Monday Musings

Let's talk "unintended consequences".

This morning, suddenly, at brokerages across the land a whole host of stocks became, magically, impossible to short.

These stocks just happened to coincide with a certain list that The SEC has deemed "unable to be shorted naked."

Let me note that naked shorting has been illegal essentially forever, certainly going to back to The Depression.  It is rarely enforced with any sort of vigor, but it damn well should be, against everyone and anyone who does it.  My view of how to deal with "Failure To Delivers" is that they should be assessed back against the failing party at the next morning's opening print (at T+3), effectively forcibly covering the naked short and skulling the offending party.

This practice is effectively counterfeiting and my argument with it is not, as is commonly presumed, that it drives stock prices down.

It is that the practice can and frequently does lead to the most insane short squeezes ever seen, as the counterfeit shares don't exist and thus when the naked shorts try to cover they've got a tiny little problem with fitting through the door! 

See, you can't buy back a share that doesn't exist!

No, this rant is about the impact of making "really illegal" what has always been illegal on the perfectly-level and nomal shorting of stock you really can borrow.

I might not be the brightest bulb in the drawer, but I'm quite sure that Goldman Sachs, which has almost no short interest on the street (that is, about three percent of the float is short) didn't suddenly became impossible to borrow.

Let's talk about the truth, shall we? 

The truth appears to be that there is now an action, taken in concert, by most brokerages to simply refuse to allow short sales on any of these stocks irrespective of whether you can get a borrow on them or not.

Now this clearly was not what The SEC intended.  At least I hope it wasn't what they intended, and that's not because I want to go naked shorting financials.  There are far better stocks out there to short right now, for instance, Apple, which whiffed on forward guidance last night and was immediately punished to the tune of $16/share.

No, I want Christopher Cox to realize that whether he intends to or not he is setting up a potential market CRASH.

Take a look at China's stock market.  It is illegal to short there.  The market has utterly collapsed over the last few months, and it is precisely because of the inability to short that it has happened.

Watch their market some night if you want grins and giggles.  It tends to move in what look suspiciously like a sine wave, up and down.

Why?

Because there are no shorts.

Really.

See, when there are shorts in the market then declines are stabilized, because every share (legitimately) short must be covered at some point, and when it is covered, it must be bought.  This places upward pressure on the price.

But when there are no shorts, then what tends to happen is that when the supply/demand imbalance gets out of hand the bid just "disappears" - that is, there is nobody will to buy at any price, as the buyers are exhausted.

I'm sure you know what the price of something is when nobody wants to buy it, right? 

"What is zero, Alex."

Christopher Cox better be damn careful with what he is doing here.  He may have aimed his "bazooka" at naked shorting, but it appears that the brokerages in this nation have decided that they're not going to risk his ire, and are simply going to mark all these stocks "short restricted."

Now there are a few places that appear to still allow you, as a retail customer, to short these names.  E*Trade looks like it may be one of them.  But I have multiple accounts with a number of different brokerages, and all of of them, all at once, suddenly had every one of these stocks show up on the "restricted" list this morning.

Suspicious?  You're damn right I'm suspicious. 

Does this really matter to me?  No.  As I said, the most interesting stocks for me to consider selling short at this point in time aren't financials.  In my view shorting something that has already declined 75% is a waste of time at best and risks a ruinous short squeeze.

But if we get a crash in the next few months, I want you to remember this Ticker, and make sure you send a copy to Chris, thanking him for the destruction in your wealth and that of every American - because it truly will have been his fault.