Sunday, March 1, 2009

Uptick Rule.

Talking to a few of my trading buddies who were railing against the Uptick Rule. The general assessment among us was that that the elimination of the Uptick Rule has had a huge negative impact on the market. Well before we go any further. what exactly is the Uptick Rule?

The Uptick Rule basically is a former rule that was established by the SEC (Incompetent Nitwits) that required that every single short sale transaction be executed at a price that was higher than the price of the previous trade or transaction. This rule was originally introduced in the Securities Exchange Act of 1934 as "Rule 10a-1. This rule which was a great rule prevented short sellers (Like me and my friends) from participating and taking advantage in a stock or securities downward price momentum. Basically when a stock is accelerating downward, you cant get short until the stock "Upticks" or trades a price that is higher then the previous price.

Christopher Cox (Incompetent Numbskull and Harvard MBA/JD) who was head of the SEC, eliminated this rule on July 6, 2007.

This rule was put in place so that investors and institutions wouldn't create a "Bear Raid" on a particular stock, like Lehman, Wamu, and Bear Stearns.

Since the elimination of the uptick rule, what has ensued is market volatility that has been unprecedented. This last statement is quite controversial....Before I go further...a small sidebar.

OK...I tell it like it is. I have traded stocks and bonds for over 20 years. I have traded at the most prestigious (Well....they were when I worked there) Wall Street Institutions. I have traded everything from Stocks & Bonds to Options & Derivatives. I have lost and made money many times over, so I am not perfect. I know how Wall Street works and operates, what I am telling you is the truth about legitimate short sellers, we are the only ones on Wall Street that don't have an agenda or some secret plan to destroy companies. We are the only ones who are willing to stake our reputations on what we believe in. We are the only ones in the investment community who actually read 10K's and filings. We are the only ones who really ask the difficult questions. When a curve ball is thrown on a conference call, 99% of the time, its a legitimate short seller. When congratulations are handed out, its usually an analyst who has some sort of investment banking relationship with the company. We actually take the time to read the earnings report, look for red flags in the footnote sections. We don't lie, we don't make up facts, we don't conjure things up, we don't tell people to short stocks, then send emails to our friends saying buy. All of this is done every single day by the "Buy Side Community". The high powered Wall Street Analyst is the single most detrimental thing to happen to the individual investor in this generation. After all that had happened since the tech bubble, these guys never found religion. Analysts from Morgan Stanley to Goldman Sachs all had strong buy ratings on everything and anything to do with mortgage finance, investment banking, and banking in general. Not once did they stop drinking the investment banking cool aid, the huge fees that were created from the securitization of sub prime debt was always front and center. There will never be an objective opinion given when fees and banking business gets in the way. When trading desks need to clear inventory, a positive rosy analyst report will be rendered by that analyst. I have seen it a millon times, due diligence is thrown in the garbage when billions are involved.

I still see it today, buy ratings on Citigroup and BOFA as late as Friday morning. These analysts are posturing for investment banking business once the dust settles. If you actually took the time to look into BOFA'a financials, you don't need a MBA (I have one) or a CFA (Don't have one-Don't need one) to realize this bank is insolvent, pure and simple. How in the world an analyst with an MBA or even a CFA can look into BOFA's or Citigroups financials and somehow come away with a buy rating is beyond me. Its downright criminal, and they should have their CFA Charter revoked.

If the buy side community actually did their job, and was more diligent in their responsibilities, us short sellers would be doing something else, so thanks for not doing the right thing. If the regulators and more importantly Congress would have listened to the other side of this rosy story sooner and taken the appropriate precaution's, this catastrophe would have have been greatly avoided.

So you can take it from me when a short seller tells you that a rule that would make short selling easier and more profitable is detrimental...take it to the bank. This is what we do for a living. Bet on the downfall of a stock, this rule was implemented indirectly to help the short community. It failed because the SEC is impotent when it comes to enforcement of illegal short selling. They have no clue how to enforce the Stock Loan Rule. The fail to deliver rule has never been properly enforced. So in the absence of supervision and regulation, some unscrupulous short sellers (Yes...they do exist) have created a "Bear Raid" on many companies. The SEC allowed Wall Street to create Short ETFS with 2X and 3X leverage that can be shorted on a down tick that has created unbelievable volatility and chaos. Have you seen the volume figures for these funds (SKF, DXD, QID, SDS, DUG,)? The market is being dominated by quantitative hedge funds and institutions that primarily trade all day long in these type of Short ETFS. The wild swings we have seen in the market has to do with the elimination of the uptick rule and the advent of the Short ETF.

The SEC has continued to come up with silly things such as the temporary ban on short selling that only creates artificial buying of sick companies, what needs to be done is not only re institute the Uptick Rule, but to include all ETFS within this rule.

My short seller friends (I don't have many "long friends") all tell me that a huge rally is in store for the markets if and when the Uptick Rule gets re instated. agenda and nothing to be gained.

I personally believe this is happening sooner then later.

BTW...Asian markets are getting hammered and US Stock Index Futures are down 1.7% currently, so it could be a real ugly open tomorrow morning.

Random Thoughts-

GE cut their Dividend...what were they waiting for? The market to turn around? Look for a partial bailout of GE Capital very soon.

Warren Buffett stating the obvious about the U.S. Economy. Can we please stop calling him the Oracle? He has been clearly wrong on his bets in Wells Fargo and Chevron.

BOFA starting to come clean on their toxic securities. A little too late.

AIG to get an additional $30 Billion from the Govt...Its never going to end.

HSBC looking to raise $17 Billion......Need a bigger boat.

Bloomberg has a new night time anchor Patricia Hidalgo..Gorgous Girl...Check her out..well worth it.

Good Night.

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