[Twilight]

Last year I suggested the oil price may take a rising saw-tooth path as production constraints interact with successive waves of demand destruction, and as more time passes, such movements would reflect the sequential collapse of the more vulnerable large developing economies. The oil price was only $70-80 at the time, so it seemed like a reasonable guess until it went vertical and completely overshot what I was expecting to see. Well, maybe it is a really jagged sawtooth.

[JoeW]

$this->bbcode_second_pass_quote('Mominator', '')$this->bbcode_second_pass_quote('JoeW', ' ')colin campbell predicted volatile prices for this reason--because the demand-side response is extremely sluggish. add that to high prices and stagnant (not declining) production, you get this volatility.

[NTBKtrader]

FOR IMMEDIATE RELEASE
2008-143
Washington, D.C., July 15, 2008 - The Securities and Exchange Commission today issued an emergency order to enhance investor protections against "naked" short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks.

The SEC's order will require that anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement. The order will take effect at 12:01 a.m. ET on Monday, July 21. In addition to this emergency order, the SEC will undertake a rulemaking to address these issues across the entire market.

"The SEC's mission to protect investors, maintain orderly markets, and promote capital formation is more important now than it has ever been," said SEC Chairman Christopher Cox. "Today's Commission action aims to stop unlawful manipulation through 'naked' short selling that threatens the stability of financial institutions. We will continue our vigorous commitment to investors by working within the SEC and in close cooperation with our regulatory counterparts to promote the continued health and vibrancy of our markets."

The Commission's emergency order, pursuant to its authority under Section 12(k)(2) of the Securities Exchange Act of 1934, will be effective at 12:01 a.m. ET on July 21, 2008 and will terminate at 11:59 p.m. ET on July 29, 2008. The Commission may extend the order to continue it in effect thereafter if the Commission determines that the continuation of the order is necessary in the public interest and for the protection of investors, but for no more than 30 calendar days in total duration.


# # #

The securities identified in the Commission's order:

Company Ticker Symbol(s)
BNP Paribas Securities Corp. BNPQF or BNPQY
Bank of America Corporation BAC
Barclays PLC BCS
Citigroup Inc. C
Credit Suisse Group CS

Daiwa Securities Group Inc. DSECY
Deutsche Bank Group AG DB
Allianz SE AZ
Goldman, Sachs Group Inc GS
Royal Bank ADS RBS
HSBC Holdings PLC ADS HBC and HSI
J. P. Morgan Chase & Co. JPM
Lehman Brothers Holdings Inc. LEH
Merrill Lynch & Co., Inc. MER
Mizuho Financial Group, Inc. MFG
Morgan Stanley MS
UBS AG UBS
Freddie Mac FRE
Fannie Mae FNM

[Twilight]

$this->bbcode_second_pass_quote('NTBKtrader', 'T')he securities identified in the Commission's order:

Company Ticker Symbol(s)
BNP Paribas Securities Corp. BNPQF or BNPQY
Bank of America Corporation BAC
Barclays PLC BCS
Citigroup Inc. C
Credit Suisse Group CS

Daiwa Securities Group Inc. DSECY
Deutsche Bank Group AG DB
Allianz SE AZ
Goldman, Sachs Group Inc GS
Royal Bank ADS RBS
HSBC Holdings PLC ADS HBC and HSI
J. P. Morgan Chase & Co. JPM
Lehman Brothers Holdings Inc. LEH
Merrill Lynch & Co., Inc. MER
Mizuho Financial Group, Inc. MFG
Morgan Stanley MS
UBS AG UBS
Freddie Mac FRE
Fannie Mae FNM

[NTBKtrader]

this just blows my mind

3 Short sales to be effected as a result of a put options exercise are subject to this Order. In addition, we note that short sales used to hedge would also be subject to this Order.

http://www.sec.gov/rules/other/2008/34-58166.pdf

so much for "free" markets...

[NTBKtrader]

This is basically partly nationalizing the financials via manipulation of markets. The SEC/FED had to be extremely fearful of a total meltdown after Indymac and the financials/FNM/FRE capitulation to make an emergency edict such as this one.

The problem is, just because they dammed up the toxic sludge from taking down the financials for the time being doesn't mean the dam won't burst open when reality keeps setting in qtr after qtr.

[Twilight]

Funny how they don't care about false rumours that lead to panic buying.

[NTBKtrader]

$this->bbcode_second_pass_quote('Twilight', 'F')unny how they don't care about false rumours that lead to panic buying.

[MrBill]

Naked short-selling without borrowing the stock is financial fraud. It should never be tolerated.

The reason some bank stocks climbed 20-30% in one or two days was mainly due to short-covering. It was triggered by Wells Fargo and JPM posting better than expected results. But it also triggered sector wide short covering in many bank stocks. And prompted some bottom pickers to enter in on the longside due to this momentum.

However, I expect it to be short-lived and as Merrill Lynch showed the write-offs and losses are far from over. The earnings season is just beginning it is not over. On the other hand there was an incentive at the end of the year/beginning of this year for many banks and businesses to get all their dirty laundery out early while everyone else was taking write-offs.

Now, however, I suspect that in light of Freddie, Fannie and Indy Mac that underperformers are now being selectively punished versus a system wide response. For example, if Lehman Bros announces another set of bad results they will be toast. They may as well take themselves private at that point. So given that we may see more losses hidden and less disclosed going forward.

That does not necessarily mean that the credit situation is improving, but it may mean banks will be less inclined to air poor results. Then we will have to wait for year-end when the audited year-end results uncover some of these hidden losses. So now that these banks have liquidity guaranteed by the Fed they are essentially playing for time. Waiting and hoping. I would still be very wary of the banking sector.

It looks like the US dollar is going to take another run at $1.6000 against the euro. Brent is up about $2 this morning. Asian stocks opened up this morning, but Europe is already in negative territory. So this short-covering rally maybe already losing its shine.

[NTBKtrader]

I agree that naked short selling should be curtailed. However, it shouldn't be curtailed selectively for just the financials, if the SEC wants to enforce the rules fine, but enforce them for everyone.

[MrBill]

Agreed. I am not sure what the SEC's rationale is for singling out only financials firms for special treatment? After the Japanese financial meltdown the authorities imposed similar restrictions. They have a short-term positive effect, like no selling on a down tick, but over-time they really do not affect asset prices that may need to correct downwards toward fair value.

[smallpoxgirl]

I guess I don't quite understand how and when naked shorting occurs. If I short a stock through a retail broker, what's the process that takes place? As I understood it, the broker would generally "borrow" shares from another customer with a margin account and sell them. Are there times when retail brokers use other processes to deal with a customer short request? It's not clear to me who would be impacted by the change of having to actually acquire the shares prior to shorting rather than having reasonable expectation of getting them once the short is done.

[MrBill]

It gets a little technical. It depends on where you are and for what value the shares settle. For example, if it is T + 3 then the trade only settles 3-days after the trade date. If it is T + 1 then it is the next day. Bonds usually trade T + 2, but equity can vary from market to market. So if you do not own the shares and you want to short them you have until settlement day to buy them in.

But then it is further complicated by failed trades. Those that do not settle in time. Theoretically, the counterpart to the trade can buy in those shares that fail, but again usually only after a grace period of say another 5-days. So you might be able to have a naked short on for up to 3-8 days in some cases without having to actually borrow those shares somewhere. That is just wrong. And it should be made explicitly illegal.

Stock borrowing is something else. That is like a reverse repo. You pay to borrow the stock, so that you can short it. In this respect you take something similar to temporary ownership of the share. I believe that is legitmate. The naked short is not.

Electronic dealing has in many cases made markets more democratic, but some of the rules are throw backs to when there were significantly fewer players that were actually members of a physical exchange. Then you knew who was good and who was a scoundrel. Global exchange trading electronically has blown those checks and controls out of the water. This is but one example.

$this->bbcode_second_pass_quote('', 'M')ore than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specializing in securities lending, show. Almost all of that is being used to speculate that shares will fall, according to James Angel, a finance professor at Georgetown University who studies short selling. The global economic slowdown, $447 billion in bank losses and an explosion of funds that can profit from stock declines spurred the increase in short selling, helping send 22 of 23 countries in the MSCI World Index into bear markets.