Sunday, September 21, 2008


OK, now I'm not an expert in some of these things, but I've been asked for help on these things, so I will do my best to clarify. Feel free to shoot me an email if I've mispoken;

THE UPTICK RULE vs. current (well, formerly current) short rules;

The uptick rule means that in order to short a stock the stock has to tick UP. Therefore if the market or a stock was in a freefall it would be hard to short it and pile on. For example, if GS was falling hard in order for anyone else to jump in it would have to tick up. You have to have a buyer to be a seller.

The current rules are that you can short any stock at the bid, even if no one is actively trying to accumulate shares. The arguement being floated now as to why short sellers are particially being blamed for LEH and BSC, et al is that let's say you have a large hedge fund with $15 MIL in buying power (or selling power). In theory they can "lean" on the stock and push it further and further down based on current rules. As the stock falls the credit rating agencies get nervous and downgrade their credit and that drives the stock even harder down. So, it's a so-called "pile on."

With the uptick rule you wouldn't necessarily be able to do that, you couldn't pile on as their would need to be buyers for your selling. So, stocks are less likely to free fall.

having said that, I still say LEH and BSC and the others went under cause they should have gone under. Hedge funds and short sellers didn't make them leverage 30 to 1 and put themselves out of business, sorry. They just made them go down faster. They certainly aren't evil. It would be impossibly to put GOOG or AAPL out of business, they would take themselves private or buy back the stock themselves. LEH, BSC, FRE and FNM were going under no matter what. So were GS and MS until this BS intervention under the guise of protecting us. Hogwash!


There are several ultra short ETFs you can play, like SKF for the financials. Google Ultra Short ETFs for a list and you can buy them and that basically acts the same way as shorting the index. You can also buy puts on individual stocks (or sell calls) or indexes.


Besides the obvious, which is that this is supposed to be a FREE market system and not a communist one, not allowing shorting creates false short, intermediate and long term pricing. If you look at MANY financial stocks on Friday, they hit 52 week highs. How is that possible or logical? It's not, its ridiculous, but thats what these types of rules do. Shorts had to and have to cover their positions and normally they may decide to press and average up to protect themselves. Since they can't do that they are forced to cover their shorts, which artificially drives up the stock, similar to the pile on when short, but instead of a pile on its a pile UP!

Also, many hedge funds are Net Neutral funds. That means they have edicts whereby they must be neautral to the market. If they can't short stocks against their longs then they can't be neutral and they may have to cover their shorts and liquidate positions both ways. Again, this creates false pricing on the stocks.

False pricing for a trader doesn't matter, it actually helps us becuase we have an edge we shouldn't have. For example, BAC is nearly $40 after Friday, I can't wait to buy some puts for like January here. I'll take my chances its lower by then since I don't think this bump can possibly last. But, for the market itself its creating a lot of bad longer term issues and any investors jumping in thinking that we have to go up are going to probably be severely disappointed. They are paying unfair bloated prices. Many fund managers don't know what they are doing and jump in at times like these, not respecting historical patterns, or even recent ones whereby the Fed has artificially propped up the markets only to let the air out later. We've seen that happen several times this year. While there is always the chance that this time will be different, I think its highly unlikely and certainly I'm not buying these things here for more than a trade intraday no matter what.

Hope this helps, please VOTE FOR WAXIE, 2008!



Erik28 said...

Great breakdown & post Commrade Waxie.

Have you seen REW (proshares ultra short Tech)???

It holdings looks like the 1st cousin to the waxie top 10 short list lil while back.

I know, I know it's like picking between 2 all-stars, but I am curious if you think REW might have more horsepower than TWM here to the upside?

(I ask your sentiment because REW has never traded at much higher prices, so it doesn't have much to any overhead pressure)

Erik28 said...

You already answered my question!!!

Jim Murphy said...

Appreciate Waxie and Tiny keeping us on the right long term market direction. You have helped enourmously during last week when the government was busy changing the rules of the game while the market was actually trading. Best luck running for the offices of president and vice president. You get my vote!
Can they continue to blame the short sellers when the market goes down almost 400 today?
Wonder who they will blame after it goes down 1000 points before they let the shorts come back?
Guess we better not complain about the government imposing taxes and additional cost on us bears to eliminate our positions every time they decide to modify market rules until we're able to get enough information to proceed.
Now I understand why Waxie and Tiny only trust them for short time frames and use protective stops!
If we trust politicians and news reporters, our accounts would get pulverized.
Now I understand better, why trendfund has rules that must be followed in order for us to succeed. So pay attention to position size, percentage of each position as it relates to portfolio size and set and adjust stops for protection as well as chose wisely the vehicles that will generate winners for our portfolios and your trendfund investment should help you reach your goals.