Financial, Real Estate, Stock Markets Trends and Current Affairs

Hence,
we come to this Bloomberg story - SEC May Restrict Short Sales in
February to Curb Bets During Stock Plunges:

Jan. 23 (Bloomberg) -- Concern that short-sellers
accelerate stock declines may prompt the Securities and
Exchange Commission to adopt a rule next month aimed at curbing
bearish bets when equities are plunging.

The regulation would require the trades be executed above
the best existing bid in the market when shares fall
10 percent in a day, said Brian
Hyndman,
the senior vice
president in transaction services at Nasdaq OMX Group Inc. In
a short
sale, an investor borrows an asset and sells it,
hoping to profit from a decrease by repurchasing it later at
a lower price.

Forcing short sellers to wait for a stock to rise above
the best price bid may prevent them from flooding the market
with sell orders and causing losses to multiply. Some exchange
officials say the restrictions known as uptick rules don’t work,
citing studies that show they may be less effective during
panics that drive prices down and volatility up.

Well, the most glaring problem with this approach is that it attempts to
purposefully break market equilibrium. Regulators are not trying to
quell the market in times of extreme volatility, they are trying to
effectively control stock prices and guide them in a certain direction.
Note that there are no proposed rules to prevent the climb of a stock!
Since there is no curb on the rapid climb of a stock's price, this idea
is highly imbalanced. Do you know what happens to imbalances in a market
that seeks to attain equilibrium? Usually the opposite of what caused
the imbalance as economic forces seek to right a fallen ship.

If one recalls what happened when the ill thought out short ban was
implemented in 2008, the convertible market choked due to an inability
to hedge and option prices soared! Shorts are a necessary component of
our marketplace. They facilitate:

• Liquidity in fast moving markets, not to mention providing a floor
  in markets that are dropping significantly. Remember, even short sellers
  have to buy back stocks to cover their positions. Without those buyers
  of last resorts, when the long only guys finally realize the jig is up
  on thier ponzi-scheme stock the selling will simply keep going until
  their is virtually nothing else to sell.
• True price discovery in that it is quite risky to short stock
  knowing the long term movement of the stock market is upward. Thus, most
  short sellers peform a considerably higher than average amount of due
  diligence on their prospects. This leads to a truer form of price
  discovery. Don't believe me? Ask the pensions guys that held (be sure to
  click each of these links to get the full picture) GGP
  (GGP
  and the type of investigative analysis you will not get from your
  brokerage house), for retirement, or Bears Stearns (Is
  this the Breaking of the Bear?), or MBIA (A
  Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie
  Middleton) or Ambac (The Ambac
  FAQ), or the many regional banks taken over by the FDIC (As
  I see it, 32 commercial banks and thrifts may see the feces hit the fan
  blades), or...
• Fraud detection in finding the Madoffs of the corporate world. It
  was short sellers who found the funny business in the books of Enron,
  Lehman Brothers (see Is
  Lehman really a lemming in disguise?"), and soon to be (if
  regulators are doing their job) Pre-paid Legal (The
  Flim Flam Scam gets SEC'd - I'm not going to say I told you
  so, again!).

So, hypothetically (of course) what happens when a company such as PPD
(see The
Flim
Flam Scam gets SEC'd - I'm not going to say I told you so, again!
and

Flim, Flam, Scam: Would a PPD Ponzi and Pyramid scheme cause
your wealth to Scram?) issues a statement that says we are an
admitted sham that has a economically unsustainable business model that
takes advantage of poor earners in their time of need all while
management sells virtually every single share they can get their hands
on into the corporate equity buyback program - virtually every single
share!. Oh, btw, we bought back 4% of our stock and have Y-O-Y 10%
increase in EPS because of it. Hooray!

The stock shoots up. The moral amongst us throw up. Fundamental
analysis, basic math and common sense go the way of alchemy and the
quest to turn lead into gold, and the crooks upper
management go Azimut shopping with those banging Italian chicks on the
bow...

I have a better idea. Let's implement the rules on the books instead of
making new ones. You know, the rules that were designed to force
corporate management to be more honest and forthcoming about their
company and it's assets? Instead of trying to stop short selling, you
can eliminate the reasons to short a stock, of course except for those
cases where the STOCK DESERVES to be SHORTED!

Let's walk through a couple of Reggie's best recommendations?

1. Eliminate the commercial real estate practice of "Extend and
   Pretend". If a loan (or any asset) is underwater on the books, declare
   it so. Period! This will assist in making the companies less susceptible
   to speculation. Either they are in decent shape or they are not.
2. Disincentivize the corporate purcahasing of shares to mask a fall
   in economic earnings. If companies want to truly return money to
   shareholders they should do just that. Return the money to shareholders.
   The term is called a CASH DIVIDEND! CASH!
3. Reverse ALL of the FASB games that have been implemented as of
   late, namely:
4. FAS Statement
   No. 157 and all related
   Mark-to-market
   accounting fantasies
5. FAS
   166 and 167 implementation delays: Chances are that if its off
   balance sheet, its off kilter. This off balance sheet mess not only
   provides fodder for short seller speculation, it allowed the bulk of this
   asset securitization crisis (be sure to click the link to read up
   on it from beginning to present) to occur in the first place. If Lehman,
   Countrywide, Merrill, WaMu, etc. weren't able to hide so much from
   average investors, they may still be in business today... The off
   balance sheet mess is nothing but Enron, restated.

More on the topic...

1. FASB
   Issues Statements 166 and 167 Pertaining to Securitizations ...

   Jun 12, 2009 ... 166, Accounting for Transfers of
   Financial Assets, and No. 167, Amendments to FASB Interpretation No.
   46(R), which change the way entities ...
   www.fasb.org/.../ContentServer?...FASBContent...FASB/FASBContent...
   - Cached
   - Similar
   -

2. FDIC
   OKs Delay of FAS 166, 167 Effect on Capital « HousingWire

   Dec 16, 2009 ... FAS 166 and 167, which take effect in
   January, will require financial institutions to bring certain
   securitized assets onto balance sheets. ...
   www.housingwire.com/.../fdic-oks-delay-of-fas-166-167-effect-on-capital/
   - Cached
   -

3. FDIC
   expects FAS 166 and 167 to increase bank capital requirements ...

   Aug 27, 2009 ... fdic-logo.jpg Federal Deposit Insurance
   Corporation (FDIC) directors agreed at their August 26th Board meeting
   that following implementation ...
   www.accountingweb.com/.../fdic-expects-fas-166-and-167-increase-bank-capital-requirements