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Stingy Investor Tip Sheet

Shorts squeezed

Wow, what a week. Of the slew of government interventions, I was most surprised by the move to ban short sales.

A short sale is basically the reverse of a more traditional long sale. Most investors buy a stock, hold it for a while, and then sell it. They profit when a stock's price increases. The short seller first sells a stock, waits, and then buys it back. Short sellers profit when a stock's price declines. There is an extra wrinkle because to sell the stock, the short seller needs to borrow it (and to pay for the privilege) from someone who owns it.

There is talk that some hedge funds have been engaged in the practice of naked short sales. In this case, a short seller doesn't bother with borrowing the stock before selling it. The practice is against the rules but technically possible. Unfortunately, enforcement has been weak in this area and I heartily endorse efforts to crack down on naked short sales. As Daniel Drew, a financier from a bygone era, reminds us "He who sells what isn't his'n, Must buy it back or go to prison."

However, banning regular short selling is an alarming development. After all, if I want to lend out my shares and earn some extra money, I don't see why I should be prevented from doing so. In any event, you'll likely see lots of ink spilled over the issue in the next little while.

But let's be more practical and look for stocks that made big gains today but are down even more over the last year. We're picking on these stocks with the view that the short sellers might have been right but were forced out of their positions. While looking for short candidates, we'll also stick with unprofitable firms. Once today's euphoria fades, these big bouncers might be at risk of trading down as investors are reminded of grim economic realities.

Company                  Price 1Day Gain 1Yr Gain  E.Yield
======================= ====== ========= ========= =======
National City (NCC)	 $5.61	  27.5%	   -86.7%     -58%
Wachovia Corp (WB)	$18.75	  29.3%	   -82.3%     -20%
MF Global Ltd (MF)	 $8.75	  55.4%	   -80.5%     -12%
SLM Corp (SLM)		$15.75	  27.8%    -76.0%     -29%
Merrill Lynch (MER)	$29.50	  33.7%	   -74.5%     -75%
UBS AG (UBS)		$21.45	  31.4%	   -72.6%     -49%
Source, September 19, 2008

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09/19/2008   11:59 PM EST   Permlink   save & shareShort

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