TheStreet.com's Jim Cramer says they're not just the opposite of longs -- they have the power to destroy companies. Today will be riotously ugly. Today's a day where you could take down a Capital One (NYSE: COF) (Cramer's Take) or a Citigroup (NYSE: C) (Cramer's Take) -- some bad credit card exposure there -- off of American Express (NYSE: AXP) (Cramer's Take). You can bang down Nat City (NYSE: NCC) (Cramer's Take) into oblivionville off of it and hammer Merrill Lynch (NYSE: MER) (Cramer's Take) to the point where you could hear the rumors fly of capital needs. Freddie (NYSE: FRE) (Cramer's Take), merciless Freddie, right at ya. Today's the day when the uptick rule would be the only friend to the notion of owning stocks without fear every minute, fear that they will break your stock. Today's the day that the uptick rule can save Lehman (NYSE: LEH) (Cramer's Take) from $14 or lower. Today's why we need it.
Yet, every time I do a piece that talks about the need to reinstate the uptick rule or enforce the naked short laws, I am immediately greeted with the same nonsense: why should the longs get protection the shorts shouldn't? In fact, other than the usual gang of two -- Patrick Byrne and David Patch -- I don't get any positive feedback on these pieces like the one I did last night on "Mad Money."
Why aren't they treated equally? First, I question constantly how anyone could even think they are treated equally: I think the shorts are now heavily favored because they can instill fear and panic that the longs don't have the ability to do. They can destroy businesses -- the ultimate goal -- and the longs can't. I don't like that, I don't like it because the great history of the stock market shows that it works better if we regulate the shorts, to make it so they can't overwhelm the longs. The creation of wealth, not the destruction of wealth, is what the market is supposed to be about, it is why it is worth participating in at all, otherwise the mattress or bonds -- only good for the most solvent of operations -- make more sense. Wealth creation is what the stock market's about. That's not what the shorts are about. They can exert a well-needed discipline on valuation. They can even exert a regulatory role in the absence of any serious regulation about the finances of a company. But otherwise, their contribution to society can't really be stressed as something that should be the republic's goal to preserve and protect. The public's interest could do better without them.
Let's say the goals of the stock market are equal, wealth destruction and wealth creation. Then I would 100% favor total equivalence and would laugh at the uptick rules and the naked shorts rule that makes it so easy to sell stock without borrowing it. If you believe that wealth destruction deserves equal protection, I am dead wrong. I think that's a preposterous proposition, right down to the preamble of the Constitution.
Right now, today, we all know the truth: If you are a short-seller, the shorts are able to create an environment that can destroy the companies underneath, not just the stocks themselves. Certainly any company that has more capital than it needs does not need to be protected and can use the short-selling to buy in stock. But any company that needs credit as a method of operation, as all financials that are not levered do, can be effectively destroyed overnight by the shorts pushing the stocks down and sowing that panic that makes the companies vulnerable to closing.
Another joke of "equivalence," another edge the shorts have over the longs is the amount they can short vs. the amount that a company can buy. Using naked shorting, short-sellers can sell short as much stock they want on a given day. They can overwhelm any stock. The companies themselves, though, are strictly and severely limited to what they can buy. Why can't the rule be changed for the companies that do the buying to they are equivalent and not helpless to the shorts just flooding their stocks with supply on a given day? Why can't they buy as much as they want? Why are the companies regulated about what they can buy, but the shorts are able to sell an unlimited amount of stock -- at least for all but the sainted few financials in the temporary protection order that SEC Chairman Cox served up last week that went into effect yesterday?
More important, does anyone think that the fear created by shorts is less punishing than the greed longs can create? Does anyone think they are equivalent? Does anyone think that you can hype a financial, for instance, higher and quicker than you can destroy it?
There are sound psychological and financial reasons, not just historic reasons, for my view.
Notice, I am never for a minute denying that there aren't a lot of fraudulent companies out there or overvalued companies. Never for a minute am I against shorting. I made millions of dollars shorting. I did it following the old rules. I can tell you, when the old rules were in place and hedge funds weren't running the joint, often bigger than their target, I never heard anyone complain that the schematic was wrong or evil or misplaced or unfair. It was accepted that it wasn't in the market's interest to be able to raid companies down and it was acknowledged by all that you could destroy a company by attacking its stock recklessly through driving down all the bids with short sales that weren't legitimately borrowed.
The fact that there are so many people who defend this new system shocks me. Since when is it in the government or the peoples' interests NOT TO PROTECT solvent firms from needless runs on the bank caused by shorting?
The day I have to defend the right of legitimate institutions to exist and not be prey to short-sellers armed with rumors and no borrowed stock is a day I just think it is worth saying that the goal of the market is to lose as much as can be made or more. That's not how I view the goal of the markets. If you do, I think that you simply believe that I am dead wrong, and I welcome the disagreement.
These rules need to be put back in place. The slippery slope of ETF HOLDRs, that basically say, "You can bang down stocks, so why not get rid of the rules?" should also be turned upside down with a 10-cent tick rule, meaning you have to wait until you have a buyer willing to pay 10 cents higher. All of the academic work supporting this nonsense was done in a bull market vacuum encouraged by a laissez-faire administration that truly believes capitalism can regulate itself. If anything, if left to its own devices, it destroys itself. Even the communists, morons that they were, knew this.
Think about this view today as you lose huge amounts of money in this declining bear market.
You just might agree with me.
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RELATED LINKS:
All You Need to Know About Short-Selling
Ask TheStreet: Naked Shorts
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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in the stocks mentioned.
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Reader Comments (Page 1 of 1)
7-22-2008 @ 8:54AM
rafee said...
kindly keep ypur opinions to yourself you r the biggest shortseller thu your buddies at the hedge funds how about FNM/FRE/housing/ABK/MBIA/.when did you get long financials keep your aspirtaion for attorney genrel to yourself
7-22-2008 @ 9:17AM
spinal said...
If you like to lose money, stick with Jim Cramer. If it weren't for his Salary , he would be as broke as he was in the 90's , a direct result of his stock pickings. It just goes to show you that not much changes. If he were such a brilliant stock analyst , he would have seen this crash coming. His Picks are down over 20 Percent. (Its) Just a shame his viewers can't take civil action against him.
7-22-2008 @ 10:02AM
Anon said...
I'll agree that Cramer picks horrible stocks, but the uptick rule does need to be reinstated.
Shorting does have a role on Wall Street, but its only to deflate overpriced stocks not to destroy the entire business.
Illegal naked shorts are showing us that something needs to be done.
7-22-2008 @ 10:06AM
Donna said...
What I noticed on Wednesday, Thursday and Friday of last week were certain bank stocks going up at the same darn time that the oil futures went down. Those bank stocks went up a lot and the oil futures went down a lot. Coincidence? I thought possibly that short-sellers were selling stock they didn't borrow and were then buying oil futures with "their" money -- forcing up the price I pay for gas.
Plus if I "borrowed" my neighbor's car without asking, I think that would be frowned on.
7-22-2008 @ 10:12AM
ajgorm said...
The creation of wealth, not the destruction of wealth, is what the
market is supposed to be about.-----Well said
Cramer--------------..Since when is it in the government or the
peoples' interests NOT TO PROTECT solvent firms from needless runs on
the bank caused by shorting? -------------------Cramer was Bear Sterns one of the companies your talking about wearing the pants in short sales department. I thought they deserved what they got for being short seller kings after all they got there selling short then get bailed out go figure..
7-22-2008 @ 10:23AM
gumbo koontz said...
The primary reason short sellers want to push stocks down is to get them cheap enough for the wealthy to buy at the bottom.. Wealthy dont like to buy anyting in the middle...
7-22-2008 @ 10:25AM
gumbo koontz said...
Short sellers has to borrow shares from somebody which means they need my permission to short my shares. I would say hell no way fucker!!
7-22-2008 @ 10:27AM
gumbo koontz said...
The only way you can protect your shares from short sellers is to obtain a stock certificate. It will lock up your shares untouchable to short sellers. Your broker would charge you $50 . Everything is stacked against you. Brokers want to keep your shares in "street name" which translates into a red light whore street..
7-22-2008 @ 10:44AM
Donna said...
I thought (prior to 7/21/08) that the short-sellers weren't even bothering to borrow the stocks they were selling. They were just selling willy-nilly. Buying stock certificates and putting them in a lock box would not prevent the short-sellers unless the rules were to state that ALL stock had to be "borrowed" prior to selling.
7-22-2008 @ 10:50AM
Boat said...
Who's bright idea was it to eliminate the plus tick rule for short selling. Didn't they realize that the rule was made for a good reason? I believe it occurred under Thaines watch. Think he's happy about that now in his new job? That man did more to destroy the markets in his short stint at the NYSE than anyone in history and he'll do the same at Merrill. And to all you members that sold out to Thaine without consideration for other peoples jobs or passing down something of value to your children I hope the stock continues to plummet to show just how ignorant and greedy you all are.
7-22-2008 @ 11:06AM
gerry said...
GREAT JOB I now understand it,, it should be called counterfeiting same thing
7-22-2008 @ 11:20AM
mr t said...
I am a recently retired investment banker at a bulge firms. That said, I could not agree with cramer any more about shorts and the uptick rule and need for advance borrow. What he does not say is that shorts are not just "short" hedge funds. Traders for household name mutual funds are as active and guilty as anyone else. that's why this is such a frekaktah market today.
The SEC and the NASD are asleep at the switch or complicit by way of negligence. I am a believer in capitalism, however, this unrestrained activity, if not stopped, will destroy it in america
7-22-2008 @ 11:55AM
nickerson said...
Most of the problems we are having at Fannie Mae and Fredy Mac are people that were working for Clinton whne he was in office. They all should be investgated and put in jail. The left has hurt the market more than people think, wait tell Obama gets in their and you can forget the stock market. You need to hide your money under a mattress.
7-22-2008 @ 9:36PM
Eric said...
These new short selling rules rank as one of the SEC's worst move ever. Here are the three problems I have with it:
1) It makes a mockery of justice, free market, and capitalism. Why should SEC offer special treatment to 19 financial stocks (who happen to be politically connected) while ignoring the rest of the market?
2) It makes the market dangerous. While you celebrate the rally created by the SEC's new rules, keep in my that short selling works in reverse too. Stock's like Citigroup are skyrocketing because short selling is down 70%, but when the selloff starts again (it will) short covering is also going to be down 70%. Historically, stock markets don't crash when there is high levels of short interest because of short covering on the way down. Now, thanks to SEC's rules, a lot downside protection has been removed, and a real market crash is a possibility.
So enjoy the current rally, because when the world turns scary again (it will), you might find there are few buyers left to halt the decline in the market.
3) It won't work. SEC doesn't have the power to stop the selloff. It can create short term rally (which is more than halfway done if you ask me), but soon, within a month or two, we will be right back to where we started. I offer two example as proof of this:
--Pakistan, where the local SEC responded to a stock slump last month by banning short selling and limiting daily price declines to 1% while allowing them to rise by 10%. The initial reaction was a massive 8.6% one day rally followed by 15 straight days of slumping prices amid extremely low turnover, the worst such period for that market in several years. As rioting investors stormed the Karachi Stock Exchange last week, the rules were rescinded.
--China, where it is illegal to short there. The market has utterly collapsed over the last few months, and it is precisely because of the inability to short that it has happened.
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Remember, when there are no shorts, then what tends to happen is that when the supply/demand imbalance gets out of hand the bid just "disappears" - that is, there is nobody will to buy at any price, as the buyers are exhausted.
I'm sure you know what the price of something is when nobody wants to buy it, right?
7-23-2008 @ 6:49AM
jim said...
I have a well researched report from America of circa 93 pages, which shows that the CEO of Goldman Sachs knew in December 2006 that GS had serious over exposure to sub prime Certificates of Deposit. The CEO decided to cover that exposure by taking out insurance, paying exceptionally high premiums.(wonder if Bear Sterns was maybe the insurer?)then continued to package and sell some 7billion$ worth of CD's in 2007. Paulson I note is ex director of Goldman, all these ex buddies helping each other out.
Why not say it, the world at large should sue American banks and mortgage houses who handed out mortgages without 1st doing proper due dilligence, then packaged them up and sold to the worlds banks, the report states that 50 % of those flawed CD's
are held by EU banks, who are in dire trouble as a result.
God help the world from the continuously dreamed up frauds and excesses of Wall street,from Milliken and Junk bonds, Keating and Savings and Loan in 80'ties whee 1000 bankk failed, then Worldcom followed by Enron, then sub prime Cd's, now their next trick, Goldman Sachs leading the "speculators wolf pack" to drive oil to 200$ when refining capacity in US is the real issue.
God help ordinary decent Americans.
Jim
7-25-2008 @ 3:19PM
Orville Rogers said...
My broker tells me you do not have to obtain stock certificates to prevent them being borrowed for short sales. Just keep them in a cash accoount instead of a margin account. Of course, with today's rules, the short sellers don't even have to borrow them!!!