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DiggIn fact, they don’t understand enough about the basics of stock trading and short selling to understand what naked shorting really is.
To help, we’ve created a guide to short selling that will tell you everything you need to know.
US Equities Showing Signs of an “Exhaustion Top” Amidst Rumours, Hype, and Shenanigans
by ilene - March 9th, 2010 5:29 pm
US Equities Showing Signs of an "Exhaustion Top" Amidst Rumours, Hype, and Shenanigans
Courtesy of JESSE’S CAFÉ AMÉRICAIN
The US stock market seems to be getting rather tired after what can only be described as a remarkable rally on light volumes and program trading.
The market is trying to rise here, with announcements like the Cisco backbone router for carriers and the AIG unit sales being hyped incessantly on financial media. The hype over the Cisco backbone router today is almost embarrassing. The anchors on Bloomberg keep saying that the router can download entire movies in 4 seconds, which is a lot faster than the 10 minutes it takes today. To anyone who knows anything about how networks are provisioned this is a howler of the first order, to say the least. For the consumer, the network is only as fast as the last mile.
It has also been reported by Adam Johnson on Bloomberg television that J.P. Morgan, a major broker dealer, stopped lending shares in AIG and Citi today "on rumours that the US government might ban short selling in stocks in which it has a financial interest." This squeezed the shorts and helped give an artificial boost to financial stocks over all. The company has since stopped this self-imposed ban on loaning shares and stocks are falling off their highs.
Needless to say, the SEC is unlikely to investigate this, or advise market makers not to start arbitrarily constraining the supply of stock based on market rumours, especially when they might be trading these same stocks for their own proprietary portfolios. They ought not be able to institute ad hoc bans on buying or selling by manipulating the supply.
Perhaps another leg up, after some consolidation, but this market is now very vulnerable to a reversal. The volumes are light on the rallies, and tend to increase quite a bit on the declines.
Don’t get in front, wait for it. But start getting defensive if you have not done so already.
The Ides of March are on the 15th.
Short Selling Restrictions “A Great Indicator of Imminent Market Crashes”
by ilene - February 27th, 2010 12:22 pm
Short Selling Restrictions "A Great Indicator of Imminent Market Crashes"
Courtesy of Mish
Inquiring minds are investigating Fannie Mae’s stunning $72 billion loss for 2009 as well as new short selling curbs. The two are actually related. Let’s take a look.
Please consider Fannie Posts $72 Billion Loss for ’09
Fannie Mae reported a staggering $72 billion net loss for 2009, underscoring the challenges that still face the nation’s largest mortgage financier and offering more grim news for taxpayers who may ultimately pick up the bill.
The Washington-based company posted a $15.2 billion fourth-quarter loss and said it asked the U.S. Treasury for another $15.3 billion to stay afloat, bringing its total bailout tab past $76 billion. The quarterly results were an improvement from the year-ago period, when Fannie reported a $25.2 billion loss, but the annual loss surpassed the year-earlier loss of $58.7 billion.
While some analysts warn that efforts to modify loans are simply postponing foreclosures and delaying losses, Fannie Chief Executive Michael Williams said the company remained committed to preventing foreclosures. "Our overriding objective is keeping people in their homes whenever possible," he said in a statement.
The government took over Fannie and Freddie nearly 18 months ago as rising loan defaults burned big holes in the companies’ balance sheets. The government has agreed to absorb unlimited losses for the next three years and up to $400 billion after that. So far, the companies have taken a combined $127 billion in Treasury support, making this bailout one of the most expensive from the financial crisis.
Short Selling Limits Yet Again
Proving that the SEC has learned nothing from history (I have a nice Fannie Mae example to prove it), the S.E.C. Moves to Put Limits on Short-Selling
The Securities and Exchange Commission voted on Wednesday to limit short-selling of stocks that are falling rapidly in price, The New York Times’s Floyd Norris reports. The rule was adopted on a 3-to-2 vote, with the two Republican members saying that no case had been made to justify any further action against short-selling.
The limits would apply to any stock whose price has fallen at least 10 percent during a day’s session. After that, short-selling would still be legal but not unless the sale was at a price higher than the best bid price then available.
The S.E.C. chairwoman, Mary L. Schapiro, said
…
The Audacity Of Synthetics
by ilene - February 9th, 2010 9:24 pm
Karl Denninger discusses an article posted here several weeks ago, John Paulson and the Greatest Pump and Short Fraud Ever, by Mark Mitchell at Deep Capture. - Ilene
The Audacity Of Synthetics
Courtesy of Karl Denninger, The Market Ticker
DeepCapture has picked up something I’ve written about before, but none of these folks seem to put together the "big picture", as I outlined yesterday on my Blogtalk show.
As Fiderer explains, Paulson asked the banks to create those CDOs “so that they could be sold to some suckers at close to par. That way, Paulson’s hedge fund could approach some other sucker who would sell an insurance policy, or credit default swap, on the newly minted CDOs. Bear, Deutsche and Goldman knew perfectly well what Paulson’s motivation was. He made no secret of his belief that the CDOs subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities which had been ignored by the rating agencies, Paulson could collect up to $5 billion.
Let’s step back a second.
A "CDO", or "Collateralized Debt Obligation", is in theory a very simple instrument. It is, at it’s core, a collection of income-producing "assets" that have a cash flow that can be diced up paid to people who have purchased components of the CDO.
The usual thought process when someone says "CDO" is that some bank bought a bunch of bonds, compiled them into a CDO and then sold off the tranches.
The CDO itself is typically held off-balance sheet in a SIV/SPV, lest the bank be forced to recognize it as part of it’s "assets." This is permissible because the bank doesn’t own the assets, the legal entity does, and it got the money to buy them from the people who bought the tranches that were issued. The banks do this because they get a nice fee for filing the papers to establish the entity along with a management fee to act as the servicer – that is, the "guy in the middle" who takes the money that comes in from the debt instruments and slices it up, paying out those funds to the buyers of the CDO’s tranches.
So you can think of a CDO, in it’s simplest form, as a way of taking a
…
John Paulson and the Greatest Pump and Short Fraud Ever
by ilene - February 3rd, 2010 11:39 am
John Paulson and the Greatest Pump and Short Fraud Ever
Courtesy of Mark Mitchell at Deep Capture
By now, everybody knows that the market for collateralized debt obligations was riddled with fraud in the lead-up to the financial crisis. What is less known is the fact that hedge fund managers helped create and inflate the market for these toxic securities specifically so that they could bet against them and profit from the inevitable collapse.
An example of a particularly sordid scheme, orchestrated by hedge fund billionaire John Paulson, was discovered some time ago by David Fiderer, a blogger for the Huffington Post. The information in Fiderer’s blog is rather incriminating, and, of course, the mainstream media is not on the case, so I think it bears repeating.
In a close reading of Wall Street Journal Gregory Zuckerman’s book, “The Greatest Trade Ever”, an otherwise starry-eyed account of Paulson’s bets against the mortgage market, Fiderer discovered this nugget:
Paulson and [partner Paolo Pellegrini] were eager to find ways to expand their wager against risky mortgages. Accumulating it in the market sometimes proved to be a slow process. So they made appointments with bankers at Bear Stearns, Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), and other banks to ask if they would create CDOs that Paulson & Co. could essentially bet against.
As Fiderer explains, Paulson asked the banks to create those CDOs “so that they could be sold to some suckers at close to par. That way, Paulson’s hedge fund could approach some other sucker who would sell an insurance policy, or credit default swap, on the newly minted CDOs. Bear, Deutsche and Goldman knew perfectly well what Paulson’s motivation was. He made no secret of his belief that the CDOs subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities which had been ignored by the rating agencies, Paulson could collect up to $5 billion.
“Paulson not only initiated these transactions, he also specified the terms he wanted, identifying which mortgages would be stuffed into the CDOs, and how the CDOs should be structured. Within the overall framework set by Paulson’s team, banks and investors were allowed to do some minor tweaking.”
It is not clear which banks ultimately participated in Paulson’s scam, but Fiderer quotes…
DEEP THOUGHTS FROM BILL FLECKENSTEIN
by ilene - January 4th, 2010 2:36 am
DEEP THOUGHTS FROM BILL FLECKENSTEIN
Courtesy of The Pragmatic Capitalist
This is an excellent interview at King World news with Bill Fleckenstein. He covers some of the intricacies of short
[click on the picture]
Did The Markit Group, A Black-Box Company Partially Owned By Goldman Sachs and JP Morgan, Devastate Markets?
by ilene - November 18th, 2009 4:57 pm
The Markit Group: A Black-Box Company that Devastated Markets
Courtesy of Mark Mitchell at Deep Capture
Although much attention has been directed at the contribution made by credit default swaps to the financial crisis, most discussion has focused on the companies, such as American International Group (AIG), that posted big losses because they sold these instruments without sufficient due diligence.
Another line of inquiry has not been pursued, however, though it is of equal, and perhaps greater, significance. That line of inquiry concerns the way in which the prices of credit default swaps effect the perceived value of all forms of debt — corporate bonds, commercial mortgages, home mortgages, and collateralized debt obligations — and as a result, the ability of hedge funds manipulators to use credit default swaps in bear raids on public companies.
If short sellers can manipulate the price of credit default swaps, they can disrupt those companies whose debt is insured by the credit default swaps whose prices are manipulated. The game plan runs as follows: find a company that relies on a layer of debt that is both permanent, and which rolls over frequently (most financial firms fit this description). Short sell that company’s stock. Then manipulate the price of the CDS upwards, preferably into a spike, as you spread the news of the skyrocketing CDS price (perhaps with the cooperation of compliant journalists at, say, CNBC).
Because the CDS is, in essence, an insurance policy on the debt of the company, the spiking CDS pricing will cause the company’s lenders to panic and cut off access to credit. As this happens, the company’s stock will nosedive, thereby cutting off access to equity capital. Thus suddenly deprived of credit and equity, the firm collapses, and the hedge fund collects on its short bets.
Moreover, credit default swap prices are the primary inputs for important indices (such as the CMBX and the ABX) measuring the movement of the overall market for commercial and home mortgages. In the months leading up to the financial crisis of 2008, short sellers pointed to these indices in order to argue that investment banks – most notably Bear Stearns and Lehman Brothers – had overvalued the mortgage debt and property on their books. Meanwhile, several hedge funds made billions in profits betting that those indexes would drop.
It should therefore be a…
Wall Street’s Naked Swindle
by ilene - November 8th, 2009 7:34 am
Worth reading if you haven’t yet. – Ilene
Wall Street’s Naked Swindle
A scheme to flood the market with counterfeit stocks helped kill Bear Stearns and Lehman Brothers — and the feds have yet to bust the culprits
By MATT TAIBBI in Rolling Stone
On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — "like buying 1.7 million lottery tickets," according to one financial analyst.
But what’s even crazier is that the bet paid.
At the close of business that afternoon, Bear Stearns was trading at $62.97. At that point, whoever made the gamble owned the right to sell huge bundles of Bear stock, at $30 and $25, on or before March 20th. In order for the bet to pay, Bear would have to fall harder and faster than any Wall Street brokerage in history.
The very next day, March 12th, Bear went into free fall. By the end of the week, the firm had lost virtually all of its cash and was clinging to promises of state aid; by the weekend, it was being knocked to its knees by the Fed and the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan Chase (which had been given $29 billion in public money to marry its hunchbacked new bride) at the humiliating price of … $2 a share. Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a bitch ever or…
Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff…
Everything You Ever Wanted To Know About Naked Shorting But Were Afraid To Ask
by ilene - October 1st, 2009 1:00 pm
Everything You Ever Wanted To Know About Naked Shorting But Were Afraid To Ask
Courtesy of John Carney at Clusterstock
One of the reasons people get worked up about naked short selling is that they don’t understand it.
Insider Trading and Investor Sentiment Signaling U.S. Stock Market Top
by Insider Scoop - August 28th, 2009 9:13 pm
Insider Trading and Investor Sentiment Signaling U.S. Stock Market Top
Source: TrimTabs, www.TrimTabs
Insider Selling in August Soars to 30.6 Times Insider Buying, Highest Level Since TrimTabs Began Tracking in 2004. NYSE Short Interest Plunges 10.3%, While Margin Debt Spikes 5.9%
SAUSALITO, Calif., Aug. 28 /PRNewswire/ — TrimTabs Investment Research reported that selling by corporate insiders in August has surged to $6.1 billion, the highest amount since May 2008. The ratio of insider selling to insider buying hit 30.6, the highest level since TrimTabs began tracking the data in 2004.
"The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon," said Charles Biderman, CEO of TrimTabs…
In a research note, TrimTabs explained that insider activity is not the only sign the rally is about to end. The TrimTabs Demand Index, which tracks 18 fund flow and sentiment indicators, has turned very bearish for the first time since March…
"When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock," said Biderman.
TrimTabs also reports that the actions of U.S. public companies have been bearish. In the past four months, companies have been net sellers of a record $105.2 billion in shares.
"Investors who think the U.S. economy is recovering are going to get a big shock this fall," said Biderman…
TrimTabs Investment Research is the only independent research service that publishes detailed daily coverage of U.S. stock market liquidity--including mutual fund flows and exchange-traded fund flows--as well as weekly withheld income and employment tax collections. Founded by Charles Biderman, TrimTabs has provided institutional investors with trading strategies since 1990. For more information, please visit www.TrimTabs.com.
Read entire TrimTab article here.
Michael Milken, 60,000 Deaths, and the Story of Dendreon
by ilene - July 23rd, 2009 7:27 pm
It’s very been very exciting to bring terrific new authors together at Phil’s Favorites and today I’m pleased to welcome Mark Mitchell of Deep Capture to our site. Mark’s written a fascinating account of the real story behind Dendreon’s (DNDN) most unusual trading activity in recent years. Here’s the first chapter of Mark’s 15 part series. – Ilene
Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 1 of 15)
Courtesy of Mark Mitchell at Deep Capture
What follows is part 1 of a 15-part series. The remaining installments will appear on Deep Capture over the next several weeks, after which point the story will be published in its entirety. It is a story about the travails of just one small company, but it describes market machinations that have affected hundreds of other companies, and it contains a larger message for anyone concerned about the “deep capture” of our nation’s media and regulatory bodies.
This story, like too many others, begins with Jim Cramer, the CNBC personality, making “a mistake.”
On September 26, 2005, Cramer announced to his television audience the sad news (punctuated by funny sound effects – a clown horn, a crashing airplane) that Provenge, an experimental treatment for prostate cancer, had flopped. Thousands of end-stage patients had been pinning their hopes on Provenge, but according to Cramer the treatment had just been rejected by the Food & Drug Administration. It would never go to market.
This seemed odd, because Dendreon (NASDAQ: DNDN), the company developing Provenge, had not yet submitted an application for FDA approval. As everybody in the biotech investment community knew, Dendreon had, in fact, only recently completed Phase 3 clinical trials and probably would not face scrutiny from an FDA advisory panel for at least another year.
As for the likelihood that the advisory panel would eventually vote in favor of Provenge, the odds looked quite good. The Phase 3 trials had demonstrated that Provenge significantly increased patient survival with only minimal side-effects, such as a few days of mild fever. Moreover, Provenge was an altogether different sort of treatment – one that fought tumors by boosting patients’ immune systems rather than subjecting them to the ravages of chemotherapy.
Provenge was not a magical elixir of life, but Dendreon was doing more than just developing a new technology. It…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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