Posted on 09/18/2008 5:36:14 PM PDT by RKBA Democrat
The U.S. Securities and Exchange Commission intends to temporarily ban short-selling, The Wall Street Journal reported Thursday night. It's unclear if the commission has approved the move, the Journal reported.
(Excerpt) Read more at marketwatch.com ...
A short puts money into the pocket of the trader. That is trading, not investing. Investing is putting capital (i.e., cash) into a business for the purpose of that cash being used to buy equipment, personnel, etc., to further the profits of the business. That is investing. Stock trading, exspecially shorting, is nothing more than gambling and trying to suck more out of the market than has been put in.
It was written poorly but the only risk I see to a NSS is if the price rises, which is unlikely as the short seller is pushing the price down. The person selling my franchise without my permission is likely to end up in the big muddy si he/she/it is in a high risk situation.
Now what is your explanation for the risk to the person shorting.
“Now what is your explanation for the risk to the person shorting.”
The risk to the shorter is unlimited risk. A stock can only go to zero but can go up infinitely.
“They are down 2/3 from the peak without ever having achieved Nasdaq-like valuations.”
Some of us believe in the herd instinct. If it was strictly company valuation then the markets wouldn’t behave in the manner that they do. All stocks in a sector would not decline/rise at the same time.
I wonder if the hedge funds are getting margin calls on their computer trades since no one seems to be following the rules. What makes you think the apply them to anyone but individual investors.
That is obvious but what is the risk on the short side. What is the average length of a NSS for a hedge fund?
For one thing, the prime brokerages from whom they have margin loans and with whom they are holding these positions would shut them down and liquidate their assets. Just like a normal brokerage.
I have to admit I’m very suspicious of WS these days. I wonder if they could stand close scrutiny by law enforcement?
http://www.fool.com/investing/high-growth/2005/03/24/the-naked-truth-on-illegal-shorting.aspx
I would be very interested in your comments about this article on naked shorts.
There's this erroneous notion going around that the recent stock price collapse in financial stocks came out of the blue. It did not. Short sellers have been selling these stocks since way before the recent news broke. Banks and brokerages have been hiding* bad assets for over a year now. In the past few months, the information dam finally broke - to the point that other banks and brokerages began shunning the banks and brokerages in the worst financial shape in fear of not having their money paid back. This got out to shareholders, who began selling them, and short sellers, who increased their short positions.
The fact is that once major firms like Bear Stearns and Lehman started announcing billions of dollars in write-offs, the writing was on the wall. Management throughout the financial sector had lied and obfuscated for too long with off-balance sheet vehicles and hard-to-value items that were nonetheless valued at fantastical levels. This was Enron on steroids.
* Why do they hide them? Because disclosure would mean serious stock price declines, hurting senior managers, who might be fired en masse, and taking an axe to the value of their stock options. This procrastination, combined with even more risk-taking by banks and brokerages, is what has led many of these companies to the brink of a liquidation where stockholders will get nothing, and some creditors might get pennies on the dollar.
No one every complains when short sellers get their heads handed to them.
The impact on the finances of companies being shorted is not discussed. Understandably so, since a company is either solvent (assets >= liabilities) or insolvent (assets < liabilities). Its stock price has nothing to do with it. In fact, if short-sellers drive the stock price low enough, the company might find that it makes sense to buy back its own stock. Other companies might see this as an opportunity for a takeover. Why was it that no corporation wanted to buy Bear Stearns, Lehman or AIG? Because they were insolvent - you could sell off all the assets without being able to pay off all their debts. They were basically a money pit.
Budweiser had no problem selling itself off to Inbev - in fact it had to fight its suitor off before succumbing to a better offer. Sandisk has had no problem trying to get acquired - it never even asked and Samsung came calling. Short sellers don't sell good companies - they sell bad companies, hopefully at the high, before anyone else figures out they're bad companies. But good or bad, a company's solvency isn't affected by its stock price, any more than your solvency can be affected by your neighbors' opinion of you.
Here’s another thought. Lehman had huge stock option programs for its senior executives. In the past four years, Lehman bought back $6.5b in stock in order to pump up the value of their stock options. If Lehman had that $6.5b last week, would it have folded? I don’t know. But having kept that cash would have increased Lehman’s shareholder capital by almost 1/3. Should companies with lavish executive stock option programs be allowed to buy back stock? Now that’s a question that’s worth pondering, because it directly affects the solvency of the companies that do the buybacks.
A very simplistic reply to your very well written reply is that I still believe Naked Shorts should be completely eliminated by strong enforcement. THe underlying stocks can be tracked and if they aren’t there, well.I haven’t thought this out in great enough detail to write a cogent response at this time.
I suspect that whatever conclusion I come to will be derided by most as no good for the market. THis is standard argument used in Medicine, Sports or almost any other activity requiring regulation when their ox is being gored. I think less regulation is best but regulations that are necessary must be enforced vigorously. All of this is sort of trite but I haven’t finished enough research to form a complete opinion except for NSS.
For now I see the SEC as the NCAA. The coach makes the big bucks from endorsements and big donors. The coaches and donors do the illegal recruiting and the students and athlets suffer the penalties. The coaches and donors get away scott free. We need to reverse this.
I think WS can be reformed but it may spoil the fun of the high flyers and ignore the Martha Stewarts and the press will hate it.
“Short sellers don’t sell good companies - they sell bad companies, hopefully at the high, before anyone else figures out they’re bad companies.”
This is fine if it is based on public information and not “insider” information. I will never believe that most of the hedge funds operate on public information until I see some real proof.
“Short sellers have been selling these stocks since way before the recent news broke.”
Sometimes it’s interesting to see blood in the water from a feeding frenzy. Shark’s don’t have friends when blood is in the water. I just don’t like paying for their fun.
We may need to eliminate options or completely change the way they operate. I also would like to see regulation that if you run a company into the ground you don’t get to take anything with you.
We are screwed now. Naked shorts, yes! But to go beyond that screams “We are trying to shore up a house of cards!”
Play the stocks and win or lose on your own money.
With any luck we'll return to a normal world as we were for more than 60 years after the Great Depression where the rule of law was: "He who sells what isn't his'n, buys it back or goes to prison"!
note * 7/6/07 SEC uptick rule order
I agree, life is a form of gambling and I don’t see why I should be bankrolling anyone.
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