Eating the Seed corn: Short Selling

This is an opinion piece. I haven't seen anyone put together the numbers yet to fully quantify what I'm speculating on. Naked Capitalism estimates that $200 Billion has been transfered from shorts accounts to closing those shorts.

Normally the role of short selling keeps a 'hot stock' from overshooting. As the stock becomes over-bought to its fundamentals, short sellers step in. Once the stock dives back down to supportable levels, the short sellers "take profits" and buy up the stock. This helps keep a stock from becoming too over-sold. There is a natural group ready to party with their profits.

With short selling on financial stocks banned:
1. It created a short uptick as shorts were closed.
2. Those shorts are gone. There is no downside protection. The $200 Billion (estimated) buying pool is gone.

If we start a new downward bearish stock trend there will be no quick recovery bounce. Normally short sellers jump in when there is an uptick to close their shorts. Now they'll be on the sidelines (maybe with put options, but that doesn't have the same stabilizing effect).

Healthy companies have cash and can penalize undue short selling with a stock buyback. It takes a company short on cash to be a short target. Those companies probably had overpriced stock anyway... I consider short selling a stabilizing effect on the market.

The law of unintended consequences will now come into effect. October is a scary stock month. Will we make it though ok?

Most of my competition has too much of their portfolio in stocks. So...

Interesting times ahead.

Also, printing money is going to really drive import inflation. I still predict domestic deflation combined with import inflation. The US standard of living is about to take a hit.

I've been asked by a relative to look into the effect of today's economy on medical spending. So that will be my next blog (unless I get to my emotions article first).

Got Popcorn?
Neil

14,280 Where are you?

This is not a stock blog, but look at what stocks did this morning. The DJIA is at 10,895. We've dropped 3,395 points without being in an official recession.

A dollar will only by 0.626 Euros. Ok, we're fine at 104.29 Yen to the dollar, but that's quite an overnight drop.

Oh, I'm sure you heard that gasoline pushed retail sales up. I like how they published numbers excluding auto sales but not excluding gasoline...

Wholesale inflation is the fastest in 27 years:
http://biz.yahoo.com/ap/080715/economy.html

Yet housing was supposed to turn up in the 2nd half of 2008! I don't think so.

Got Popcorn?
Neil

Chinese Stock Market Plunge

The Chinese stock market is about to pass the 50% off milestone. Between this and risking global food prices, it could be an interesting year leading up to the Olympics. The WSJ earlier noted that as much as 50% of Chinese corporate profits were profits speculating in their own stock market.

Don't be foolish to ignore this trend just because it is 'over there.' China buys billions of US airliners, computers (or parts), software (despite huge piracy), and other US goods. In a repressive state, the economy either grows or there is civil unrest. Oh, I expect the Olympics to be a rallying point for Sino patriotism, but how long afterwards will the 'glow' last?

ORIGINAL WSJ ARTICLE



















Got Popcorn?
Neil

Bond turmoil worse than Internet bubble: Bear CFO

http://biz.yahoo.com/rb/070803/bearstearns_markets.html?.v=1


this quote by the Yahoo editor stuck out:
"Bond market turmoil sending investors fleeing from risk may be a worse predicament than the 1980s stock market fall and Internet bubble burst, Bear Stearns Chief Financial Officer Sam Molinaro said on Friday.

DJIA now down over 200.

I'm sure this will be all the talk of the HBB soon.

Got popcorn?
Neil

edit: These stock market oscillations fit in with my recession model even though they really worry me. As long as the market stays above (DJIA ~12,500) this summer. Note: I'm fudging. Its ok to have a crash in mid-September+ per my estimates. We don't have to be strict about the Autumn equinox on September 23rd. But if a world wide stock market crash happens in the next 5 to 6 weeks... I'll be really worried. That is *not* in line with my predictions. If the crash happens in October... all according to plan. ;) Market now down (DJIA -250 at 13,185) pretty quickly...

Mark to Market: A ticking bomb for the hedge funds

It just feels like we are 4 to 12 weeks away from a "big financial event." This is the result of the increasing "risk premium" being seen in all financial markets. Quite frankly, the current system is set up for a negligible risk premium. That risk premium (or risk aversion) will only grow over the next few weeks.

Head over to calculated risk as they talk about the 3rd Bear Stearns hedge fund to halt disbursements. We all know what was left from the first two... This is going to

A link for the only good "Hedge fund implode-o-meter" I know of:
http://wasatchecon.blogspot.com/2007/06/hedge-fund-failometer.html

I just cannot imagine "the rich" doing without their jets, clothes, vacations, etc. So when liquidity becomes precious, they'll rush towards it. I still remember a friend's glee as he tracked the sultan of Brunei's cash flow issues post Gulf war I. ;) Can we say "high end fire sale?"

I am predicting that the meltdown in subprime will really start to hurt real estate closings in September. This is probably not enough... but the slow down in the LBO market might be...

Either way, I'm thinking J6P gets his wake up call in September or October. No later.

I've also decided to completely shut up about finance at work or with friends. I'm tired of being Mr. Doom. Its too late to save them; at this point I'll only give them something to hate me for. I know people who left our work to seek employment with yacht builders; maybe not the best time in the economic cycle for such a decision?

If you haven't read "The Hungry Years," consider it. Its very depressing. But it does a good job of describing how jobs were shed in the great depression. Ouch.

Thankfully the one coworker who did listen just entered escrow on selling his home! He's dutifully cut his asking price 5% every couple of weeks (he couldn't quite make himself do it every week). He actually ended up with a *tiny* bidding war. (Two buyers, one just out did the other. 1st buyer refused to increase the bid.

Its too late to stop this. I don't think the crash will occur in August...

But the Nikkei, Hang Seng, and Jakarta composite aren't exactly doing hot tonight.
http://finance.yahoo.com/intlindices?e=asia

Got popcorn?
Neil

No Housing Turnaround for Two Years?

I love it when the MSM finally catches up. The *really* fun part is when the fundamentals point to rising home prices... but the MSM helps the sheeple push them down more. :) But that's years away:

http://biz.yahoo.com/bizwk/070727/jul2007db20070725384162.html?.v=2


First, it was the second half of 2007. Then it was 2008. Now analysts are saying the national housing market may not rebound until 2009

On July 25, the National Association of Realtors reported that sales of existing homes fell 3.8% in June to a seasonally adjusted annual rate of 5.75 million units, contributing to the bleak-and-getting-bleaker outlook.

Now, the rest of the article gives too much space to NAR spin... so the MSM isn't yet ready to accept the full story. Oh well. Wall street is interesting again today.

DJIA now is at: 13,354
Nasdaq: 2578
S&P: 1468

I'm quite surprised at a summer bear market. If this continues for much longer, it will gain a momentum of its own. It just might.

Now with the LBO market (KKR?) or mortgages get the credit for the drop?

But wait, Real estate only goes up!
(But man do coworkers want to get out to non-bubble markets.)

Got popcorn?
Neil

Bonds continue to dive

Look at A rated ABX index. At 81.5 cents on the dollar.

I've always heard 82.5 cents on the dollar is the bottom of the normal trading range...

Sound the dive alarm

Got popcorn?
Neil

Update:
The bond market is tanking and this Friday is Friday the 13th.
I'm thinking the stock market is in for a world of pain.

What would a crash of Friday the 13th be called?

Co-workers stock predictions

First, this blog is for entertainment only! Do not make investment decisions based on some loon posting on the net.



I have a co-worker who has been pretty good predicting short term bounces in the market. His predictions?

3/14/07 Climb back up to ~12,400 on the Dow.

End of week... Due to noise, not as tight of a prediction, but most likely 11,700. However, due to market noise, he is giving a window of 10,900 to 11,900. In other words, down for the week from today's close, but a range of possibilities.

This is only fun and games. What's your prediction?

Fair use of Yahoo stock quote.

Got popcorn?
Neil

Edit 9:23 PST The Nikkei is down 2.98%... so I'm beginning to think this was optimistic.

Neil

Stock market set for St. Valentine's day Massacre?

Thought for the day:
1. MBS backed bonds continue to fall at a rate only the most bearish bloggers could contemplate.
2. This is putting various hedge funds at risk (when compounded by the deflation in commodities).
3. One decent sized bank failing would "wake up" the system.
4. Several builders have to be feeling the cash flow pinch; an inopportune failure could push the market down.

So... the question, could we have a stock market drop on February 14Th 2007? If so, I already know the name for the day. I'm thinking that the market is getting nervous enough that one bit of bad news late Tuesday could push Wednesday's stock market down.

This could be interesting... maybe not 2/14/2007, but soon. I haven't "felt" a financial environment like this since the dot com bust.

Due to the time its been since we've last had a 2% market correction in a day... I'm not sure the next one will be a single digit correction. In fact, I'm betting before we see a 2% to 4% correction day we'll see an 8%+ correction in stocks.

Got popcorn?
Neil