Short sellers boom in June as SEC tries to shut them down

Despite plunging housing prices, record oil and food costs, rising unemployment and a growth-chilling credit crunch, there is some good news in the economy. MarketWatch reports that short sellers had their best month in seven years in June.

Specifically, it reports that The Strunk Short Index, which tracks short selling fund managers, rose 10.47% in June -- it was last higher than that in March 2001 when it climbed 12.45%.The Strunk's best years were in 2002, when investors sold tech stocks, and in 1990, during the last major U.S. banking crisis. It gained 30% and 43% respectively in those years.

But thanks to government intervention, the SEC is going to shut down the one bright spot in the economy. Bloomberg News reports that the SEC is changing the rules of short selling. In particular, it is banning so-called naked short selling -- in which a trader sells a stock without borrowing its shares -- for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). For the next 30 days, traders will need to borrow shares to short them.

This is less of a problem than it appears. The stocks of the two companies fell over 26% Tuesday and they'll probably hit zero in the next 30 days if current trends continue. Meanwhile, unless the SEC decides to ban short selling on the 150 banks expected to fail in the next 18 months, the shorts will not be denied.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.