable to naked short selling than a WB, or WM?
> Please...
Pulling for a good report from CTX...but it is doubtful...you never though banks surprised this week....a couple of the better homebuilders next?
They they said it exists but had no impact.
Then the implemented reg SHO
Now they are saying it is destroying the banks.
Now we have a huge rally.
SOO now the king has no cloths. Hw re they ever going back to the past when Naked Shorting does not exist.
Remember after the short squeeze then the bottom will fall out like a rock
Even at emergency , SEC offers policing to only 19 investment banks for 30 days .
How about the regional banks where they have already been hurt by naked short sellings .
The naked short sellers can short sell unlimited quantity of shares of any bank by not having to borrow the same .
Such short sellers then have the " privilege " to command an unlimited supply of shares .
Such short sellers are naturally invincible since they have been well fed financially in expense of the economy of USA .
Yet , SEC would only police for 19 investment banks .
Why does the lawmakers tolerate such notorious violation of the law ?
Further , banks are often required to shore up their balance sheet forcing them to sell newly issued stocks at depleted pricing .
An article indicated that the same short sellers who depleted the banks' pricing would buy the newly issued stocks for covering their position .
Magic ! short selling " nothing " at a high price and buying back the tremendous quantity of new issues at a dirt cheap price .
A small group of short sellers make huge profit on the misery of a very large number of innocent people .
Is this vicious cycle of selling phantom stocks at high prices while covering the position with cheap new issues , really happening under the eyes of lawmakers ?
Just in case , Banks should have a grace time to shore up their balance sheet until the naked short selling is limited .
www.greenfaucet.com/th...