Ban On Shorts

[TraderBG 10]

I'm a bit worried about the ban on shorts in financials. Even though I trade the ES, I'm concerned it will effect the reliability of the patterns I've worked so hard to master over the past couple of years. Is anyone else worried about this? And do you guys think this ban will last indefinitely? Furthermore, without getting into a political debate, I'm also a bit concerned that if Obama gets in office that he will further interfere with the markets with more regulations and what not. Is anyone else concerned about any of these things?

[sevensa 10]

No point in being concerned. What will happen, will happen. All you can do is to prepare and adapt if needed.

[TraderBG 10]

Ok let me rephrase my question: Does anyone else see this as a real possibility?

[stanlyd 10]

Regualtion does not always have to be a bad thing. IMO if credit default swaps had been regulated or been more transparent, then all this morgage lending mess would possibly not have been let to happen.

[smwinc 20]

It's not permanent, it's only a temporary ban.

 

No, I see this as no possibility.

[TraderBG 10]

Thanks that's good to know

[jasont 10]

TraderBG I'm not exactly sure how long this ban will last. Not sure if they have announced yet or not how long they expect it to last. However the impact it will have will be interesting.

 

My thoughts, not what will or is going to happen is that with the introduction of this regulation it is like we are beginning at ground zero from this point on. Although it is possible, I think that dropping beneath our previous low whilst continuing the ban is very unlikely. The reason being that big traders a) are not likely to be holding big amounts of stock at this point as leading into last week we were at prices not seen for quite some time. And b) if they are holding large amounts of stock, with the ban of short sales would be unlikely to sell now.

 

Considering there is no money to be made by selling stocks before you own them right now because it is banned, you have to own the stocks before you sell them. So take the moment the rule came in as level zero, you need to move to +1 before you can come back to zero. Being that majority traders were likely short selling in this market for equities in the shorter term, that doesn't leave many buyers holding large amounts of equities prior to the recent low. Prior to that they would have to have been holding from April 2005 according to the S&P index.

 

Now the equities are not the same as the index but as an average make up, that is the case. It makes it very difficult to move beneath that level.

 

Now for the future from here I think it is important, until the ban is lifted, to understand that any downward movement on the ES is going to be caused by traders locking in gains rather than speculating that the market will move lower. As selling to buy at a lower price in equities is not allowed, big traders will be instead selling to lock in current gains. The dynamics change a bit because people are no longer selling to make money, they are selling to keep it.

[lordbinder 11]

http://img525.imageshack.us/my.php?image=pakjistancd6.gif

 

this is a chart of what happen on pakistan after shotr was ban

Edited September 22, 2008 by lordbinder
image doenst show

[smwinc 20]

Good chart.

 

China's Shanghai is another example.

[waveslider 10]

FWIW there are plenty of "inverse" ETFs that you can short the market with. SDS has 29 million shares traded on average each day!

[Kiwi 16]

How does an inverse ETF offset its incoming customer orders though?

 

Won't they have to close their doors if they can't offset risk?

[waveslider 10]

I was just having this conversation, and I really don't know. Possibly via puts on SPY, I wonder if they figured it into the business model. Since the banks that offer it are the ones who make a market in it, they control the spread and can net quite a bit that way...

[lordbinder 11]

not only inverse there is ultra shorts, so if one can get into a down movement it can easily be achieve

[TraderBG 10]

Well, luckily my signals still worked very well today. I got 4 sell signals on the ES all of which were very profitable. I feel a little less worried now, but it's only one day so we'll see. Did anyone have problems with their signals today?

 

Thanks for everyone's relies

[lordbinder 11]

my signals on ES worked as usual, I made the same average points

[TraderBG 10]

Great to hear that lordbinder!

[DbPhoenix 42]

What's next, a ban on stock sales?

 

By Bill Fleckenstein

 

The Securities and Exchange Commission has a list, and it's checking it twice. It's a compendium of nearly 1,000 companies the so-called watchdog has now pronounced off-limits to short-selling.

 

If this do-not-short list weren't such a travesty, it would be hilarious. Among the companies the SEC wants to "protect" are the ones -- Moody's and McGraw-Hill, to name just two -- that did such a horrendous job rating the mortgage paper that helped cause this debacle in the first place.

 

The Cox virus unleashed

 

In the end, SEC Chairman Chris Cox and friends will discover that this will turn out to be an epic example of the law of unintended consequences. They've probably just succeeded in blowing up a tremendous number of quantitative-oriented money managers and hedge funds. In essence, this targets anyone who runs a long-short fund or arbitrage fund of any kind, and anyone who manages any sort of stock basket.

 

To distill those gory details down to their essence, what the SEC has done is guarantee that less liquidity will be available for markets.

 

I suppose that if this doesn't work, the next step will be to just outlaw selling altogether. After all, that does seem to be the government's response to prices it doesn't like. There was a witch hunt for speculators in commodities on the long side when oil (and various food items) went higher over the summer. Obviously, we've seen that lower stock prices have also precipitated a government response.

 

So when the bond market eventually revolts -- because of the cumulative effect of the Federal Reserve’s monetizing any and all pieces of paper the Treasury buys -- is the government then going to ban the short-selling of government bonds? Will it eventually say you can't sell dollars? How is any rational person supposed to plan for where the government may draw the line as to what sort of "manipulation" it may condone?

 

Meanwhile, one item you'll likely never see on the SEC's to-do list: leading the charge on reforming financial statements. Scrutiny of IBM would be a perfect start, as the company has shown itself to be a financial engineer of the first order. Nevertheless, IBM last Tuesday begged its way onto the do-not-short list.

 

This happened even as IBM has been borrowing money to buy back its own shares while it crows about what good shape it's in. The stock is off only about 15% from the highest price it's ever traded at. And it sports a short interest of 10 million shares -- not that much more than IBM trades on any given day and microscopic relative to the 1.354 billion shares it has outstanding.

 

Any real, untroubled company would be completely embarrassed to be on that list. Thus, in my opinion, IBM's actions are perfectly fitting with how it operates.

 

The on-closer-inspection rejection

 

Of course, anyone with any knowledge of history and an IQ above room temperature knows that many of the financial institutions now in trouble have themselves, not the short sellers, to thank for their plights. I'd like to offer the following example, via a recent Bloomberg story headlined "Ten days changed Wall Street as Bernanke saw 'massive failures'":

 

"The storm in the markets began with a long-deferred nod to reality by Lehman. The 158-year-old, New York-based firm had possible acquirers inspecting its books. They discovered that Lehman hadn't yet written down its portfolio of subprime mortgages . . . as aggressively as some other Wall Street firms."

 

So, in all likelihood, what the short sellers are being blamed for is the harsh reality that Lehman shareholders would just as soon not take "ownership" of. That is not to say there wasn't any short-selling, but rather that short interest in Lehman was never large. In fact, short-selling was rather modest. As of the last reading, it had dropped to just less than 28 million shares from almost 54 million in June. (For reference, the company had 689 million shares outstanding.)

 

Security says, 'Remove your shoes -- and your shorts'

 

Nonetheless, despite any and all facts to the contrary, the SEC and the government have resolved to pursue their idiotic "solution" in terms of banning short-selling of certain stocks for the time being. They also have demonstrated that rules don't mean anything, because they are willing to change them whenever it suits their purposes, no matter how disruptive or foolhardy those changes may be.

 

A friend summed up the situation by commenting that we're in an environment where "short sellers . . . are risking private money betting against badly run businesses and governments are risking public money betting in favor of badly run businesses. You don't need a Ph.D. in finance to know which group of folks believe in truth and free markets. . . . You can expect to see all foreign banks move their toxic waste to their U.S. subsidiaries for delivery to Henry's Helpful Handouts."

 

One wouldn't have to be too cynical to conclude that we now know the real reason Treasury chief Hank Paulson decided he needed a $700 billion bazooka. I don't mind him helping out old friends at Goldman Sachs, and I would prefer that the financial system not implode. But I find this bailout bill completely outrageous. Though I won't hold my breath, I hope it doesn't get enacted as currently proposed.

 

The silver lining: Halting a money-fund run

 

If I were to try to find the piece of last week's actions that was least objectionable, I would say it was putting a halt to the run on the money market funds. I know that places at a disadvantage all the people who prudently owned government-only paper, like many of my readers. But just as, when push came to shove, American International Group had to be bailed out, a run on the money market funds would have been devastating to too many innocent bystanders.

 

The bottom line is that the government has decided it doesn't like where the prices of houses are, where the prices of mortgage-related debt securities are, where the prices of commodities are and where certain stock prices are, so it has elected to change them all by fiat. It won't work, and one of these days, the bond market will be absolutely shattered.

 

If Congress manages to agree on a bailout bill, the financial crisis will probably be over (but I'll reserve judgment until I see the action in all markets in the wake of the legislation).To that extent, the government's actions will keep the economy from getting "extra-worse" on the back of a stock market crash and a run on the money funds.

 

Having said that, when folks discover just how weak the economy is, especially now that we've blown out all kinds of participants in the stock market, we may still get some sort of a crash or serious sleigh ride south, though it's really hard to draw conclusions at the moment.

 

We obviously have been close to a crash in the stock market and a seizing up of the financial system. But regardless of what the "experts" say (most of them, after all, saw none of these problems coming), my fear is that the worst is still in front of us.

 

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/whats-next-a-ban-on-stock-sales.aspx

[TraderBG 10]

Great read DrPhoenix. Thanks for posting.

[firewalker 10]

I was curious to see what would happen with the ban on short selling specific stocks. But several examples (from the ban in July in the UK) gave me the impression that, apart from a possible dry-up in liquidity, it will not prevent price from falling.

 

Here's one of Fortis' past glory (one thing less to be proud of in Belgium!):

 

The first chart shows the trend of the past year. The second shows the last couple of weeks with the red circle being the moment when they outlawed naked short selling on several financials in Belgium.

[firewalker 10]

I'm a bit worried about the ban on shorts in financials. Even though I trade the ES, I'm concerned it will effect the reliability of the patterns I've worked so hard to master over the past couple of years. Is anyone else worried about this? And do you guys think this ban will last indefinitely? Furthermore, without getting into a political debate, I'm also a bit concerned that if Obama gets in office that he will further interfere with the markets with more regulations and what not. Is anyone else concerned about any of these things?

 

Seems to be some talk about a speculator tax?

 

When oil rose close to $150, it was all the speculator's fault too.

Now that it's back below $100, I don't see anybody complaining anymore

[TraderBG 10]

The last thing I need is to pay anymore taxes! It's hard enough to make a profit as it is.

[Trader333 10]

If they stick a tax on trading it will kill liquidity even more in my view and probably result in even lower prices.

 

 

Paul

[Soultrader 12]

Japanese government on the other hand has been giving tax breaks to attract private money into the stock market. You are definitely right about diminishing liquidity with extra taxes.

 

We only pay 10% for profits related to stock trading. But yet, there is approximately $15 trillion of Japanese private savings stashed away in banks without the intention of investing!

[TraderBG 10]

SoulTrader, if they hit me too hard with a tax, I might be your new neighbor

[JLJ 10]

Fidelity told us we are limited to putting 30% of our account into an inverse ETF. Apparently this is because the SEC is trying to protect us from the risk of ETFs, as if we can't figure that out for ourselves. Might other brokers have different rules? I'm hoping....

If not, it's a bummer. I'm new to this, I've only been working in a practice account, but I have done very well with Inverse ETFs. Now I find that I am very limited in what I can do with them.