After the week we just witnessed, it has become clear that there is a valiant attempt to drive these markets lower this week. Perhaps it is SHO related to get prices as low as possible so the hedge funds that are rampantly naked shorting can get covered at ridiculously low prices compared to their recent levels.
Of course, the shorts are arguing that some of these stocks have had incredible runs...and they MUST be shorted and they MUST come down. Well my friends, that is total garbage. They didn't go straight up. Many have had great runs, with perfect confirmations along the way. There is no need for these stocks to come straight down.
It really is ridiculous that shorting even exists. All the impropriety that exists in these markets, and I mean ALL of it revolves around shorting, and the misuse of it. People have said that it takes a buy for every sell. Well, that is garbage also. It takes a buy to overcome fake shares that don't exist plus the actual shares of someone who is really selling. So, it basically takes twice as many shares for a stock to go up as it does for it to go down.
Now, I spoke with Ameritrade at length today. I wanted to clarify the general rules as far as shorting shares. I didn't discuss the actual shorting of stocks. I wanted to know the EXACT specifics regarding the rampant "naked shorting" of the stocks we own. Here is what they told me:
When you purchase a stock, and your account has a debit balance, all stocks in your account go into a pool of available shares that can be shorted. In other words, any shares that are bought on margin, can also be borrowed against to short a stock.
Therefore, as Ameritrade maintains, irregardless of the number of shares you own over your margin balance, your entire share amount can be shorted against. Ameritrade doesn't create or maintain a market, they only balance the market of those customers they do business with. It makes no difference how many shares are "authorized" by the company for shorting. So, many times when you see the float of a stock trading, it isn't even close because alot of those shares are short shares that don't even exist.
So, this means that all this stuff you may have been reading about setting your limit sells at ridiculous levels or requesting delivery of your share certificates isn't as important as what I'm about to tell you. What makes a naked short...and other shorts start to cover is when obviously the price goes higher, or when they get called to cover their shares immediately.
When a large amount of people reduce the balance in their account, so that their balance is a CREDIT balance...meaning you have no margin balance...then it creates an immediate deficit in the number of shares that can be held short. The shorts get an immediate call to cover. Market makers have to cover to eliminate the deficit, or as the new Regulation SHO professes, they will face being listed, fined, and risk losing their license for maintaining short deficits in stocks.
This makes perfect sense in a number of respects. When a market is euphoric, buyers create large margin balances that create excessive shares available for shorting. When the buyers dry up, alot of those shares are still available to short. That is why we can have excessive downdrafts in a market that has had a huge rally rise.
It also explains why a stock that many people are holding alot of shares of that has had a big run will come under so much pressure. Everyone is buying more on margin to average down, and that creates more shares available to short. Sellers and fresh short shares keep continual pressure on the stock.
How many times have you seen a stock have a great run, then it comes tumbling down without the breath of holding an uptick? Finally, everyone gives up and tosses in the towel. Well, when that happens, everybody's account is no longer carrying a margin balance and the short shares start getting called to cover. All of a sudden, the stock starts walking back up with out any interference whatsoever. That is the shorts covering on the shares they shorted against those you bought on margin. They are getting a call to cover immediately.
So, here is the plan. You need to consider doing whatever you can to effect a short squeeze on the stocks you own the most shares of that have had a sizable downdraft of late. If alot of people can immediately get rid of all the crap in their account that isn't performing, or take a couple winners off for profit, then that can reduce your DEBIT balance in your account so you have NO MARGIN BALANCE. Do whatever you can to get your account with no margin balance so you are playing with ONLY the cash in your account.
Once you do this, make an immediate call to Ameritrade, or whoever your broker is, that you are requesting the shares of your holdings not be made available for shorting. Have them confirm it in writing that they have done so, and also request that the shares that were lent out on your positions be immediately called to cover.
Put your broker in the hot seat. Make them earn their commissions. Don't hang up with them until they guarantee you in some fashion that your shares are going to be called to cover.
As an example, let's say you own 5 stocks and your largest position is 10000 shares. Your account balance is 200,000 and your carrying 250,000 worth of stock. If you can pare off just one, or a little of all of them to get your balance under 200,000, then you immediately effect a call on all the other shares you own that are being held short by someone else.
Now, here is your job. Take the information I've given you, and hit all the message boards with this information this weekend.
Tell everyone to spread the word....to get back just under their cash level and then call their broker! It should be enough to cause some panic short covering and get some of these MMs to cover their deficiencies now that they are being watched by everybody.
If it pops up on several hundred message boards over the weekend by several hundred people, it could spread like wildfire, reverse these markets next week, and everyone will be back where they should be...and the shorts will be back to losing money once again.
Please, everyone try. All it costs you is a few minutes of your time to try.
(Voluntary Disclosure: Position- Long; ST Rating- Strong Buy; LT Rating- Strong Buy)
Posts: 136 | From: British Columbia, Canada | Registered: Jun 2004
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