Saturday, July 4, 2009

Reinstating Short Sale Restrictions

Never one to let a crisis pass without pretending to care and "just doing something," the elected and appointed friends of bankers are at it again. The SEC is being asked to reinstate short sale restrictions again. The pompous and ignorant apparatchiks like Barney Frank are happy to hold the evil short sellers responsible for the aftermath of their own stupid policies.

Such announcements can be good for a few days' short squeeze, but will change nothing and will not alter what happens next in the stock market. If you trade on a daily or weekly time frame, these are the types of risks of which you have to be cognizant. The timing of this possible rule change would be convenient for some of the behemoth financial firms that line Barney's pockets. Following are the current 6 month charts of Skank of America (ticker: BAC) and then Shitibank (ticker: C, used log-scale on this one due to the wild swings in what is now a penny stock):

Last fall, if anyone remembers, instead of talking about re-instating the uptick rule, there was an absolute all-out ban on short selling of the financial firms that helped create this mess. Not surprisingly these firms who were "protected" from the evil short sellers read like a list of who's who among those that donate the largest amounts of money to the campaign coffers and back pockets of our elected bureaucrats. Using the charts of BAC and C again, here's what happened when this even more restrictive measure was passed in September last year:

So, yes, the casino is rigged and the little guy is always good for a squeeze. I don't like it but to think it can be changed by crying about it is silly. Over the longer-term, market forces beat apparatchiks every time. Those evil people who dare to profit from an obvious bear market need to be mindful of such short-term jerk jobs, but with a longer-term time horizon and proper risk management, these evil brethren of mine will make a killing.

Here's an important list of ongoing and future failures of the bureaucracy when it comes to markets and the economy:

• They couldn't stop the bear market from occurring
• They couldn't stop the biggest financial panic since 1987 despite changing the casino rules
• They couldn't stop the real estate bubble bursting and crash in prices and they damn sure can't re-inflate this bubble once it's done bursting in several years (no, we're not close to the bottom in real estate)
• They couldn't stop the deleveraging process that is now well-established and they can't stop it from completing (though they can prolong the agony for all of us)
• They can't force consumers to spend and they can't stop the new consumer trends of saving, debt repayment and frugality
• They can't create jobs without stealing money from the real economy and making the economic contraction worse
• They can't force "green shoots" to grow since they are not the people who actually take risks in the real world to create economic growth

Any measure to prevent the stock market from going down to its natural level will fail. The bear market is not over and a new leg down in the bear market has already begun. The bear market will continue until at least the beginning of 2010. Going long with new money in any sector, including Gold miners, is high risk right now unless a short-term trade or part of a core investment philosophy that invests a fixed amount in Gold stocks every month to dollar cost average into the only long-term secular stock bull market out there. And Gold? Gold is a safe way to stay out of the casino for a while until the dust settles.

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