Friday, Dec 05, 2008
Those wanting to see the future need look no further than the latest legislation, rules and decisions put into force by the people with the power. For example, there’s the 2005 Supreme Court eminent domain decision that allowed for private property to be seized by developers solely for the purpose of increasing municipal revenues. This decision, made at the height of the development boom, paved the way for a massive land grab that is taking ownership of huge tracts of land from the many and placing it in the hands of the few. And today we are witnessing the results of the 2007 decision made by Securities and Exchange Commissioner Christopher Cox to overturn the uptick rule, a decision that opened the door for the largest looting of the American people in history, and the unprecedented transfer of assets from private hands into the control of the government.
What is a short sale?
If a trader thinks a particular stock is headed lower he can sell it even if he doesn’t own it. Then, when the price drops to a level that pleases him, he can buy the shares, effectively canceling out the trade in his account. For instance, he can sell a stock at $99.50 and buy it back at $9.50, if it falls to that level. He will then pocket $90.50 for every share he sold short. If he sold 1000 shares short, his profit would be $90,500 less small transaction costs. Obviously, if the market as a whole or owners of a selected company in particular get into panic selling mode, short sales can be incredibly profitable.
The rule for short selling is that the trader must borrow shares to sell from his brokerage. If this rule is followed, a short seller’s action will be confined to the amount of shares a brokerage has available to lend. However, the advent of online trading and the indifference of the SEC has allowed this rule to be disregarded, and traders can now engage in what is called naked shorting, shorting unlimited amounts of a stock without needing to actually borrow the shares. This has exponentially increased the amount of shares sold short.
Repeal of the uptick rule sets the stage for a market crash
The uptick rule was established after the great market crash of 1929 to restrict short selling by permitting short sales only following a trade where the traded price was higher than the previously traded price (uptick). Think of a stock that was trading at $100 per share with the last two trades at $99.75 and $99.50. Under the rule, anyone wanting to place a short sale of this stock would have to wait for an uptick – a trade that took the sock up from $99.50 to $99.75. The short sale could only be executed when this uptick had occurred. The uptick of a stock price is a signal that for almost all sellers, there are eager buyers.
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Put into place to stabilize the marketplace after the extreme market instability that occurred at the beginning of the Great Depression, the job of the uptick rule was to keep the market from plummeting downward as one short seller piled on top of another. Without it, the first short seller could execute his trade at $99.50, the next at $99.00, the next at $98.50 and so on down. When short sellers smell fresh blood such as that, they rush in to capitalize on it. Without the uptick rule, short sale following on top of short sale can be executed until the price of the stock goes into a nosedive. In markets that are trading down anyway, the absence of the uptick rule assures a death spiral for any stock where short sellers decide to pool.
The uptick rule prevented hedge funds and other professional traders from pushing the stock down by shorting, more shorting, and shorting again. Without the protection of the uptick rule, once a stock is selected by short sellers its fate is sealed. When market participants see an otherwise desirable stock plunging at the hands of short sellers, they become wary and afraid there is something serious wrong at the company. In self defense, they sell their stocks and take their money out of the market. As this type of selling spreads, panic becomes rampant throughout the entire market. This is the kind of panic selling we have seen in the U.S. and world markets since September of this year.
The withdrawal of the uptick rule followed on the heals of the defeat of the efforts by the Bush administration to put Social Security funds into the market, an initiative that would have assured even more money for those in the know to grab when the lights went out on Wall Street. On July 6, 2007, the day the uptick rule was repealed, the Dow Jones Industrial Average stood at 13,611, just three months away from its all-time high of 14,198. The timing of the repeal was absolutely perfect. Repeal of the uptick rule sent a clear signal to anyone paying attention that the party was now over and it was time to establish a short position to be sure of benefiting from the market’s coming drop.
Repeal of the uptick rule helps engineer the financial crisis
The decision of the SEC to repeal the uptick rule exposed the markets to the very same “bear raids” and “runs on banks” that prompted the original enactment of the rule following the huge market declines of the early 1930’s. The repeal has left the markets wide open to predatory trading abuses such as naked short selling, the equivalent of financial terrorism.
Since the goal of these terrorists was to create utter and complete financial instability, a financial institution was chosen as the example of how to completely destroy a company in short order. Bear Stearns was the first to go down, dropping from $61.58 to $2.84 in just five trading days (March 14 to March 20) on jaw dropping volume that equaled 4.2 times its total share float. We can only guess who placed the initial short sales that got the ball rolling. Then came Fannie Mae whose shares were selling for 49 dollars one year ago and now sell for 49 cents. Freddie Mac had a similar price decline.
Lehman Brothers, a venerable institution with derivative products held by most of the major financial institutions worldwide, took a similar dive, going from $16.20 to 15 cents in five trading days on volume three times its total float. Such volume increases reflect extensive naked shorting. In the face of these startling declines, the ability of these firms to fund their daily businesses disappeared, and they were doomed to fall under government control. When the government gathered these entities into its arms, the holders of the common stock received nothing.
The latest casualty is the powerful global franchise Citigroup, whose 52 week share price high was $35.29, followed by its low of $3.05. The government now owns a major portion of it too.
Evidence is plentiful that the uptick repeal torpedoed the markets
A study by Birinyi Associates in April provides ample evidence that the repeal of the uptick rule increased market volatility. On the day the uptick repeal was announced, the market Volatility Index had a huge and immediate spike from 13.25 to 23.55. The Birinyi study also showed that during the same period, the absolute dollar value of the daily change in each stock in the S&P 500 index increased from $1.02 to $1.77.
Market volume showed an immediate and dramatic shift from up ticks to down ticks, highlighting that those in the know got the message as soon as it was issued. Unbridled shorting began with gusto on the day the uptick rule was repealed.
Calls to reinstate the uptick rule have been soundly ignored
The data used by the SEC in their attempt to justify their abandonment of the uptick rule is clearly flawed. A study by the New England Comlex Systems Institute (NECSI) found that this data was unsound and left the markets vulnerable to spikes and drops. It was collected at a time of market stability when prices were steadily rising. Stocks no longer regulated by the uptick rule were never put through the rigors of a test during volatile market times.
NECSI researchers compared stocks before and after the repeal during volatile 12 month periods and found dramatic results: a doubling in the number of stocks losing over 40% of their value in a single day. They have called, unsuccessfully, for the SEC to reinstate the uptick rule.
Wachtell, Lipton, Rosen & Katz, a firm whose client list reads like a Who’s Who of Corporate America, sent a memo to clients saying that the conditions that led to the original adoption of the uptick rule are in existence today. They sharply criticized SEC Chairman Cox for not acting to reinstate the rule as millions of investors lose their life savings and retirement assets, and widespread manipulative short-selling and bear raids continue.
The SEC has historically played a leadership role during market crises to assure that the markets are fair and orderly. They have generally been creative and innovative in protecting the securities markets and financial intermediaries from manipulative conduct. This new failure of the SEC to act on behalf of the investors they are mandated to protect is viewed as incomprehensible by many onlookers. Others have begun to connect the dots and see the SEC’s indifference as a chilling cue that huge market declines are part of a preplanned effort to bring the world’s financial institutions to their knees along with the economies they represent so that these assets can be gathered under government control. The further collapse of these markets may also allow for a massive currency devaluation or the implementation of a new currency as called for in the plan for the New World Order under which the economies of the world would be homogenized.
Having ownership of assets in many private hands safeguards against abuse
One of the fundamental safeguards of freedom and liberty is the holding of assets by a broad base of people. This system respects the wide distribution of assets so that no large concentration is held by any one person or group. It is a system of checks and balances just as necessary to the preservation of the American way as the maintaining of the three branches of government. When assets become nationalized, power becomes centralized in the hands of the owner of the assets. When the balance of power is lost, the installation of a dictatorship is almost complete.
This article was posted: Friday, December 5, 2008 at 5:15 am