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Market Oracle FREE Newsletter


The SEC Takes Its Cues from… Wall Street?

Stock-Markets / Market Regulation Jul 06, 2009 - 10:56 AM GMT

By: Graham_Summers


Best Financial Markets Analysis ArticleOriginally today’s essay was going to counter the most common inflationists’ arguments. However, over the weekend the SEC announced it is considering reinstating rules that make it more difficult to go short in the market. This move warrants immediate attention for a number of reasons, namely:

  • It shows how much the SEC is on the side of Wall Street
  • It’s another move that fixes nothing but looks good on paper
  • It further sets us up for a full-blown repeat of 2008’s collapse.

Regarding the first point, the SEC first instated these rules temporarily back in July 2008. At that time, the story presented to the public was that “evil” short sellers are the guys responsible for taking down the market, resulting in Americans losing trillions of dollars.

Of course, as everyone knows, Wall Street banks collapsed due to greed, lack of oversight, excessive leverage, bad business practices, outright corruption, and fraud. However, these facts didn’t stop the SEC from vilifying investors who actually did the analysis to discover that the Wall Street firms were insolvent and went short as a result.

What I find so strange is that the SEC blamed short-sellers for allegedly taking Wall Street down… but didn’t investigate Wall Street analysts how continuously listed themselves and their competitors as “buys” all the way down to $0. Apparently bullishness that stems from corruption (or brazen stupidity) is OK. But fundamental analysis based on financial realities is considered “evil” or lacking in integrity.

Indeed, once the “anti-short” rules lapsed in August, the SEC was urged to take up more “anti-short” policies by none other than mega-Wall Street legal firm, Wachtell, Lipton, Rosen, & Katz. On this count, it’s worth noting that one of the lawyers who wrote the letter personally oversaw numerous Wall Street mergers (JP Morgan & Bear Stearns, Bank of America & Merrill Lynch, Wells Fargo & Wachovia). Obviously he’s an objective source and only interested in protecting the public from “evil” short selling activity (You can read the actual letter with highlighted passages here).

On a final note, anyone believing the SEC’s “anti-short” policies are aimed at protecting the public should note that the SEC just celebrated its 75th anniversary with an expensive dinner funded (in part) by Fidelity, Standard & Poor’s, D.E. Shaw & Co. (the hedge fund that paid Obama’s economic advisor Larry Summers $5 million) and other firms that the SEC is meant to regulate.

Aside from the various conflicts of interest, banning short selling or making it more difficult does NOTHING to help the financial system. It doesn’t clean up banks’ balance sheets, it doesn’t end market manipulation, it doesn’t clear crummy debt, it doesn’t stop insider trading… in fact it really doesn’t do much of anything except prop up financial stocks temporarily.

Here’s a chart of the Financials ETF from May 2008 to the end of last year. The SEC implemented its “anti-short” rules in July. Suffice to say, these rules didn’t do much in terms of preventing the inevitable.

Markets can be propped up and manipulated for a time… but ultimately they follow what fundamentals dictate. If financial firms own trillions in crummy debt and are effectively insolvent, it doesn’t matter if a government body makes it illegal to short sell them… they will eventually collapse regardless.

Indeed, one could quite easily argue that banning short-selling actually intensifies financial collapses rather than averting them. To go short, you have to borrow shares from a brokerage firm. Once the stock you’re shorting collapses you then have to buy the shares on the market in order to return them to the brokerage firm.

This is called “covering your shorts.” It’s not difficult to see how this can actually help stop a collapse. After all, at some point stocks will have fallen far enough that the shorts will want to take their profits. When they do this, they have to buy stocks… which brings the collapse to a halt and can actually kick off a rally (as it did for the rallies in November 2008 & March 2009).

By taking out short-sellers you’re removing a group of investors who HAVE to buy stocks once they collapse, leaving only those who are crazy enough to step in and buy during a full-blown collapse.

In conclusion, the SEC’s decision to potentially ban short selling again protects Wall Street, not individual investors. It also accomplishes nothing in the way of helping the financial system… and may in fact only make the eventual collapse even worse. 

I already thought the market was due for a collapse in the coming weeks. However, if the SEC does implement these rules, we’ll probably see a short rally followed by a full-blown Crash again. If you’re unsure of how to protect yourself from this, I suggest taking a RISK FREE trial subscription to my confidential investment letter: Private Wealth Advisory.

Had you subscribed to Private Wealth Advisory last year, you would have MADE, not LOST 7%. You also would have exited the market completely on September 19, 2008, a full three weeks before stocks wiped out TRILLIONS in investor wealth. And you would have outperformed every mutual fund on the planet.

Most importantly of all, you would have understood exactly what the Fed’s moves meant for investors. There would be no confusion, no guessing games, just simple easy to understand explanations of what was going on, what it meant for your money, and how to best profit from the market volatility.

Private Wealth Advisory costs $180 a year. That’s $0.50 a day. And I always offer a full 30-day RISK FREE trial period. Because Private Wealth Advisory is a weekly service, this means you have one month to explore the historical archives AND receive four new hot off the press issues (one a week) without risking any of your money: if you’re not 100% totally satisfied with my investment insights and gains from my picks in the first 30 days, I’ll give you every penny of your $180 back, no questions asked.

To sign up for your RISK FREE trial, click here.

Good Investing!

Graham Summers

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

    © 2009 Copyright Graham Summers - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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