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Shorting These Stocks Is Now Verboten

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May 14, 2009 – Comments (19) | RELATED TICKERS: WFC , RF , C

Zerohedge has the post:

Thursday, May 14, 2009

Shorting These Stocks Is Now Verboten

Posted by Tyler Durden at 4:40 PM

For all who wonder which shares are poised for the next invisible hand lift off, I present an email distributed earlier today by CMC, which is a major spread betting provider in the UK, to its clients. If certain individuals at Morgan Stanley's ETF and quant trading operations want to opine as to the inaneness of the current hard to borrow nature of these stocks, now is the time to speak up (oh wait, curiously Morgan Stanley itself is in the Do Not Short list... hmmm... kinda odd that, is it not?).

C - Citibank

RF - Regions Financial

STI - Suntrust Bank

KEY - Keycorp

BAC - Bank Of America

FITB - FIfth Third Bank

MS - Morgan Stanley

PNC - PNC Financial Services

WFC - Wells Fargo

GM - General Motors

F - Ford

Which brings up the question: who exactly is it that sets the availability of borrowable shares or the cost of borrow? Is it the custodians, the State Streets and The BONYs, who as we know are highly conflicted and have every interest in pushing stock prices higher, or is the prime broker repo desks: the Goldmans and the Morgans (both JP and Stanley) of the world? Inquiring minds want to know just who is making shorting impossible these days.
Short selling update

Due to significant increases in the cost of borrowing stock in the underlying market, along with a lack of available shares to borrow, we have been forced to restrict short selling on the following US Shares:

Clients are not allowed to open any new short positions or increase any short positions in these instruments. If you currently hold an open short position, you are not forced to close this and if you need to sell in order to close a long position your order will be accepted.h

MY COMMENT: You can apply red thumbs to all these, IMO, they have been rigged to rise by more illegal interventions in the market.

Iwas FORCED to return my WFC shares and pay the current high price after WFC rallied from $8 to 24.

I posted on it here:

Rally of the Insolvent, Bến Tre on the Stock Market

May 07, 2009

I WAS short WFC, which is a no brainer, since WFC is insolvent.

I have been short WFC for some time, I covered part of my short when it reached $7 ish, but I expected WFC to hit $0.01 or less, so I let it run past $20. Not a big deal, plenty of cash to cover and not a big short position in WFC.

Funny thing was half of my short position was covered AUTOMATICALLY by my broker. They said the shares were recalled, and I WAS FORCED TO COVER AT $20++++! ROFL! But I still had half of the short position left in WFC. I let it ride past a 20% one day move. Then  week day, I was CALLED and EMAILED that my borrowed shares were being RECALLED and I had to cover at $24+++. Lol. 

I was forced to cover shares after a 100% run up. LOL. Joke is on me, Fooldom.  Although I had 2X the net amount in cash, I had to return shares at the current price? ie I had $30k in cash, $10k in short WFC. 

My advice to longs and shorts is to realize the market has become detached from fundamentals and the rule of law and SEC, do not appear to want to intervene, in any serious manner. We are witnessing the Rally of the Insolvent.

 

19 Comments – Post Your Own

#1) On May 14, 2009 at 8:49 PM, angusthermopylae (39.10) wrote:

To me, shorting has always been a high-roller way to play--my stake is so small, I can't afford a good-news surprise to buoy a price to the point where I get wiped out.

With that said, CAPS has been a chance for me to do two things:  1) Try out shorting/red-thumbing a stock...

...and 2) realize that I was right:  I'm nowhere good enough to place actual money in shorts.

Add to that the nonsense that you experienced, and I think that, for me, the game is too rich and too rigged for my weak, pitiful testosterone level.

But I'll keep trying.  Hey, if my red-thumbs become my big earners, I might actually try it in real life.

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#2) On May 14, 2009 at 9:02 PM, motleyanimal (82.18) wrote:

Government pension funds used to be a primary source for borrowed shares, in fact they fueled the financial sector meltdown by providing so many shares to brokers in 2008 for short sellers. They have recalled or stopped lending shares, especially banks and financials, once they figured out how much it had cost them.

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#3) On May 14, 2009 at 9:38 PM, LattePup (96.21) wrote:

I made a couple thousand in my first and last effort in short selling. (Movie Gallery, if anyone cares)  I didn't enjoy watching it knowing I had limited upside and infinite downside, and after reading some of this nonsense I'm even more convinced it isn't for me (even when I had an underperform tag i think my 5 worst alltime picks were redthumbs (though most of those would now be positive if I hadn't chickened out, e.g. CROX))  I'll still use redthumbs more to track my own sells or to mark stocks to avoid buying or just for the exercise of doing so, but I doubt I'll ever go short again in real life. 

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#4) On May 14, 2009 at 9:48 PM, ikkyu2 (99.16) wrote:

This is why I don't short much.  Game's rigged.

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#5) On May 14, 2009 at 9:59 PM, MGDG (35.08) wrote:

That was in the disclosure I read when I opened my margin account. That the shares could be called back at any time. I think the big runup in those stocks caused the holders of those shares to want to sell. I'm sure they knew the shares weren't worth anywhere near what they were selling for on the open market. They needed those shares back to complete their trade. I would be of the opinon that the brokers were calling the shares first from the retail traders before the Institutional traders.

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#6) On May 14, 2009 at 10:58 PM, abitare (49.79) wrote:













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#7) On May 15, 2009 at 12:01 AM, angusthermopylae (39.10) wrote:

abitare,

Wow...a bear that lays it out very clearly ("borrowing from future earnings")...the Scottish accent doesn't hurt, either.  It started out with CNBC trying to take him to task, and he wasn't cowed (sp?) a bit.  I like that.

MGDG,

How likely is your explanation?  I'm not criticising; in fact, it sounds completely plausible and believable, if my understanding of the way shorting works is correct...

But, what would be the logical conclusion for this?  Big Investor A loans out Xteen gazillion shares for shorting (ostensibly, because he's going to hold onto those share forever).  Medium Investor B borrows those shares for shorts.  If Big Investor A recalls those shares because he wants to sell, then yes, they would get recalled and covered.

But what's the effect on the overall market (and that stock in particular)?  There are a bunch of "buys", and the price jumps...a la today's headline,  "Bank, technology stocks lure in bargain hunters"  Now, Big Investor A has an even bigger bankroll, at least on paper.

So, what does he do?  If it's true that he's lost faith in the underlying stock, then he sells...at a bigger profit (or, admittedly, a smaller loss).

On the other hand, if he is truly a student of Dr. Evil, he either holds the stock, or shorts the very same stock, knowing that the recent "rally" (1-2 weeks) was at least in part caused by the covering of shorts...and it's going to fall because the "rally" is artificial.

So, if you are correct, then there's a 1-in-4 chance the underlying holder is playing it honest, and a different 1-in-4 chance that he will hold that stock.

But what it does tell me is that this would be a good way to execute a "pump-and-dump" and leave the former shorts holding the bag.

I guess a good indicator would be if those stocks have an unexplained cliff-like fall in the next week or so.  "Unexplained" in that nothing has changed, but everyone is selling like crazy because the big boys are...

...of course, in my humble opinion, everyone is buying like crazy, even though nothing has changed...but what can you do?

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#8) On May 15, 2009 at 12:14 AM, russiangambit (29.39) wrote:

Tomorrow is option expirations. Lately these have bullish . But tomorrow  (or Monday) I expect it too be bearish due to the recent run up.  Puts and protection will expire, calls will be excercised. There will be every reason to sell after that.

 Actually, if I were that big investor discussed above, I would've sold today. So, I am not sure why the banks were up today.

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#9) On May 15, 2009 at 12:24 AM, russiangambit (29.39) wrote:

I just discovered the Hugh Hender guy, after portfeuille recommended him. He seems to be a bit high strang, like Mark Faber. He needs to center himself, as  they say in yoga -)).

So, he is sticking with cash and Treasuries and expecting deflation? I would agree on the longer term view. But treasuries pay only 1-2%, and they are about to fall off the cliff.

Still, I would love to see him on the US CNBC. Put him  against Larry Kudlow. Everybody in the US too polite to give Larry the dressing down he deserves for being always wrong. Everybody I see on CNBC  lately (I don't watch it much, though. Just a few minutes here and there)  has a circular logic syndrom: market goes up because economy is getting better, economy is getting better because the market goes up.

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#10) On May 15, 2009 at 12:29 AM, JGus (28.82) wrote:

Another great post, Abitare!

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#11) On May 15, 2009 at 12:32 AM, starbucks4ever (97.89) wrote:

Honestly, I just don't understand why anybody would want to short WFC. The lessons of 1996-2000 have been so quickly forgotten. How many people have lost their shirt betting against Pets.com, and that was a company that makes WFC look like a paragon of reliability.

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#12) On May 15, 2009 at 1:08 AM, awallejr (81.58) wrote:

I wonder if this has anything to do with the banks converting preferreds to common.  The arbitrage play is there, buy the preferreds, short the common.  Not as lucrative as it was a few weeks ago however.

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#13) On May 15, 2009 at 1:09 AM, MGDG (35.08) wrote:

angus, my explantion is probably less likely than the Dr. Evil senario. I was thinking there could have been quite a few Institutions that had lent shares not expecting the degree of carnage that was to follow and looked at this being a good opportunity to drive the share price higher for a more profitable exit. The Dr. Evil plan would make it easier for them to manipulate the share price, while fleecing us retail investors in the process.

I had been watching a Bearish Rising Wedge develop in the SPY chart and I see with the price action Monday & Tuesday it has broken below the wedge. This is not a good signal to be long in this market and might be a good opportunity to begin loading up on shorts if we close below 875. I see today the SPY bounced up near support of 875, which would be expected. I believe that support will taken out shortly. Next stop 800? 

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#14) On May 15, 2009 at 1:26 AM, awallejr (81.58) wrote:

This is what I don't understand.  MGDG, why?  Because you see a POSSIBLE chart pattern?  I used to do that when playing Baccarat. Chart the streaks.  In the end it meant nothing.  S&P will rise and fall because the companies themselves will rise or fall.  Watch Abitare's blog on Marc Faber. A fantastic blog that few apparently caught. Here is the link:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=195060&t=01007146184382914537

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#15) On May 15, 2009 at 2:13 AM, MGDG (35.08) wrote:

awallejr, for me I use the charts to measure investor sentiment, which can drive the market in the short term. It's not an absolute predictor of market direction, but allows me to pick entry and exit points with a higer degree of success than I had before using it. The only thing I see moving the markets long term is earnings growth.

I really want to watch the video Abitare linked in his post, unfortunately the computer I'm on has no audio, so I'll have to wait until I get home. I'll check out the other one you linked also and comment on it. This is the first blog of Abitare's that I've read.

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#16) On May 15, 2009 at 2:21 AM, portefeuille (99.59) wrote:

#6,7 I have posted some more Hugh Hendry footage here (comment #40).

Actually the first 2 words I have posted in my blog were "Hugh Hendry".

And from comment #20 here: "Hugh Hendry is best as to guests."

I guess I am kind of a fan ...

I reposted the Hugh Hendry videos from CNBC Europe (in comment #8 here) just a few hours before you posted yours in comment #6 above.

We are building hype!

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#17) On May 15, 2009 at 4:40 AM, goldminingXpert (29.57) wrote:

All of these stocks on this list should drop 75% or more before finding true value.

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#18) On May 15, 2009 at 6:02 AM, FastTradinOutlaw (< 20) wrote:

all general motors cars are ugly as hell.  The vette had some big engine low weight cars but most of them are ugly as hell and cadillacs belong in the junkyard.  Ford is better.

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#19) On May 15, 2009 at 6:54 PM, bridgeboy0 (31.32) wrote:

Are you SURE that WFC is insolvent?  At least one investor appears to not agree with you:

 

OMAHA, Neb. (AP) -- Warren Buffett's company found more bargains among beaten down marquee stocks during the first quarter as it added to its sizable investments in Wells Fargo & Co., US Bancorp and Johnson & Johnson.

Berkshire Hathaway Inc. revealed those investments and several other changes to its roughly $41 billion U.S. stock portfolio in documents filed with the Securities and Exchange Commission on Friday. The filing offers a snapshot of Berkshire's holdings as of March 31.

Berkshire's bank stock purchases are in line with comments Buffett made as his company held its annual shareholder meeting earlier this month. Buffett called US Bancorp and Wells Fargo extremely strong banks, and he said he'd be willing to invest in them at current prices.

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