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To
OTC Journal Members:
For all of you who were following
the trading strategy I laid out in last weekend's edition for shorting
large caps into earnings releases, you probably have figured out by now
that I have pretty much abandoned that idea. The Daily BLOGs have
contained no short term trading ideas.
I watched a few of the stocks in
the table trade on Monday and Tuesday after earnings, and I decided it
was too much of a crap shoot to pursue. The analysts have pretty much sabotaged
this strategy by ramping the earnings estimates so low companies are not
having much trouble beating them. There is more bad news priced into stocks
than the actual earnings would suggest. Therefore, companies are generally
beating. They only sell off if the company gives negative warnings about
the future. It was a nice idea, but I know when to abandon a strategy that
doesn't look like it has potential.
On a separate note, I'm announcing
the launch of a whole new OTC Journal site in about the next 10
days. The new site will be considerably more user friendly. It will
be far more pleasing to the eye and easier to navigate. It also has a lot
of video content. You will be able to review 18 different short video clips
on various investing principles. I think you'll like it. More as we get
closer to launch day.
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The SEC's Selective
Short Protection - It Makes Me Want To Vomit |
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Small and microcap companies have
been complaining for years about the abuses built into the system that
favor "illegal naked short selling". For those of you unfamiliar with the
practice, let's go over some basics about short selling.
When you sell a stock short, you
do the sell transaction first, and the buy transaction second. You sell,
and hope to buy back later at a lower price. Instead of "buy low and sell
high", it's "sell high and buy low". When you buy the shares back, it is
known as "covering your short".
In order to trade in this manner,
us regular, every day investors have to get our brokerage to "locate" shares,
borrow them, and then allow us to execute the short sale. Market makers
are allowed by regulation to short stocks without borrowing them as part
of their normal trading practices.
I think short selling is great, and
anyone should be allowed to short a stock who has the capital.
Illegal naked short selling has been
the subject of much complaining and consternation by many public companies
and interested parties for many years. This occurs when a short sell is
executed without a legitimate borrow first. Institutional investors are
allowed to do this on a regular basis as a course of business. The fact
that it is allowed is 100% the fault of the SEC's lax attitude towards
this practice.
Prime brokers generate millions in
fees on the trading side. The DTC system, the people who keep track
of the street name stock at your brokerage firm, also collects millions
in fees for "open fail to delivers"- shares of stocks that have been sold,
but the trades never settled since the seller couldn't deliver.
The whole practice is the subject
of a giant class action suit by the guys who got big tobacco and the asbestos
industry. In essence, as many have pointed out in the past, illegal naked
short selling allows sellers to actually create "counterfeit shares"- shares
that don't exist, and sell them to create excess supply.
This past week, the Christopher
Cox, the Chairman of the SEC, was interviewed on CNBC, and
after watching the interview I was literally ready to vomit.
Early in the week the SEC
announced it was invoking a "Ban on Illegal Naked Short Selling".
Wow I thought to myself. If there was one good thing that would come out
of this Bear Market, having the SEC get rid of illegal naked short
selling by closing up the loopholes in the DTC System would be my #1 choice.
Alas, the level of stupidity, and
the unbelievable hypocrisy of these guys just blew my mind. The SEC
is going to monitor and stop illegal naked short selling, but only on 17
designated financial stocks that trade gazzilions of shares everyday, and
have been beaten into oblivion by the bears.
Christopher Cox got up on
CNBC, and in an interview actually stated that Illegal Naked Short
Selling was, in fact, not illegal. Technically, it might simply be a violation
of SEC regs- and it happens due to a series of loopholes in the system
that allow it to happen.
He stated they were invoking the
special power to ban the naked short selling in 17 bank stocks for 30 days,
but that it would be far too difficult and inefficient to ban naked short
selling across the board on every stock.
Dear Mr. Chairman- please
answer this question for me? if you can ban illegal naked short selling
on 17 of the most heavily traded financial stocks- stocks that trade literally
hundreds of millions of shares everyday and are traded by hundreds of hedge
funds and other institutions, why can't you ban illegal naked short selling
on a $.50 stock that only trades 100,000 shares everyday. Wouldn't that
be far easier to track?
About 15 minutes after the interview,
CNBC
trotted out Cramer. This guy can certainly have his moments, and
this was one of them. I applaud his courage. He called out the shear stupidity
of the SEC stance on this issue, and was actually waving a copy
of the statute that requires the SEC to regulate the proper settlement
of trades.
Ladies and gentlemen, unfortunately,
this is your government regulators at their very worst. This whole thing
is one big transparent gimmick to prevent Fanny and Freddie from completely
melting down to nothing, and is selective enforcement at its worst.
Over the past couple of years the
SEC
has implemented some rule changes favoring small companies that I applaud.
Rule 405, which limits the number of share small companies can include
in a registration statement, was great for financing small companies. The
change in Rule 144 and the relative ease of the registration process under
the current SEC is a welcome change for smaller companies and enhances
their ability to raise capital in a way that is not a detrimental to stock
values.
However, this ban on illegal naked
short selling for a few companies is a real slap in the face for investors
on the long side. A personal thank you goes out the Jim Cramer for pointing
out the shear hypocrisy.
It makes me want to vomit. If it's
right for 17 financials, it's right for all stocks. Chairman Cox suggested
the commission could look into some "rule changes", which of course they
won't do.
SEC- do your job and make
the playing field fair for all investors. If huge institutions can naked
short stocks without legitimate borrows, let me do it too. Make it the
rule. If not, enforce the existing rules.
All they need to do is enforce the
existing rules. That's it.
Home Page : www.otcjournal.com
Email Questions or Comments To:
editor@otcjournal.com
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