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Why Pick on the Shorts?
'You show me bad fundamentals, I'll show you short sellers'...
- analyst quoted on CNBC, Aug 2008
So, the SEC is going to initiate new rules on short selling. How lovely! Is it really the shorts that are responsible for this bear market? Hardly so! What smacks of regulation and government control is this conversation about controlling stock prices by limiting short sellers access. It's a complete farce and runs in the face of pure capitalism.
Isn't it the short sellers that provide a market? Naked or not, shorts are good for the market. They put a rational face on markets, but also add fuel. But are shorts always wrong? In a perpetual bull market, they are. But we don't go up everyday forever, do we? (It sure seemed that way in the late 90s.) Let's look at the current story. Are they right? Is that even a relevant question? You can short a stock to zero theoretically, however wouldn't some value players find 'value' at certain prices? If Lehman (LEH) was attractive at 24, it must certainly be loved at 12, right? Makes you wonder...
September Is Not a Bullish Time
The calendar turns soon, and it may not be a pretty picture. Historically, September has been the worst month in a calendar year. Even worse than October, which is seen as 'the crash month'. For whatever reason, performance has generally been the weakest heading into the fourth quarter. This year's wildcard issues include a Presidential election, inflation, weak economies both domestically and globally, a credit crisis, higher crude oil and a housing recession. With the market teetering on support and the current financial situation in a critical situation, it's hard to see if the bulls can mount any kind of rally. We're still in a bear market, and the 'slope of hope' the bulls have been arguing lately is becoming quite slippery.
Fannie and Freddie... Playing Taps
This is a given. The GSEs have too much debt and too much exposure to be able to withstand more housing troubles. The Feds will come in with a bailout plan, with FNM's and FRE's equity wiped out. The short-term debt burden in monstrous... some 200 billion due in Sept. The taxpayers will take the hit on this one, of course. The only concern is who's next... and there are many sick financials to choose from - take your pick. The market really won't show much traction without participation from the financials.
Fear Is Not a Factor... Yet
One thing we look at is fear, or recently... lack thereof. Why the high level of complacency? Is it that traders and investors are just numb to bad news? Perhaps the level of bad news needs to ratchet up a notch. Whatever the case, the lack of fear is disturbing to the extent that market rallies are just to be sold. Momentum has stopped in its tracks - look what has been occurring this week. Meanwhile, financials are mostly back to their March lows, if not lower. The VIX peaked back then at 37. Today's VIX reading is roughly 21. The lack of fear tells us that anything bad in the market is not priced in.
Disclosure: None
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This article has 14 comments:
Firstly, they can take their liquidity and INVEST it for the building of our society, instead of trying to destroy it.
Secondly, who ask these people to be my financial guardian? Did I miss the election?
But in any case, it's not so much the shorting process, but really the GANG-SHORITNG of stocks. It has become far too easy for a couple of well funded shorts to water-board a stock to death. Torture in the name of transparency, is still torture.
The SEC has chosen to totally ignore the problem of NAKED shorting for more than a decade, and THIS is the root of today's problems, because its FRIENDS the large financial institutions who spawn the hedge funds have placed their influence on those bureaucrats... it is this favoritism for the big financials which has caused grievous harm to the small investor, particularly in low to mid cap stocks where hedge funds can move them much faster and harder with naked shorts, and thereby profit by the volatility that they themselves have created... if you have a problem with naked shorting fine, I do too, especially with regard to the despicable, biased history of ignoring the activity by the SEC, but to try to stop short selling in totality is not only naive, but also a disservice to all investors who rely on the free flow of capital in the financial markets.
How does one legally sell something for which they do not have title? I am far from knowledgeable about the history of short selling, so I rely on experts in the field of investing. One of those persons is Bob Chapman; a man who speaks the truth about the state of financial markets and the world economy in my opinion.
Here is Bob's explanation regarding the scam of short selling:
theinternationalforeca...
His website has many articles regarding where the economy is headed, which we all know is bleak to say the least.
The "abomination" is that people with no understanding whatsoever about the products being used in these markets go off half-cocked making assertions that are incorrect, dangerous if enacted, and counter-productive to the longer term health of the markets.
There is a HUGE difference between NAKED short selling and COVERED short selling. A point not stated yet... Covered short selling requires borrowing the shares at a cost... if they are available. And the cost to borrow is paid by the shorter regardless of where he comes out in the trade. Naked shorting does not require borrowing and is therefore already illegitimate as wpdragon correctly states.
apppro - you should learn the difference and then reassess the validity of your own viewpoint. Covered Shorters correctly throw the BS flag on bad fundamentals and other aberrations of stock valuations. Can you say dot com bubble? Pump and dump? Or any other parabolic rise or aberrant pricing behaviors? Shortsellers call out bad management and egregious accounting as well. How many times did Thain publicly say Merrill had plenty of capital? Eight, nine? And look what a mess Merrill is in. Shorters were telling you the truth about the value of Merrill's stock long before Thain & co. quit lying to everyone. As you would have it, the market would be akin to a giant Ponzi scheme. You could only hope to not be the last dope that bought in.
Oh, and the "building of our society" statement you made... man, the day is not long enough to enumerate the fallacies and totally tear apart that misguided and illogical statement you made.
OldNavySailor writes: "How does one legally sell something for which they do not have title?" Ummmm... you borrow it?! This is the mechanism in place for stock shorting - (see above). Just as there are mechanisms in place to sell the auto that you have a loan on and do not have title. Think man, think!
But where the Oldsailor really scares me is where he admits his own ignorance but then jumps on some so-called expert's bandwagon in a vain attempt to gain credibility. If you don't understand shorting to begin with, how do you understand the so-called expert you just latched on to? You should really do some studying so then you could make an informed opinion and rational discourse could follow. Otherwise, you're just sailing in the wrong ocean, sailor.
In some ways, Shortsellers are the ultimate truth tellers and at least they are willing to put their money behind their convictions.
Good article. As the author states... "Makes you wonder..."
I'll tell you where the short sellers have been... singing from the roof tops to anyone who will listen about all the systemic risks and problems in the economy (housing, financials, banking, credit markets, commodities, inflation) while the head-stuck-in-the-sand crowd was saying "Oh gee, what problems? I can't possibly lose money - stocks always go up and no one in companies, or the government or on Wall st. would ever lie to me... would they?"
Waaa, sounds like some of the latest posters have lost money in the market and have sour grapes about it! History is not on your side. If you just would have listened... Think man, think!
Here's a great article on the current state of this short bashing titled:
"This Blame Game is Short on Logic" ....
www.ft.com/cms/s/0/95c...
Enough said.
If the SEC didn't have its head up its butt, naked short selling could have been eliminated years ago.