I am a pretty liberal person, I am the type to not like rich people but I also hate govt deficits and am in favor of letting people do anything they want as long as it doesn't hurt others.
That being said the actions that the Federal Reserve, Treasury, the SEC and Congress announced this week amounts to socialism...or maybe going as far as creating Communist State.
Short Selling Restrictions
Chris Cox was asleep at the wheel for so long and seemed to have woken up this week and started panicking. We had a relatively stable stock market, even during the dot com bubble days. Surely the Nasdaq was melting down from all the Pets.com and Etoys.com of the world but there was no meltdown in the fundamentally strong stocks. Then in a series of moves, he implemented Reg SHO which allowed for de facto unlimited naked shorting and eliminated the uptick rule. He also worked with the exchanges to get rid of trading curbs. July of 07 was when the uptick rule was eliminated and that was also the starting point of the massive volatility in our markets.
Stocks no longer traded on fundamentals starting that point, it traded strictly on momentum. Understand that large naked shorting also causes massive short covering rallies in the end. Stocks like Overstock.com, Emcore, Dryships and FirstFed Financial were driven up and down like the Freefall ride at Six Flags.
Then in January of 08, March of 08 and July of 08 the naked shorts tried to break the market down but wasn't able to and we bounced back. What they did the past 2 weeks amounted to stock market terrorism and Chris Cox took out his shotgun and killed them all, even the innocent ones.
Stopping naked short selling on all stocks was great...but that was something the SEC was supposed to do all along. But stopping short selling completely on a list of financial stocks is akin to calling a baserunner on 2nd base out after reaching safely because they took away 2nd base completely afterwards. This is a gross injustice and has forced legitimate short sellers to be forced to cover. Look at stocks like MI, ZION, STI, BAC, PNC, CMA and SPG. They were all strong stocks since July and didn't even fall during the meltdown earlier this week. But when the short selling rule was put in, they blasted off to levels unseen ever or at least in 52 weeks. They are trading at 20x forward p/e and even higher and nobody knows how much bad loans they have. They were already up 50-100% from lows in July and in just 24 hours went up another 30-100%. If you believe in bubbles, we have them in regional banks and reit stocks. But what can you do, it is illegal to short them now. This is not anything resembling to a free and open market. You can't change rules at the end of the 3rd quarter during the game. This is going to create a bubble in many financial stocks, as many of them will start approaching tripled digit p/es...or in the case of homebuilders...an infinite number.
Bailout to End all Bailouts
The USSA which I call now took unprecedented steps towards socialism, creation of the North American Union and the Amero currency and having the Federal Reserve Bank becoming the primary bank in the USA. In March the Fed gave 30 billion dollars to JP Morgan to buy Bear Stearns. But that dwarfs what was done this month. The US Govt bought both Fannie Mae and Freddie Mac for what could cost taxpayers 500 billion to 2 trillion dollars. Then we took an 80% stake in AIG for 85 billion dollars. Now the bailout to end all bailouts is being discussed at 500 billion dollars to start and potentially increasing to over a trillion dollars.
In the end, the US Govt will own or guarantee 80% or more of all mortgages in this country, control equity stakes in nearly all the banks and insurance companies and devalue the dollar in unprecedented fashion.
We could very well end up with hyperinflation as taxpayers backstop trillions of dollars of poor debt and continue the death spiral deficit spending.
We could have avoided this worst case scenario with a few preventive measures. Stopping naked short selling. Having the uptick rule and trading curbs. Regulating credit swaps and derivative markets. Tightening margin requirements for stocks and commodities. SEC actually reviewing capital requirements of investment banks and forcing them to disclose their off-balance sheet transactions and level 3 assets.
Of course none of this would have started if we never allowed subprime mortgages and leveraged CDOs but that set aside, a proactive federal government could have stopped this if they acted when Jim Cramer yelled out "They Know Nothing!".
I am scared, disturbed and annoyed by the continued klepto socialists that are running this country. Maybe they are brilliant men with a plan instead. We're getting closer to a North American Union with a common currency and having one giant nationalized bank....that bank looks like Bank of America after its takeover of Countrywide and Merrill Lynch.
My advice to everyone. If you own bank stocks...take some profits...you just had a ridiculous, phony rally that was strictly govt imposed short covering. Don't buy puts as the bid/ask spreads will continue to be ridiculous as market makers aren't allowed to short the stocks they write puts for. Start buying the beaten down multinational stocks like GE, Nokia, Intel and ExxonMobil. Start taking positions in heavily naked shorted sectors like solar, china, brazil, oil/gas drillers and commodity producers. ENER, CSIQ, RIO, PBR, CHK, FCX, GG and BHP are some good ones.
But if you are running out and buying bank stocks right now after a 100% rally, this is not the right time. If you are stuck with a short position and are under mandatory imprisonment of your position, wait for a better time to cover.
In hindsight, when there is blood on the street and VIX spikes above 35, it's always a good time to buy. There were lots of 50% swing trade gainers out there along with many expiring options generating 2000-20000% returns in one day. Options on WB, CME, MER and others were the lottery ticket to riches.
Have a nice weekend everyone.
