July 21, 2008
Hobbled Short Sellers Unable to Cull the Weak
Never Have So Many Short Sellers Made So Much Money With Stocks
“More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007 … Short selling on the New York Stock Exchange rose to 4.6 percent of total shares last month, the highest since at least 1931 … The U.S. Securities and Exchange Commission last week limited so-called naked short sales of Fannie Mae, Freddie Mac and brokerages. In such a strategy, speculators sell shares they haven’t secured first. [Not possible in my vast experience, but then again I’m a small fry.]
So-called short covering [probably] helped financial stocks in the S&P 500 surge 12 percent on [Wednesday] July 16, the biggest-ever gain.”
That looks like “panic buying” last week in the bank index — maybe forced covering of short sales? The bottom may be in, but I’d expect prices to go sideways to “build a base” over the coming months. No need to rush in, is there?
July 21st, 2008 at 2:29 pm
“A” bottom may be in, not “the” bottom :) I agree, no need to rush in yet.
July 22nd, 2008 at 4:15 am
Naked short sales should be possible within a short period (3 days).
wikipedia:
Naked shorts in the United States
Naked short selling is a case of short selling the shares without first arranging a borrow. The Securities Exchange Act of 1934 stipulates a settlement period up to three business days before a stock needs to be delivered,[3] generally referred to as “T+3 delivery.”
If the stock is illiquid or simply has a small number of outstanding shares, finding the borrow can be difficult to arrange. In these cases, to ensure delivery, the trader normally arranges for the borrow before making the trade. In the case where a borrow cannot be arranged within that time period and the shares cannot be given to the buyer, the trade is considered to have “failed to deliver.”[3]
The SEC states that “Naked short selling is not necessarily a violation of the federal securities laws or the Commission’s rules,” and clarifies that in some circumstances, it can contribute to market liquidity.[4] However, naked shorting to drive down share prices violates US law. In recent years, a number of companies have been accused of using naked shorts to profit at the expense of shareholders. To do this, the trader simply enters a naked short with no intention of ever delivering the shares.[3] A large enough short sale could cause the price to fall, as is the case with any stock being sold. As long as the trade is large enough to move the share price, the short sale is likely to be profitable. On the other hand, the short seller is vulnerable to a “short squeeze.”[citation needed] That is the condition where the stock price unexectedly (from the short sellers’ point of view) rises and short sellers try, all at once, to close out their money-losing short positions by buying back in the open market the shares they had shorted, thereby driving prices ever higher in a self-reinforcing feedback loop.[3]
Legal naked shorting would normally be invisible in a liquid market, as long as the short sale is eventually delivered to the buyer. However, if the covers are impossible to find, the trades fail. A sudden rise in the number of fail reports will alert the SEC that something irregular is going on. In some recent cases, it was claimed that the daily activity was larger than all of the available shares, which would normally be unlikely.[3]
Cheers,
Markus
July 22nd, 2008 at 5:34 am
A retest of the lows would be nice here.
July 22nd, 2008 at 9:12 am
@Markus: I guess if you had a good “relationship” with your broker, it would be possible to do such a thing, but if you’re a small fry, your chances of being able to “naked short” are zero.
July 22nd, 2008 at 10:17 am
I made 20% on Lehman last week by simply watching SKF
rocket out of control-a lot like the early Cape Canaveral launches in the 1960s. A beautiful,short-lived, bear rally:-)