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
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
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 msn.com, September 19, 2008
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