Ban on Short Sale Ends - Hold Your Breath

On October 1, 2008, the Securities and Exchange Commission extended its emergency action prohibiting short sales of shares of certain financial companies to the third business day after the enactment of the pending federal legislation to stabilize the credit markets and financial system, but not later than October 17. The legislation, better known as the bailout bill, was passed on Friday, October 3 and immediately signed into law by President Bush.

The day after the ban was first announced, the ProShares UltraShort Financial ETF (SKF) was halted and when it resumed trading it barely budged. In the meantime, financials tumbled and many holders of SKF missed out on a 16% gain that day.

Since then, SKF has been trading reasonably in tune with the double inverse of the Dow Jones Financial Index (also the basis for the iShares Financial ETF - IYF). Despite the ban on short selling, most of the stocks protected by the ban have fallen anyway.

ProShares has announced that October 9, 2008, it will resume its normal process of creating new shares of its ProShares UltraShort Financials (SKF) and ProShares Short Financials (SEF) ETFs.

This is good news for investors as spreads should be slightly narrower and the ETFs should more consistently trade closer to their net asset value.

What about the stocks that have been protected by the short selling ban? Many have already been crushed. Without the ban in place, will they take another leg down?

Consider the following:

At the July lows for IYF, at a time before Lehman collapsed, Merrill was sold, WaMu got taken under, etc., etc., the ETF fell to just under $60. Since then it traded in the $65 to $75 range. It wasn't until just this week on Tuesday that the ETF finally fell back below $60. After all these cataclysmic events in the financial sector, should the underlying index still be worth almost the same amount it was three months ago?

Where do you think financial stocks go from here without the SEC to protect them?

Disclosure: Long SKF

Comments

[User 218471:]

Definitely understand where you are coming from on this one. On the one hand, it's a bit funny that you would be one long the financials short ETF. Then again, this will more than likely cause another sell off in financials. My only fear at this point, looking from the side of a shorter, would be if the SEC extended the "no-short" period... a move that I think would be obvious at this point in time.

www.bullishbankers.com.../

Great write up... it's going to be interesting to see where things go from here.

2008 Oct 09 02:32 AM

[vodka_tonic:]

i'm going to beat GS down to 100....140 my ass....buffett my culo.

2008 Oct 09 03:09 AM

[Jase:]

SKF is a bargain below $250. There's a tracking discrepancy that was caused by the short selling ban. Think about it: SKF should now be tracking above $300. It made its all-time high of $211 when UYG (its counterpart) made its all-time low of 14.08 back in July. UYG has since tanked more than 30%... do the math. SKF should be trading above $300 as I type this.

2008 Oct 09 03:37 AM

[anastos:]

Tracking discrepancy? I doubt they're calculating the NAV wrong, which is what actually tracks the double inverse. Anything above that is gravy poured on the ETF by the effects of the market. If you think the price you're paying per share is what double the inverse is, you need to research what you buy a little more closely.

2008 Oct 09 06:15 AM

[Sr. EM:]

Please check the NAV of SKT and you will realize you are wrong.

Everybody is saying that the end of the ban will create a sell off, maybe the oposite will happen as people realize that there are some bargains out there.

Evrybody was expecting a rally after the bailout package and look what happened.

2008 Oct 09 06:40 AM

[john s. gordon:]

why don't you just restore the uptick rule ?
> jack

2008 Oct 09 07:59 AM

[Jase:]

Anastos,

I'm fully aware that SKF tracks the Dow Jones Financial Index. I'm also fully aware that ProShares calculates the NAV based on pricing of the underlying at 4PM EST. My point was simply that the closing price of the underlying (DJUSFN) at market close yesterday was still below the closing price back on July 14th (approx. 270 vs. 287, respectively).

2008 Oct 09 07:59 AM

[thezo:]

I dont think you have a good understanding of the mechanics of the market. Since the short ban we have not been able to sustain a good rally. In these times we should be able to have HUGE oversold rallies with amazing upside. We have not. Why? Because when a stock bounces 10% theres only one type of trader that is willing to pay the new sky high price...a squeezed short seller.

All excessive moves in the market are caused by wither panicking longs or shorts.

The SEC has damaged the markets and we may not see a decent rally until most investors are washed out.

The short ban put a ceiling on the market and took the floor right out of it. On the way down there are only dip buyers...no shorts covering for profits. This decreases the liquidity for the panic sellers.

They took the juice out of the orange and now the dip buyers are just prey for the panic.

2008 Oct 09 08:26 AM

[thezo:]

and would any of you risk shorting in these oversold conditions

people aren't that stupid

2008 Oct 09 08:28 AM

[bearfund:]

All the ban on shorting has done is make it impossible for anyone to make money on downward legs, and therefore reduced the supply of capital and buying pressure. The reason stocks fall in price during bear markets isn't a flood of short selling, it's a dearth of buyers. That's why you saw so many of these issues plunge in the last weeks: no one wants to take the risk of buying. Regardless of whether shorting is prohibited, no stock will rise that does not have an excess of willing buyers. Ever. The rule was stupid and I would hope that after watching some of the worst days in history enter the books under its auspices the powers that be will take the hint and not repeat their folly.

2008 Oct 09 08:52 AM

[robert.b.fe...:]

John, Gordon got it right. Restoring the uptick rule would go a long way towards stabilizing the bottom as shorts would have some semblance of control but still be present to shore up the bottom end.

2008 Oct 09 08:54 AM

[antix:]

Unfortunately, there are still plent outhere with more money that brains. So yes, some will still play the short in this market!

2008 Oct 09 08:56 AM

[antix:]

plenty out there! Wow! Can't spell without my coffee! haha

2008 Oct 09 08:58 AM

[jswede:]

XLF down 31.7% since day after the short selling ban.

If one cannot sell short, then the only folks who can make a bet a stock is overvalued are those who are long.. and those people went long because they thought the stock was undervalued.

So you're waiting for people to change their minds about an asset they are long and have a strong interest in appreciating... and when they do it's ugly - the knife just drops.

No short sellers are restraining the longs' enthusiasm on the way up, and no short sellers are covering to dampen the drop on the way down... it's a recipe for incredible, and itrrational, directional moves.

2008 Oct 09 09:07 AM

[strutzma:]

Is there any chance that the shorts would want to go out and cover pretty quickly (today?) now that they have the opportunity and don't want to be stuck in this same position, potentially, days or weeks from now?

2008 Oct 09 09:12 AM

[antix:]

Hello,
Can anyone help me understand the P/E of ebay? It has gone from 94 in May to 43 today. When the Skype write-down comes off, how will it affect the P/E and is this good or bad?

2008 Oct 09 10:15 AM

[jswede:]

antix, your answer lies with the "E"

2008 Oct 09 11:00 AM

[Smarty_Pants:]

Short selling ban was nothing more than a scapegoating ploy by the government to blame "someone".

Impact of short sellers on stocks is negligible. The volume of short selling is tiny compared to daily volume. How can 2% of all trades "drive" a stock down unless everyone else is selling too?

Bearfund is right. A lack of buyers with only a very few sellers will do more to drive a stock down than anything else, whether those sellers already own the stock or are shorting it. If there is an endless supply of willing buyers shorting will only slow down the rising price momentarily.

It is probably closer to the truth to say that there was an oversupply of 'longers' that drove the price to extreme heights than to say 'shorters' drove it down.

Ban "Longing" in the market. That will fix things. :-)

2008 Oct 09 12:09 PM

[DaveW:]

One of the most fundamental consequences of the shorting ban was to further undermine the public's confidence in the market. This is a crisis of confidence and trust. The end of the ban will be another brick in the wall to build a short term rally (maybe lasting a whole four trading sessions), before we descend toward deeper lows.

2008 Oct 09 02:03 PM

[CaptD:]

Shorts are helping create this market envirnment! Many companies like GE are under attack from the GLOBAL shorts (Oil $) and as a MAJOR US Defense contractor it is just one of the most visible companies in what I am now calling the (FIRST) ECONOMIC WORLD WAR or EWW 1.

If MAJOR recovery does not really happen tomorrow (10/10/08) then that will signal the beginning of a total economic collapse of the life style we have known in the past. Global "foot draging" where nobody wants to be first to lend $.

Get ready to discover many straGEtic US companies that are getting ripe for foreign takeover UNLESS SHORT TRADING IS HALTED ASAP BY THE SEC until things return to "normal", (LIKE YESTERDAY). Imagine if Boeing was bought by Iran or China or Russia!

Our money (SEC) people are thinking of themselves instead of what is best for our country and will be labeled as $ Traitors as this man made situation continues to go down faster and faster.

2008 Oct 09 03:53 PM

[thezo:]

hey CaptD why dont we just ban selling for a loss?!

that'll work

if there was never a ban...we would probably be above 10,000

There was no short squeeze rally after the bailout....why???

there were no shorts in the financial names to squeeze...

2008 Oct 09 08:28 PM