The Fundamental Upside of the Short Sale Ban

While the artificial nature and blatant bull-biased market manipulation and resulting historic short squeeze caused by the short sale ban are disturbing and in my opinion bad for the market there is one serious upside to this bit of government intervention. The upside lies in the ability of traders to once again use fundamental analysis and re-enter the most promising short ideas once the dust settles October 2nd.

In my opinion, the short ban was necessary in order to prevent record VIX and a market ripe for manipulation during the unveiling of the banking bailout. Simply put the government feels that the market cannot be trusted to keep from tearing itself apart during the despair phase of this contraction.

Having said this, I still feel that the squeezing out of existing shorts on companies which are fundamentally insolvent and mispriced such as First Financial (FED) (a California Option ARM lender which holds at par several billion dollars, or approximately 60% of its assets in California Option ARMs set to recast over the next 36 months) or Capital One (COF) (while probably solvent in no way appropriately priced when assets contain several billion dollars of yet to be realized writeoffs on auto leases, credit card loans, NY Real estate, and Option ARM mortgages) can lead to a terrific shorting opportunity. Any financial firm whose price seems to misrepresent the real world prospects for its balance sheet over the next 24 month period is an excellent short opportunity.

The one question at hand is whether these opportunities will be available to ordinary traders and investors or if they will quickly be seized upon by the market makers and hedge funds.

Disclosure: Short FED, no position in COF.

Comments

[Mark Sams:]

I totally agree. Capital One (COF) presents an excellent short opportunity once the ban is lifted. Regardless of the bailout, the recession will worsen before it gets better. Housing prices still have a ways to go before reaching long-term trend value. Defaults on auto loans and credit cards will increase. Perfect short.

2008 Sep 23 10:21 AM

[Kint:]

Also, the ban did nothing to prevent the collapse of Wamu..

2008 Sep 26 03:33 PM