Sunday Rock Blog: Rage

The SEC took a step in the right direction on Friday with their very public accusation of Goldman but we all know how these things usually turn out. With their globe dominating reputation on the line, GS will throw their highest paid pack of lawyers at this. In the end they will probably get a slap on the wrist, I'd guess not more than a $500M fine which is worth it to them. They make far more money screwing over the planet than they would ever pay in fines so the business model will live on. In my opinion this whole charade is about the SEC trying to regain credibility in the eyes of investors. Unless we see some serious follow through to Friday's broad market downside then GS will probably bounce back. I'm tempted to get very bearish on GS based on the above chart but it was only down 13% Friday and it held the key $160 level. GS merely fell back to March prices. A close below $160 would spell doom for GS. If this is just the beginning of a crackdown on the Fraud that goes on at GS then it wouldn't be surprising to see GS head back to 2009 lows.



While I'm on this topic completely lacking federal credibility when it comes to cracking down on Wall Street fraud I'd like to draw attention to the timing of this release. Why is it that any major market moving news always, always comes out on option expiration. Any investors holding futures options get totally screwed because execution of these options happens at the open. What is the hidden agenda? The fed used the same timing when they announced the banning of shorting of financial stocks in 2009, also when they recently raised the overnight interest rates. Are these announcements timed to transfer wealth? I'd also point out that GS's stock was up quite a bit ahead of this announcement. Did they wait for a price cushion in GS's stock price? I should point out that there are other theories about the timing, like the desire to catch Goldman off guard:

"Yesterday, for more than an hour after the SEC filed its charges, the SEC had the headlines to itself. A short Goldman denial appeared around noon, and a longer, more compelling one appeared at the end of the day, when most people had already started checking out for the weekend. Thus, the SEC's fraud story dominated the headlines all day long."

Another more scandalous idea that Bloget points out is that the SEC timed to release to draw attention away from the disturbing results of an investigation into the actions of the SEC in the Stanford ponzi scheme.

Short Selling Financials Ban Quotes

The best time to sell stocks (short or otherwise) in the last month was Friday morning after the ban, nice setup SEC. Furthermore, markets have given back all their gains since. Its sure reassuring that those sales weren't due to short speculation and that we don't have to worry about covering (bear market rallies).

" Imposing new regulations at this time is kicking the market while its down." Head of CME education department

"To think, I mocked Russia for being a nation run by market commies"-Barry Ritholtz

"Its like fondling some girl in a public place, its just wrong. You can't do that." -btb


In my view, the only thing they got right with this ban was the timing. As you can see in the chart up top, the market had bottomed and begun to rally before news of the US ban broke. Sure the news was probably leaked which help spark the rally, but we certainly had good technical support for a major bottom. The ban served to pop prices way too fast to be sustained which led to this relatively orderly selloff ever since (albeit a 500 point decline in the dow). This pullback gives buyers who missed the low last Thursday a chance to get in and potential for support just below here. I'm still expecting a big rally from here but new lows for the year will convince me otherwise.

In other news, Wall Street turns to religion.

Market Could Have Formed an Important Bottom But....

I was going to do a post about how the market may have formed an important bottom today. The charts (technical reversals galore), the VIX spike and the sentiment (GS finally cracking, Gold skyrocket) seem to suggest that we will move higher for a while. I was going to post some charts and make my argument. That was until I read this news:

SEC Is Set to Issue Temporary Ban Against Short Selling

If this actually happens the the stock market will collapse, and maybe not recover. We will get a true financial Armageddon. This is the action of desperate fools. This proposed intervention into supposedly free markets will cause complete chaos because short selling has been a vital part of many aspects of the stock market. These are the effects I suspect that this rule would have:

1. Complete loss of faith in US financial markets due to incompetent regulators. Money will leave the US, investors will seek other unregulated assets (like physical commodities).
2. Liquidity will dry up, shorts provide shares to buy when everyone wants to buy and no one wants to sell. Shorts bid for stocks when everyone wants to sell and no one wants to buy. Market makers will no longer be able to function. Options (insurance) would not be able to be sold.
3. Those who are currently short would now have a very good reason to not cover. They won't be able to short again if they do.
4. No short covering rallies, stocks will just fall and fall as people loose interest and want to sell their investments.
5. Complete chaos, our financial system is built on a number of assumptions. One of them is that shares can be sold short. Everything will have to be re-evaluated, no one really knows what would happen if short selling was made illegal. Brokers will loose business, maybe some will go bankrupt. Will put prices go to infinity?
6. All the attention on short selling would distract people from the real problems, oh your know, the global recession and credit crunch.

I think this type of intervention would have exactly the opposite effect that the morons at the SEC think it would. The law of unintended consequences will be working overtime if this insanity actually goes down.

Fwiw, I am long, no shorts or puts here as of today. So I'm not saying this because I'm worried about loosing money on my bearish positions. In fact this news, if it actually happens, would make me more bearish than ever. I will certainly be exiting all my positions if this actually happens then I'm buying gold and burying it in my backyard.

The SEC chairman should not only be fired, he should go to jail.

Disclosure: Long GS, AIG, ICE, JASO, UNG, DBA

Well the crazy bastards did it:

SEC Bans Short Selling of Financial Stocks

What those idiots didn't know was that the market recovered ON ITS OWN today, and that without this crap we might have made a longer term bottom. Instead, the completely inept people at the SEC went into a panic and now we get to see what happens with their BIG experiment in Socialism. Will the system crumble tomorrow or will we collapse when the ban ends? I guess we will just have to see what happens. Capitalism is rapidly dying.