For 3 hours this morning, I tried to short some financial stocks. I could not execute a single short trade. No shares were available to borrow. I just came from Karl Denninger’s Blog and he mentions the same thing.
Skimming through what he said, he suggested that the brokerage firms are banning shorts of the stocks on the Feds list. I also wasn’t able to short two financial stocks not on the list, so that may not be the case.
My thought was that there has to be an awful lot of people shorting the financials. Plus if there are no short positions available, the time is ripe for the stock to take off. One reader [Old gold bug] pointed out to me a while back, “When you are right too soon, you are wrong.”
I’m not sure what is going on here, but there is another possible play in motion. The big holders could be taking delivery of the stock. Once the stock is out of street name it kind of kills the broker’s ability to offer it as a short. There is a window of vulnerability here. How long does it take to get the shares delivered to the holder? They can't sell the shares until they receive the certificate.
I really don’t know what to make of it. If Karl’s suggestion is right, then there are going to be “Air Pockets,” where there are no buyers and you have 10-20 dollar drops. A lot of these stocks couldn’t survive half an air pocket.
On the other hand, if everyone is short the market; it is liable to take off.
The thing that no one really has said much about is the SEC changing the rules of the game. Last weekend’s rule change cost me some bucks. I’m getting ready to take my toys and move off shore to play.
20 comments:
Good point, Jim.
Nobody really talks about it, but the stock market has become more and more of a stacked deck as time goes by. They limit how much it can drop before they shut down trading, but there is no such limit on the upper side. I suspect you are right that there is funny business going on with shorting.
You can only stack the deck so much before it becomes a house of cards. And you know what happens to those.
I have CFD account I use for EUR/USD trade. They disable shorting financials stock there too. Unbeliveble ;)
A short update:
The following stocks were not shortable at Scottrade from 7 am to 7:30; C, BAC.UBS,LEH. WFC was OK to short, but why bother to play if the market is telling you what you can bet on.
Common sense says something is wrong. It's kind of like that Ferry in India that sank a few years back when everyone rushed to one side to watch two lovers commit suicide.
I’ve always had a problem with the idea of shorting stocks.
To me, it has always seemed the financial equivalent of borrowing someone’s car and returning it with the gas tank empty.
If the shares are honestly owned by someone else, it doesn’t seem right that the broker would “loan” them out, especially when they are returned generally worse off than when they were borrowed.
For example: How about if we “short” someone’s house. Just give us the house to use, and we’ll return it in a few months. After all, no harm no foul, right?
Jim,
This is off topic but I was wondering if you feel like commenting on what is happening to American Express now?
I've read that AMEX is sort of like a "canary in the coal mine" and what is happening right now doesn't bode well for the US's economic outlook being that AMEX is sort of the "heartbeat" of small business.
I would love to get your thoughts on this if you feel inclined.
I wonder if you feel like commenting on what the heck with the market?? bad news = up market???
Hi Malcom
I see your point. But when you use analogies, you actually modify the way you perceive the situation. Politicians use them all of the time for good reason. When you buy a stock, you are betting that it will increase in price. Shorting a stock is the belief that the stock will depreciate in price.
As long as prices go up everyone is happy. When prices start to go down, the "investor's" ego and pocket book suffer. Normally shorting a stock in a down market is easy money. The last 7 days have made real fools of the shorts. The shorts give some balance to the market going up as well as down.
A good example of a market that doesn't allow shorting is real estate. A short seller is a buyer later in time. Right now, there are no buyers.
A majority of the people in the stock market are averse to shorting. Their positive mental attitude conflicts with the negativity involved in shorting stocks, it seems so un American.
Hope this answers your question.
Hi Watchtower
In the 1987 crash, American Express was a real surprise. It kept it's value.
Cramer really bad mouthed them today. I didn't agree with his reasons. Visa and MC troll for new users using the telephone directory. It's not easy to get an AX card.
If interest rates were to go up, I would expect them to make more of a profit.
It would be a good stock pick if I was diversify among 8 different stocks. But as to what it will do in the future, is anybody's guess.
Remember you buy dreams, but you get stuck with reality.
Folks,
It's just so simple! There is no shorting... because...
Stock prices always go up!!
BWAHAHAHA
Hi Anon 5:20
I'm not too sure but it looks like big money is going after the shorts.
If everyone and his brother shorts a stock, it doesn't take much of a price increase to make the shorts sweat and have to cover.
With a real tight market, a million share buy order, could send a stock up 3 points. A million share sell, could bring more short sellers into the market, without a price drop. Notice how it feeds on itself.
We are at a point now, where things are not working in a normal fashion, take oil and finance--forget real estate and the government stimulus package!
Washington Mutual and Wachovia Bank announce loses and their stocks go up???? Something is wrong with the market.
So as to what is going on, we really don't have enough information. We only have bits and pieces.
Things are getting worse at a faster rate. The next few weeks could be fast and furious.
My only tip, shorting the market right now is dangerous.
Hope this helps, thank you for your comments.
@ Jim_in_San_Marcos
If the person shorting the stock and the person holding the stock were operating independent of each other, I would agree with you, but doesn’t one affect another?
I’ve never shorted a stock, so I may be misunderstanding how it all works, but if enough people short a stock, doesn’t that itself bring the price down?
In other words:
Let’s say that I buy and hold a stock. My shares are now effectively off the market, which lowers supply, which raises the price of the shares assuming that the demand remains the same.
Now someone comes along and “borrows” my shares. These are now sold, which increases supply, forcing the price down.
If enough people are shorting and selling (like the hundreds of millions of shares of some of these troubled stocks), doesn’t this flood the supply so much that the price crashes?
I know that in theory there will be a time when the person needs to buy the shares back, but in many cases isn’t the damage already done by the time this happens?
It’s OK to say “sure, you had one share then and you have one share now”, but by the time you give the shares back, you have destroyed the company and made my share worthless.
Not to mention the fact that brokers will “loan” shares that belong to someone else. I don’t like the idea that my shares can be used to my financial disadvantage, against my will, and without my knowledge.
"I’m getting ready to take my toys and move off shore to play."
As will a number of other individuals, I suspect. Government interference and manipulation of the financial markets is now the name of the game in the United States...
I think it comes down to the fact that all of the pigmen see the writing on the wall.
Con, fool, trick, lie...do everything possible so that McCaine has, at the least, a snowballs chance in hell.
They are kicking the can down the street. If McCaine manages to get elected... rinse and repeat and keep the con going. Then they will try to fix it.
If Obama wins...the pigmen will try to do the same thing but if he doesn't go along, they will get out of Dodge and right quick. And that is when you will see the mother of all shorting and selling.
Just look how easy it is for them to get the government to roll over and give in to there every demand.
A sad end to E pluribus unum.
Hi Malcom
We are pretty much in agreement.
Nothing is really certain. A bunch of people shorting stock doesn't necessarily mean it will go down. If the stock went up $20 dollars each short share would have to be covered. In the 87 crash many people were creamed when they shorted in the morning and the stock came back. If a stock jumps up $20 and then you try to buy it back, you and the other shorts could raise the price another $20 just trying to buy it back.
Right now everyone shorting the financial stocks are being creamed. The stock might be worthless, but it is going up in value. Don't ever think that the stock price is a fair value for the company. It is just what the person next to you is willing to pay.
Nobody claims that what is happening is fair or not. If you deposit $1,000 in the bank and someone borrows it and bids against you in an auction and wins the bid using your banked money, it would kind of tick you off. Not only is he willing to pay more than you think it is worth, he's using your hard earned savings to do it with.
To sum it up in a few words, "Only the rich can afford to have scruples."
Thank you for your comments
Hi I'm not Potus
I don't see how this mess can last until the election.
Either way, we have front row seats!
Hi Boom2bust
Your quote, "Government interference and manipulation of the financial markets is now the name of the game in the United States," says it all.
Risk reward and failure are all a part of the life. It kind of reminds me of the punch line to that artificial insemination joke, "Spare the rod and spoil the child."
Jim - I don't recall where I located the following link but I came across it a couple of days ago. Que it up and listen for "at least" a couple of minutes. It is extremely well done & deals with naked short selling/failures to deliver and the corruption of the capital markets. The author seems to liken the current situation to a modern day South Seas Bubble. I think you will find this presentation to be very valuable and time WELL spent.
http://www.businessjive.com/
I am officially afraid of the stock market. This week has been a waterfall of bad news with losses across the board from banks to airlines and those very stocks have SKYROCKETED. United Airlines reports $3billion in losses and the stock goes up 68% that day?
Where is the logic? How is anybody supposed to make sound decisions?
Hi Dan Mac
Thank you for the link, I learned a bit. It's over an hour long, but I will probably listen to it again.
Here is your
link to it.
The guy spent some time putting that together. It has given me a lot of food for thought.
Hi Anon 4:34
This market does give one pause to think of what would happen if someone announced some good news.
The question is, what is good news?? "I only lost two billion as opposed to four billion as projected?"
If you are in current the market, it's one of the few times where common sense is of little or no help.
I guess we can all move to the stern and listen to the band play as the ship goes down.
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