by Michael Shulman 09/22/08
SHORTING IS ALMOST SECOND-NATURE TO SOME TRADERS
You must remember that shorting in all of its forms is now a common occurrence -- it isn't anywhere as illicit as sipping hooch in a speakeasy. Variations such as naked shorting have been in the headlines for many months.
In mid-2007, the SEC ended the uptick rule, which the occasional TV pundit claims is the cause of the markets' decline. (Never mind the fact that nothing was done to improve the quality of the terrible stocks that were being shorted!)
Then -- after one year, lots of volatility and $100 billion in shares -- shorting is as natural to many investors as going long.
The really unfortunate thing is that, essentially, this new short-selling ban won't address the real problems with financials like Citigroup (C), Merrill Lynch (MER), Morgan Stanley (MS), Sovereign Bank (SOV) or Wachovia (WB).
I've been warning my ChangeWave Shorts readers, and anyone who will listen on the Fox Business Channel, that these investment banks' balance sheets are atrocious, and that more write-downs will be forthcoming and forward earnings will suffer because they are selling off the very assets they need to regenerate profits and earnings.
SO WHAT HAPPENS NOW?
I foresee a lot of suspended dividends and stock valuations that will go kaput. The simple fact is that investors should be shorting these companies because, fundamentally, they are a wreck.
But, what really spurred the government to step in is that the "dark side" of the shorting world -- the guys with suspenders, so to speak -- started attacking some of the financials that were solid -- making innocent companies guilty by association.
And, the respective governments instituted the bans as a way to keep the perceived "bullies" from stealing the little guy's lunch money.
But, I'm here to tell you, that what they've done is actually removed the teachers from the school.
WHY SHORT-SELLERS ARE SAFETY NETS
What I mean is that there are two kinds of short-sellers: the back-alley bullies sipping their whiskey and plotting the demise of good companies, and the protective kind of market-makers who short-sell and keep things in check for the market to hedge some of their long-side bets.
Their actions ensure that the marketplace is liquid and fair for the rest of us. They make sure that you and I -- by and large -- don't pay exorbitant options premiums.
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