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The U.S. Securities and Exchange Commission issued an emergency order on Tuesday placing restrictions on the short selling of shares of certain major financial firms.Inquiring minds will want to consider this snip from the Bloomberg article Lawmakers Balk at Paulson's Fannie, Freddie Plan.
The SEC's order will require that anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement.
The order takes effect Monday, July 21, and will terminate at the end of July 29. The SEC said the order may be extended, but for no more than 30 calendar days in total duration.
The agency identified the following securities affected by its order:
BNP Paribas Securities Corp
Bank of America Corp
Credit Suisse Group
Daiwa Securities Group Inc
Deutsche Bank Group AG
Goldman Sachs Group Inc
Royal Bank ADS
HSBC Holdings Plc ADS
JPMorgan Chase & Co
Lehman Brothers Holdings Inc
Merrill Lynch & Co Inc
Mizuho Financial Group Inc
Bernanke told lawmakers it's "important" for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market. Paulson said the two companies are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages.So now the SEC is issuing short sale restrictions on financials because Bernanke says it's important for them to rise.
I have news for Bernanke and the SEC. This won't work. China had short sale restrictions on and it did not stop the Shanghai index from falling over 50%. Insolvency cannot be cured by short sale restrictions and many of those companies are insolvent.
All these short sale restrictions are going to do is create a vacuum. Once the shorts are driven out these shares will plunge. And who wants to buy a bond or provide capital knowing or even thinking share prices were artificially inflated.
Phil Erlanger on Minyanville has an interesting piece today called Short Interest's Overblown, Overblamed.
The best defense against misinformation is the truth. To paraphrase Jack Nicholson, the market can’t handle not having the truth. Lack of information leads to lack of confidence. ....This is truly a panic measure and 100% guaranteed to fail.
The above charts show that short selling intensity is below average in the banking sector and in Fannie Mae’s industry group.
Generally, short interest tends to lend support to price action, though there are times when short sellers can be correct. The existence of short sellers is support for stock prices, because short positions must eventually be covered.
Perhaps Chairman Cox should focus on freedom of fundamental information, so that short sellers and stock buyers can make more informed decisions, and so all can sort fact from any fiction put out there by rumor mongers.
Mike "Mish" Shedlock
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