Short selling and the market.

Sometimes I feel like I'm talking in circles here.

So, again, short-selling is indeed part of a healthy market. It provides liquidity, reduces volatility and expedites the process of price discovery.

Short-selling *cannot*, in and of itself, render a company insolvent. All it can do is depress the share value somewhat; which in the long term does nothing but create a buying opportunity for well managed organizations.

I'll agree there is a big Wolf at play here; but it isn't the short-sellers. Its real name is 'moral hazard' and the recent SEC activities are doing nothing but gorging it on raw meat.

The fundamental problem here is a history of bail-outs of the financial sector; going back to the S&L crisis of the 80's. This has done nothing but encourage bad behavior. The current actions to limit shorting is just more of the same.

Hi V,
I respect your point of view.
It's the "Opportunity for well managed organizations" I have difficulty with. The simple man hasn't got an organization and I don't mean to get too philosophical here but the stock market and the nation were created to serve the simple man.
Lets imagine a world without shorting or options / future trading.. growth will be slower and more predictable. The only thing that should be important in stock performance is a companies balance sheet and business performance. Nothing else.
Yes, well organized companies with talented analysts will be first to recognize trends and will profit from getting into a stock early.. but that's all.
You must admit that if Fidelity has an interest in Apple staying a certain price for a certain time, they can make it happen. That, right there is manipulation that will always hurt the private investor. The private investor doesn't have access to this data, it's not his line of work and he should not be disadvantaged.
It's the same crap that's going on with the health care system of this country. You can't see the forest from all the (manipulation) trees, and the end result is that people can't afford to be sick! while other fat cats make money off of them. And while a few insurance companies are making money, we the tax payers are paying billions to support hospitals who have to treat people that need to be hospitalized for pneumonia infection, because they couldn't afford a doctor who would prescribe $25 antibiotics which would keep them out of the hospital. It's the same story everywhere.
Government is week and works ONLY for those who financed their political campaign, supporting legislation that is immoral and nothing but added taxes to us.
We work 5 months of every year for the government - are we really getting our money's worth?

V, to clarify I agree that some degree of short selling is part of a healthy market, but not to the degree that was occurring. I wasn't trying to indicate that short sellers were the "Villian". It's just one aspect of a situation gone quite a bit overboard.

It is healthy to allow companies to sell more shares than they have released to increase cash flow, but not to overextend themselves too much or simply to drive the prices up. I agree with guliamo that the manipulated system is sick. I agree with guliamo that the county's interests should be the common citizens but I feel our country and government have long ago forgotten about the common people. We are just pawns to manipulate.

I suspect that this period of stopping the short selling is really so those cronies losing their ass can gain some back and then sell before allowing the market to continue on it's present course. I agree with you V that government is doing too much self serving (i.e. the "powers that be") manipulation of the stock market. If this were truly a system based on capitalism, then these things wouldn't occur, but it's not.

It's called Fascism.

fundamentally, i love entrepreneurship. so, if the market can create new products and services that people with buy/use, including shorting, options, etc, i am generally in favor of it. also, since i deal with the government all the time in my job (they are our main customer), i appreciate how inefficient government can be...plus they always have mixed motives and they usually get the lower-end of the human resources available compared to the private sector, especially at the "working" level. i just really don't like the idea of a gov't that is bigger than absolutely necessary. as far as the sentiment above about the common man, and small investors compared to institutions, that tilts too far left for me. i am more of a drawin-esque capitalist.

i believe in creative destruction and that risky behavior that doesn't work out should NOT be rewarded with a government bailout.

but things are truly nutty at the moment. rather than focus on the shorts who are scapegoats, in my opinion, maybe the best thing to do would be to have a market holiday for a day or two while the gov't figures out what to do and so everyone can take a breather. . .kind of like halftime. let the coaches make some adjustments on both sides of the ball. . .gov't and private.

you guys probably already know this, but i just read that the UK is banning short selling until January. should be an interesting case study.

God save the queen! :)
I like your Darwinistic approach, LT.. and I love the entrepreneur just like you do, but these "products" are based on nothing. Why call them "products" in the first place?
A product is something of value being bought and sold between parties that understand it's functionality... aren't we forgetting something though? Average Joe was also invited to this party and he hasn't a clue about these products, what they do or who they're for.
So it's all fine and dandy that brokers and traders think up new products but they happen to be pissing in the pool where you and I swim..
And lets look at this product - the "short". It means.. I can make money if a company does poorly... huh??
No no no brother.. If a company does poorly what you do is not own it's stock and buy a company that does deserve your investment.
I'll bet the founding fathers are rolling in their grave seeing what their "free market" has turned into.
I agree with DJD.. this is fascism.
The fact is that under current legislation a person who wants to do nothing more then hold on to his money is at risk of loosing it. This is not cool.
After all my criticism of the US, I still think this is the greatest country on earth and only America can decide to change it's ways and get the job done.

shorting may be more of a business model than a product or service, but now we're missing the point and talking semantics. i think that whoever thought of it is a genius.

how do you feel about "vice" stocks, like alcohol, gambling, or arms dealers (like LMT, GD, RTN?).

how do you feel about investing in a company because you want to make money, even if you don't agree with their product?

Shorting is a healthy part of a market, but it comes as a result of accounting detectvies and good analysts noting a disconnect between the stock price and the underlying value of a firm, i.e. crooked management cooking the books, etc.

Bigger issue and I have an idea of how Guliamo might react to this, but I read/heard rumor that this mortgage bailout was going to be backed by our gold reserves to provide confidence in the resolution of this mess. The fact that gold coins etc have been hard to come by b/c bullion has been being bought by the comex etc. indicates that the manipulations you're describing above may have been much larger in scope. Well, what is that act, if true, going to have on gold prices. (Higher Bob! Higher).

So the manipulation has been far broader in scope.

Fundamentally though to "fix" this we have to do a few things.

One, this was a result of bad policies (equal opportunity lending which became no doc loans), loose money (Greenspan), and a reaction to a bubble (dot.com) that should've been left to pop on its own. The financial infrastructure was FINE until they foolishly tried to save the market in the first place.

1) we need to have REAL economic statistics published, like shadowstats.com - we must publish M3 again and shine a light on Fed manipulation. We have to have real data on which to base policy otherwise we get knee jerk stupidity.

2) anywhere the word "incumbent" appears on a ballot, vote against them. Across all parties - Barney Frank, schumer, Shelby, all of these dirtbags-OUT.

3) MAJOR MAJOR jail time for these bastards who profited BILLIONS on this.

4) No more "equal opportunity lending" BS. No more no doc loans, no more low money down stuff. None of that. That's what got us here in the first place.

5) reestablish the "wall" between retail lending and investment banking - (Jamie Gorelick ought to be good at this, she's put up a couple of other big walls.)

6) One big item that I noted was this and I'd really like your thoughts on this: I'm interpreting the "guarantee" of the money market funds as essentially establishing now a direct competitor to FDIC guaranteed deposits for banks. In effect, you're now giving deposits to the same group of asses who got us into this mess.

7) Lastly, what's done is done. Someone asked if there were going to be other companies added to the Dow if AIG was delisted, and the answer is yes, since a new firm has emerged that owns two large investment banks, and an insurance company and a big loan portfolio, the ticker will be the FED.

Sorry last item - we need REAL financial and economic education in the US school systems- to start - all of the market gurus on this site ought to go into high schools and push the babysitters (er, "teachers') out of the way and really teach this history and capital markets to kids. We're further behind on this than we are on science education.

Greed(/hope) and fear rule stock markets and we've entered a period where these emotions will swing wildly. They both rule the bulls and the bears (and also the government). The only reason the bears are winning out is because most stocks are over owned by the public.

Who ran those stocks up and sold to the public? The insiders. I had seen a chart on the amount of insider selling at the banks/mortgagecos the last few years and it was staggering (http://seekingalp​ha.com/article/9213​5-bank-insiders-ma​de-out-like-bandits). They essentially liquidated their entire holdings and sold to the public. So now the government steps in and says Joe Public owns worthless stock that he bought from some bamboozlers and, although he's not smart enough to know this, we won't let Jane Doe short that stock.

Let's say a giant pension fund owns stock in a bank I have shares in and they have a lot of it. Is their selling their shares out not just as damaging to my position as any hedge fund? Why should they be allowed to sell and bring down the value of my stock? Why not ban selling altogether?

Can the government bail out actually change the course of those bank stocks? Of course it can, not because they've changed the value of them but because they are SOCIALIZING the losses. I placed that in capitals because you really need to concentrate on that word. This is a pure hand out. Every dime that was ever made in CFC for instance was made by the insiders and now every single American taxpayer is accepting the loss. Some more than othesr if they bought the stock and rode it to oblivion or took out a mortgage on an overpriced piece of lumber and wallboard, while Angelo Mozillo lied into the camera that things were just fine.

If you think that banning short selling has any effect but to weaken the system read this http://abcnews​.go.com/Business​/MarketTalk/wire​Story?id=5837361. The short squeeze on Thursday/Friday and the ban bring a true crash scenario into play. In the words of Jack Nicholson "All you've done today is weaken a country".

Your government is now out there running around like chickens with their heads cut off creating even more schemes to bail out everyone everywhere thanks to you Joe Public. These are the same fools who got you into this mess yet they are qualified to make the next steps to save the day? Check out this blog http://glo​baleconomic​analysis.bl​ogspot.com/ and consider Mish's advice about contacting your senator. You may not be able to change the course of the future but you may be able to bring those accountable to justice and make those accountable for future transgressions aware of the weight of justice as well.

A little more off topic, but something I want to raise for you fundamentalists here: Have you thought much about P/E's lately? Check out this yahoo from back in March when these companies where cheap on a P/E basis http://www.inves​tortrip.com/dow-j​ones-djia-sale-pe​-ratios-under-15/ . How much cheaper are these companies now? If you ever hear anyone use this rationale, listen carefully to that person and then do the opposite of what they say because they are a moron. P/E's are always look cheapest at the top of the market - not the bottom. The market is a discounting mechanism and when it sees that E is headed lower P/E looks damn cheap.

Currently the P/E on the QQQQ is 20. The P/E on a 10-year t-bill is 25 ($100/$4 based on 4% interest). You have to ask yourself how much do you want to risk your capital for that kind of differential. Are you doing it because you hope risky QQQQ is going to go up by 25% so that the P/E is equal to that of t-bills? Are you hoping t-bills will go to 0% interest so that people have no choice but to put their money somewhere (assuming they don't choose their mattress or gold)? Are you hoping the E goes up by 100% so that the P/E is a more reasonable level of 10 for the risk you are taking on? Or are you hoping that the greater sucker rules haven't been banned? If you are hoping any of these things, you are in big trouble. Repeat after me "The market is not a ponzi scheme, the market is not a ponzi scheme...".

"Lets imagine a world without shorting or options / future trading.. growth will be slower and more predictable."

Except it provably would not.

Take onions for example. Futures trading was banned by law in 1958 on the mistaken belief that it was speculators that were causing price swings.

Since then onion prices make corn and oil look stable.

So, be careful what you wish for.

Beancounter,

My one fix for this mess.

Either remove the Fed's authority to set interest rates (leave it up the market) *or* socialize the entire credit industry.

If the Fed controls the money supply, I should be able to get a credit card, mortgage and maintain a credit rating directly with them. I should be able to borrow money for whatever purpose I want at the current rate. My credit rating should determine my line of credit, not the interest rate.

If I default on a loan I should face criminal charges. Bring back debtors prisons! No new loans until all the old ones are paid back.

The other irony here is that the SKF opened down and closed up yesterday - I'll bet it's at 150 at the end of the month when the ban expires....

Education in basic economics. Gads!! What a thought. The function of profits and losses in a capitalist economy. The allocation of scarce resouces that have alternate uses. Market economy versus centralized mangement. The history of the absolute failure of socialism to meet the basic needs of their citizens....in short, good idea beany. The problem is the schools are too busy teaching about Global Warming...climate change... and other nonsense. I would reccomend Thomas Sowell's book called Basic Economics as a starter.

Term limits? I'm with you. A politician sees as his first priority getting re-elected...everything else is secondary. That will not change until we keep people from making politics a careeer.

Fascism? Now there is a word that is as overused as it is misunderstood. I dare you to arrive at any concensus as to what this word means. Stanley Payne, probably the worlds leading scholar of of fascism wrote in 1995, "At the end of the 20th Century fascism remains probably the vaguest of the major political terms." Basically, it is a catch all term to describe something you don't like.

Lastly, as most of you have pointed out. Last week was not a failure of capitalism and the markets and I think it had little to do with greed. These problems were the result of an activist government looking to manipulate the mortgage market in order to achieve some greater "social" good. Why would a bank make a subprime loan? Without the government creating false incentives and mandating "fair" lending practices none of this would have happened.

Defense contractors as sin stocks. Vlad Putin will love that idea. The world is still a VERY dangerous place and there are still lots of folks that would love to kick our butts. Defense is high/high/high tech and very/very/very expensive and will be until we have a fundamental evolution of the human spirit...

Sorry ya'all...not much stock talk here but you guys are interesting.

I'm personally holding my SKF.

Short-sales are kind of like the release valve on a pressure-cooker. They keep provide downward pressure against a perpetual upwards bias.

Disabling that mechanism is only going to make for much bigger reversal when its turned on again.

don't count on an evolution of the human spirit. the last 100 years were the bloodiest in history. the arms dealers are here to stay. i should know, i am one.

They can do anything they want. Suspend short selling. Make sure monetary policy and it's mechanics aren't taught in schools, not even unversities, put me in prison for posting vids that educate about the truth of our monetary system and it's inherent unsustainability, put you in prison for watching them, put us all in work camps just to expand bottom lines, establish debtors labor prisons, sieze property through imminent domain, fly planes into buildings and blame it on backwards arabs that live in caves to get a war going to reduce the labor pool and unemployment figures artificially by calling up the weekend warriors and shipping them out, and artificially spur the economy by growing debt and building new weapons, purposely put citizens into debt so the property can be repossed at penies on the dollar by the Federal Reserve Bank, Incorporated (No funny that's exactly what it is, a private corporation), then saddle the rest of us with their debt and collapse the dollar and cause a rapid and severe depression reqiuiring a nationwide state of emergencty to be declared and then just as the short selling ban is due to be lifted, so is a US combat infantry division being deployed in the US (Army Times) for "training" in population control, suspend the elections and declare the New World Order.

Man ohh man, I think those conspiracy nuts may have hit it right on the head. I can tell you that my instincts are telling me something really really bad is coming down the pike...

The writing's been on the wall ever since the war started and the dollar started declining, and interest rates kept getting cut and cut..

I'm afraid that it's wriiten in that wall in stone now, and really, it's been there for a number of years.

The worst part of it is we're such f%^@ing pussies we just let them do it. This time it's different though. education is on fire via the internet. Due dilligence is required there's a lot of whackos out there, but some of the things I've learned since the interenet age began I don't think I could have learned without it.

as long as we don't swerve left and become socialists, we should be fine. chaos is a part of life. pray for regulatory and partisan gridlock so the gov't won't implement a point solution, knee jerk solution that'll hurt later on.

Why do they kep calling the bailouts socialism? Can someone explain that to me? It's facisim. Socialism would be if the government bailed out those that are in default.

When government is sleeping with corporations, the proper term is FASCISM (sp?)

By the way, all of this is what happens when a nation stop making things,

here's my definition: socialism: a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.

So, if the government owns and controls stuff, that's socialism to me. And I don't like it.

Fascism is a governmental system led by a dictator having complete power, forcibly suppressing opposition and criticism, regimenting all industry, commerce, etc., and emphasizing an aggressive nationalism and often racism.

I think that the best government is a humanitarian one. Mailnly becasue a humanitarian government funnels tax monet back into the economy, countering the endless siphoning of the greedy

Only so much can be extracted from a population. Unbridled capitalism and loose regulation are the cause of the current woes. It all started with deregulation. What a STUPID idea that was. yah let's just trust a viper not to bite.

Check out "A Mortgage Fable" in today's WSJ.

Some due diligence on the above. The deployment date is one day before short selling is re-instated (if they do). I think maybe you know what the delay is for now and what is expected...

U.S. Army 3rd Infantry Division’s 1st Brigade Combat Team Assigned to NORTHCOM Beginning October 1st
September 21st, 2008

Via: Army Times:

The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys.

Now they’re training for the same mission — with a twist — at home.

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.

It is not the first time an active-duty unit has been tapped to help at home. In August 2005, for example, when Hurricane Katrina unleashed hell in Mississippi and Louisiana, several active-duty units were pulled from various posts and mobilized to those areas.

But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities.

…

They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.

Training for homeland scenarios has already begun at Fort Stewart and includes specialty tasks such as knowing how to use the “jaws of life” to extract a person from a mangled vehicle; extra medical training for a CBRNE incident; and working with U.S. Forestry Service experts on how to go in with chainsaws and cut and clear trees to clear a road or area.

The 1st BCT’s soldiers also will learn how to use “the first ever nonlethal package that the Army has fielded,” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.

“It’s a new modular package of nonlethal capabilities that they’re fielding. They’ve been using pieces of it in Iraq, but this is the first time that these modules were consolidated and this package fielded, and because of this mission we’re undertaking we were the first to get it.”

The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets.

Cripes, and I thought *I* was paranoid!

This isn't the end of the world. A bunch of people that thought they used to be rich are not going to be anymore. Another bunch will not notice much of a change at all.

A few will even enjoy cheaper housing, goods and services as a result of this.

Try and keep some perspective, folks.

Don't worry I'm not over the deep end...But I jave to tell you I watch all this and TRADE based on some of it.

Did someone say fascism? http://www​.marketoracl​e.co.uk/Arti​cle6412.html Interesting quote from Mussolini.

" Why do they kep calling the bailouts socialism? Can someone explain that to me? "

It's socialism for the super-rich. That's what all these bailouts are really about; and why BushCo are behind them. They are protecting their assets at the expense of ours.

It's also why I'm a socialist; as its the realistic end-game of any free-market experiment. I just would prefer that we all benefit; not just the wealthiest one-percent.

So, V4. Since you are a socialist I assume you would be willing to share the profits you make, since you are a Top 2% and all, with those Top 90% market guru's. After all, from each according to his ability...to each according to his need. Taking from the rich so that you can give to the poor...or to put it another way, taking from the successfull to give to the unsuccessfull...or, taking from the productive to give to the unproductive...makes about as much sense as depressing the happy for the sake of the sad --

Only the super-rich are going to benefit? I assume all of us here are Market Guru own homes and cars. Work for some entity that relies on the ability to hire and access capital. I am not saying I like this bailout...but to lay this exclusively at the doorstep of the "super-rich" and "BushCo" seems to fly in the face of logic.

You assume wrong!

I've been priced out of the housing market my entire career (and I just turned 35). It looks like I'm going to stay that way thanks to the government bailing out wealthy speculators.

Again, we are already a socialist state. I'm just suggesting that everyone should benefit from that; not just the wealthiest 1% with bailouts of their hedge funds.