Saturday, July 26, 2008

Barron's on shorting

In SEC Chairman Christopher Cox's op-ed piece in The Wall Street Journal last week, McCullough writes, "he spilled the beans as to why naked shorting has been forbidden in that select litany of names. According to Mr. Cox, the list 'applies to precisely those financial firms that the Fed has designated as eligible for access to its liquidity facilities -- and for which the taxpayer could be on the hook.'

"So there you have it. Under the guise of not wanting to further burden the taxpayer, they put together that very telling list of [primary dealers] and [government sponsored enterprises]. Of course, they don't give a fig about the taxpayer." The real aim was to avoid wasting the Fed's powder on institutions targeted by evil short sellers, McCullough comments.

In any case, the myriad woes of the credit system strongly suggests that the stirring stock market rally led by the financials in the wake of the Fannie-Freddie bailout and the crackdown on short-selling was mainly the product of short-covering.

Not exactly an original notion, but one well-supported by the data. Bespoke Investment Group points out that banks were the most heavily shorted group among the Standard & Poor's 1500 index in the latest short-interest numbers through July 15 -- the day the financials made their lows. Short interest hit 19.6% of an average bank stock's float; no doubt much of that has been bought back in the subsequent week. Last Thursday's wicked selloff suggested that's likely played out.

Bought back? Only if they re-shorted higher. We'll see when the short interest figures come out. I don't know one bear on banks that now has become a bull because of Cox's proposal.

Just like I couldn't find one bear that became a bull because of the Fed's alphabet soup.

But I do know bears, who would grudgingly accept the thesis that lower gasoline prices could help out the consumer.

And since oil, which "we will never see $100 a barrel in this lifetime" will probably have a 9 handle on it, before the Olympics are over, means we will grudgingly have some converts.

No comments: