Comments (7)

• greg

  I sit on my computer every day and trade the markets. It is 10:56 AM and I have made my final trade of the day and free to do what ever I want, like reading these articles.

  Your analysis of this market is completly off base. Here is what I watch when making decisions on trades:

  1. The media. It is the sole factor for over stating conditions and makes large groups of people move into the markets.

  2. Over speculation. Watched it in oil and responded to the article "Oil Follies" that the move was purely speculation driven and oil prices were going to fall sharply. The author said it was supply and demand. I said no and bought puts when oil was selling at $135.

  3. Creation of new ETF's that allowed more participation in the markets creating more demand and increased speculation. Just the idea that there is a VIX that you can invest in is a good example.

  4. Mark to Market caused forced liquidation based on audited values of assets.

  5. Margin calls caused further liquidation.

  6. T-Bill rates are low not so much about people trying to find safe haven, they are low because the Fed is buying them to help provide money for the TARP.

  7. The govenment is borrowing money and currently paying around 3% for 10 year bills and is lending it through the TARP at rates from 5 to 10 percent.

  There are many other factors you need to look at when investing in this market. While interest rates are important, it is not significant. My main rule is never follow the sheep! And never take advice from Jim Crammer.

  Published: December 10, 2008 10:16 AM

• Brent

  Greg, all prices are set by supply and demand. You can't say that a trader "doesn't count" as part of supply or demand because he is a "speculator". We are all speculators in some sense!

  Published: December 10, 2008 11:01 AM

• Ned Netterville

  Ben, Your analysis of the market is spot on. However, there is another factor contributing to the volatility that few are aware of. For a long period of time, on the NYSE, OTC/Nasdaq, and other markets, professional traders, specialists and speculators took the other side of many securities transactions (trades) with the intent of making a profit. Most of the trades they made were very short term for very small profits--they were often long or short a stock for mere seconds or minutes to capture a 1/16th or 1/8th of a point--but their trading kept price swings to a minimum. Their trading had the beneficial result that they were often there to buy or sell when no one else was--except at a less favorable price to the person on the other side of the trade.. However, congress and presidential administrations thought these folks were making too much money, so they initiated rules through the SEC and other regulatory agencies that made it extremely more difficult to profit from very small moves. As a result, most withdrew their capital from the markets, and without their resources devoted to buying and selling, market volatility jumped. If you watch CNBC you will see the DJI moving up or down by relatively huge increments compared to former times when nothing special is going on to account for such big moves other than the lack of market liquidity government has imposed. Keep up the good work.

  Published: December 10, 2008 12:44 PM

• D. Saul Weiner

  Ned,

  I am not familiar with these rule changes that you referred to. If you have a source for learning more about the specifics here, that would be helpful in assessing these developments.

  Published: December 10, 2008 9:54 PM

• newson

  whilst covered short-selling is both a legitimate practice and useful in speeding price discovery, naked short-sales are price-distorting and a fraud against shareholders (illegitimate and economically destructive).

  bloomberg has a fair primer on naked shorts here:
  http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aEOpTqmLZB7A

  this is a case of the authorities asleep on the job.

  Published: December 10, 2008 11:36 PM

• Ned Netterville

  Sorry, Saul, but I can't send you to a website. My source is my brother, a recently retired NYSE member and an independent floor broker for almost forty years. With all the info available on the Internet, however, I suspect a good cyber researcher could somehow find and compile a list of the regulations that have either been mandated or "strongly" advanced by the government to "control" the behavior of stock-market participants and exchanges--usually in the name of protecting the "little guy." Mr brother's work as a floor broker was "executing" orders for other brokers, usually because they were too busy to do it themselves, or because they valued his ability to get them a good price in the few stocks he was most familiar with, which were pretty much determined by the physical proximity of the booth where they were traded on the floor to the location of his clerk and phone on the floor's perimeter. (Warren Buffet's high-priced Berkshire Hathaway shares were one of his babies. The necessity or advantage of being close to the action diminished as communication technology advanced.) He was not a trader nor a specialist, so very few of the rules changes directly impacted his function, except to the extent that they lessened the liquidity in the stocks in which he concentrated his services, making it harder for him to get a satisfactory price for his customers (viz., other brokers) and earn their continued business. Most of the rules were actually imposed by the NYSE rather than the government, but they were enacted by the exchange because of pressure from congress and/or the administration, usually applied by the SEC, which holds the power of life and death over securities exchanges and all broker/dealers to a degree that makes resistance futile. (If there were no government regulations nor limitations on entry into the securities industry (viz., freedom) by government licensing, registration, etc., the market for shares would be much bigger and safer for investors large and small. Competition and those in the industry who depend on an effective, liquid stock market as a means to earning their living would assure that their customers were getting a fair shake better than government ever will.

  Along with one of the people on the Bloomberg discussion, I see naked short selling mostly as a red herring for people to blame when their favorite stocks go down in price. The Bloomberg discussion rightly contains the following warning: "THIS TRANSCRIPT MAY NOT BE 100% ACCURATE AND MAY CONTAIN MISSPELLINGS AND OTHER INACCURACIES. THIS TRANSCRIPT IS PROVIDED "AS IS," WITHOUT EXPRESS OR IMPLIED WARRANTIES OF ANY KIND. BLOOMBERG. I spotted a number of inaccuracies in a very cursory reading.

  There would be little or no such thing as naked short selling if the buyers (or their stock brokers) insisted on timely delivery. If I really believed I was a victim of naked short selling, that is if I bought a stock at, say, $100 a share and the price dropped precipitously to fifty dollars as a result of naked short selling, I would demand delivery of my stock by settlement date or consider the trade canceled for failure of the seller to deliver! (If I still wanted to own the stock I could now buy it at $50.) Timely settlement is as much an element of the contract as price, and if the seller fails to deliver, the seller has violated the contract and the buyer is relieved of any obligation to pay the contract price. There is an old stock-market saw that goes, "He that sells what isn't his'n must buy it back or go to prison." Although we don't send short sellers who fail to deliver to jail anymore, they can still be made to pay. Some of the comments on the Bloomberg discussion seem to be talking about situations in specific stocks wherein there exists a huge undelivered short position, much greater, presumably, than the float (shares available for delivery). Something seems to be missing from what the complaining parties are alleging. If what they are saying was truly the case, and the decline in share price was not due to the company's business, then a magnificent opportunity for a "short squeeze" would be available and some smart traders would jump on the opportunity by buying the stock and insisting on delivery in order to "squeeze" the shorts and drive the price upwards like a skyrocket. For an example of such a short squeeze, look at what happened to the price of Volkswagen shares a few months ago, and read about what happened to the short-selling hedge fund(s) that got caught in a "bear trap." Porche, which owns a large number of VW shares and wants to own more reportedly was the buyer who applied the squeeze, and forced the shorts to cover at a very high price.

  Buyers insisting on the fulfillment of their contract is the key to aborting raids by naked short sellers. An off-setting purchase by the short seller isn't enough to satisfy the initial contract, unless the short seller can arrange for immediate or early deliver in order to complete the initial short-sale transaction by the settlement date of that short sale.

  Purchasing put options is a form of naked short selling, and a "legal" way to accomplish much the same objective. The purchase price of the put option is somewhat like the margin that SHOULD be required of a short seller, whether by law or by the seller's agent/broker who is responsible for his sellers' deliveries and unless he has required margin in lieu of stock, the agent is a complete fool. Of course in the case where a short-seller's trade, naked or otherwise, goes sour and the stock goes up instead of down, the put-option owner's loss is limited to whatever he paid for his option contract. However, the short (naked or otherwise) seller's potential loss is theoretically unlimited because there is no limit on how high a stock's price can go. The potentially unlimited losses that are possible in short selling effectively prevents all but a tiny fraction of stock-market participants from engaging in the practice, and those who do are almost all professional traders.

  Professional traders can often maintain a short position for a long period of time without failing to make timely deliveries as long as they are doing a sufficiently large volume of trades in the stock each day. In effect, they maintain the short by "rolling it over," that is to say by purchasing to "cover" their earlier shorts while simultaneously selling to initiate new short sales in a sufficient amount to match the short position they want to maintain.

  My sage stock-market advice: Buy low, sell high, or, sell high buy low; and kim, bulls can get rich, bears can get rich, pigs inevitably get slaughtered.

  Published: December 12, 2008 12:36 PM

• Don Sabatini

  Good advice of all the commenters, nice to read.

  Published: April 27, 2009 6:18 AM