SEC Anti-Shorting Rules
The Dynamic Wealth Report
December 29, 2008
Best Of DWR: The Worst Idea Ever
Editor's Note: The research team at Hyperion Financial Group has been
working tirelessly all year to bring you great investment ideas. Some of
our ideas worked better than others. Sometimes we were on the mark,
sometimes we missed a bit. Either way, we’re constantly striving to
bring you original money making ideas in some of the toughest market
environments. Here’s a highlight from this year….
Originally published in the September 24 edition of
The Dynamic Wealth Report by Brian T. Mikes…
The Worst Idea Ever
Let me ask you a serious question. If you had a splinter in your thumb,
would you listen to a doctor who suggested amputating your arm? Would
you just follow the advice blindly? What if another doctor suggested a
lung transplant because of a small cough? Seems a little drastic don’t
you think?
We’re witnessing the same kind of quack doctoring right now. Only the
inept doctor is the SEC, and the patient is the free market economy.
What am I talking about?
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I’m talking about the Worst Idea Ever. The SEC’s decision to place 800+
companies on an anti-shorting list. Before you frown at me for climbing
up on a soap box, let me tell you something. This anti-shorting
provision is impacting your trading accounts. And it’s directly changing
important parts of the market.
What’s most upsetting? Nobody’s saying anything about it.
You’re losing your rights, and you don’t even know it.
First, let me speak my piece. I find this decision to limit shorting
un-American. No, it’s actually anti-American. In the financial world
people do stupid things all the time. They buy houses they can’t afford. They take money out of their retirement plans – additional taxes and
fees be dammed. They borrow money to invest in high-risk trading
strategies. They spend more money than they make.
None of those stupid things even come close to touching anti-shorting
provisions.
It just makes me sick . . . and mad. There’s huge global implications to
this stance. I’ll address those in a minute.
Last week the Dow Jones Industrial Average was the most volatile ever.
You don’t need me to tell you how gut wrenching the 1,000 point fall in
two days was. You don’t need me to tell you how confusing the immediate
1,000 point rebound was. (And you wonder why traders swig Pepto-Bismol
like water.)
The government has a knee jerk reaction.
Let’s eliminate short selling. Let’s hand pick upwards of 800 companies
and stop people from shorting. Seriously, shorting is not the problem.
I equate these anti-shorting arguments to being anti-American. That’s
how strongly I feel about this topic. Investors can make money when
stocks go up . . . why can’t investors make money when stocks go down?
Let’s be honest. The investors who short stocks didn’t create the real
estate problems. They didn’t start the mortgage and credit crisis. They
didn’t cause banks to write off hundreds of billions of bad loans.
All the short sellers did was turn a profit. If they were wrong they’d
have lost lots of money. (And my bet is you wouldn’t see them up on
Capitol Hill asking for a bailout). But they were right and they made
lots of money. Let me ask you, what’s wrong with that?
If the government thinks this anti-shorting ban is a solution, they
don’t know the first thing about free markets.
Ok, I’m off my soap-box now.
More importantly, I want to tell you why you should care about this
provision.
Do you have an account where you trade stocks and options? If you do,
this anti-shorting rule is already impacting you. Don’t believe me? Just
keep reading.
Because of this SEC ban on shorting stocks - your brokerage firms are
changing the way they operate. They’re limiting what you as a customer
can do in your account. They’re limiting the types of trades you can
make.
Let me give you an example. If you sell call options (which give someone
the right to buy stock from you at a fixed price) you might end up short
the stock. That means you’re breaking the law.
Do you buy put options?
Many investors use put options to profit from falling stock prices or to
hedge their portfolio. I know I do. If you wanted to exercise that
option, you might be breaking the law.
If you own put options, this changes the way you’ll trade. And more
importantly it possibly changes their value.
Different firms are dealing with these problems in different ways.
Some are limiting you ability to exercise the options at all. Others
will only let you exercise an option if you won’t be short in the
account (even for a split second). Oh, and heaven forbid that you’re
assigned a put or call option. Your firm will force you to cover the
position immediately. Knowing how that works they’ll probably go right
ahead and do that for you – then tell you afterwards.
Don’t believe me?
Call up or e-mail your brokerage firm. Ask them a simple question. “How
does the SEC’s anti-shorting provisions impact my put options?”
Scary isn’t it?
Now, earlier I stated the policy of the SEC has global implications.
Unfortunately, countries around the world are adopting the anti-short
stance. They’re blaming the short trader and threatening to tar and
feather anyone who thinks of shorting stocks. London followed suit
shortly after the SEC announcement. Now I’m reading of exchanges in Asia
doing the same thing.
Of all the things we could export, this is the worst ever.
And just to put to rest all you market watchers who think this
anti-shorting provision’s going to help . . . it won’t. The markets have
fallen since this new anti-short provision was put in place. Do you know
what the worst performing industry group’s been? Financials. (If it
wasn’t so serious I’d be laughing right now.)
One last fact.
General Motors was added to the anti-short list recently. Apparently
they own a bank or part of a bank (the logic is a bit fuzzy). The stock
managed to fall more than 11% the day after being added to the list.
I
guess not shorting stocks is a huge help. It proves you can’t save a
horrible company in a struggling industry.
• Leisure Goods (Down 8.9%)
In the last month, the leisure goods industry is down more than 8%. The
trend lower is being lead by companies like Polaris (PII),
Winnebago
(WGO), and JAKKS Pacific (JAKK).
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