Why would shorts cover if the market falls precipitously?
Let me assure you, that any short who has overstayed his very brief welcome over the past five years has seen his profits evaporated in mere minutes.
Haven't you heard of letting your profits run? Shorts don't cover if the market goes their way, they cover when it moves against them and the want to protect profits. A neophyte might cover if the market is moving his way, but not people that know what they're doing. If the market is moving their way, they're more likely to increase their positions.
Disagree. First, I don't think you can characterize things so generally. But only the most skilled and well capitalized shorts can really follow a stock to the very bottom. No trader I know sticks around short for any significant time in this market, and the ones who have have been destroyed over the past five years. Over and over, I have seen the market recover violently no matter how rotten earnings have been. And I mean, to a man, every trader I know and I talk to a few dozen, are very very skittish.
Covering when the markets fall precipitously is a taxable event, forcing the shorts to share their profits with the IRS.
ALL short sales are short term gains by IRS definition, regardless of the holding period. IF you hold a short position over a year-change, there is a special treatment that is recommended, and you can defer the gain into the next tax year, but overall the transaction is subj to ST treatment.
The great advantage to shorting is when companies go belly-up. Then the shorts never have to cover and nothing gets reported to the IRS so they don't have to pay tax on their profits.
I read that too just recently on Puplava's site, and it is flat out false. Gains from a short sale are due when a stock becomes worthless, cover or not, and are always ST gains regardles of holding period. Think about it. If I short a put or a call and the put expires worthless, I never cover, right? Think the IRS will let get away with collecting the premium tax free? Nope.
Naked shorting is even better, because you don't even need to borrow the shares you';re selling because you';re just selling air, i.e., phantom shares. You can sell multiples of the entire shares outstanding of the company that is being shorted and make huge profits.
True.
In addition, the SEC recently eliminated the up-tick rule for shorting, which had been in place since the great depression. Now you can hit every bid without the inconvenience of waiting for an up-tick and create huge downward pressure and enormous profits when selling those air-shares.
Also true. IMO.
The conditions are ripe for a huge and lasting crash.
In a free market, I'd agree. But we don't have that.
You obviously don't know Chanos and his recently purchased US Congressman Richard Baker that he hired away mid-term as the Chairmam of the House Financial Services Committee on Capital Markets to lobby for hedge-fund swine. Chanos also kept also housed a high-price whore that serviced Eliot Spitzer.
Google him. While you're at hit, google Stephen Cohen, Marc Cohodes and David Rocker as well and see deepcapture.com
Gains from a short sale are due when a stock becomes worthless, cover or not, and are always ST gains regardles of holding period.
It doesn't matter what the law says. Billion dollar hedge funds are above the law. That's why John Mack is walking around free instead of doing time for insider trading and Gary Aguirre was fired from the SEC.
Shorting with no intention of delivering the shares from T+3 is already illegal under the 1934 Securities act.
If I short a put or a call and the put expires worthless, I never cover, right? Think the IRS will let get away with collecting the premium tax free?
Not the same. The bankrupt companies usually end up on the pink sheets and trade OTC as penny stocks, which the hedge funds continue to report as a short position and don't pay tax on.
That's one of the sources of the huge systemic risk. If the SEC required all of the naked-shorts to cover, there isn't enough money remaining in the system to cover all of the naked short shares at even pennies on the dollars. It's all been used to buy mansions in the hamptons, private jets, porsches, high-priced whores, and government officials.
You think hedge funds follow the law and don't cheat the IRS? Google UBS and see why they're in so much trouble. Not only does UBS break the law, but they have the audacity to help other rich Americans hide income from the IRS.