When the short interest in companies that are as robust as Apple (NASDAQ: AAPL) increases, it is a sign that investors are willing to bet against almost any firm in this market. For the period ending October 31, shares hold short in the big consumer electronics firm were up 16% to 28.1 million shares. The figure compares with short holdings as of the middle of October.

There is little obvious reason to think Apple will go lower. Its shares are below $94 already, down from almost $203 a year ago. By almost any measure, Apple is one of the most successful companies in the world, with a clean balance sheet, $33 billion in cash, growing sales, and the best products in its market segments.

The theory behind shorting Apple is that its holiday quarter will be weak. But that may be a fool's gamble. Most evidence points to Mac sales continuing to grow sharply even with most PC sales falling. The iPhone is taking market share from all other smartphones. The overall handset category may be down for the rest of the year, but Apple's product is almost certain to pick up sales.

By moving into Apple, a lot of short sellers will get burned.

Douglas A. McIntyre is an editor at 247wallst.com

If you break the cycle of short-and-no-cover, you can win.

I know that wasn't the purpose of the Anglo-French plan that we were dragged into, but it will be the effect, and the effect will be electric.

Let's just take an obvious example: State Street (NYSE:STT). This is a longtime conservative trust bank that is an important custodian for life savings and for mutual funds. For a year now it has been under assault as an institution that has too much leverage in hard-to-value asset-backed instruments. The idea that a custodian could fall apart is something that shakes every money manager to his core and causes him to take his money out of cash and put it in T-bills. That's been going on for ages now, and I know money managers who are scared to death to keep their money "in the system," which is State Street, something that instills panic across the board.

When you hear that and you are a short-seller you know what to do: You plunk down $25 million to buy credit default swaps to wager against the firm's debt, then you buy position limit puts and then you short the stock along with all of the other like-minded souls you talk to every day. You get the stock rolling downhill, then you buy a second set of swaps, paying double the price -- doesn't matter what the vig is when you know you are going to win -- and then you call the media and you tell them that everyone's pulling their money out of State Street and the credit default swaps are spiking huge and then the media goes out and reports on it. The company is helpless to refute it as the problem is being caused by the sellers because it is pretty much business as usual in a very tough time, and the stock gets hit again. Other hedge funds get wind, they short it down further, longs panic and then the credit agencies put the company on notice because where there is smoke there must be fire. Then the clients pull as much money out as possible and voila, the end of State Street.

We have seen this run several times. Frankly, I don't know how State Street stayed in business.

Until this morning, the only policy that had been put in place to stop this destruction of capital by the shorts -- and I fully concede that State Street may have made mistakes, but I will not concede that those mistakes should have made it be wiped out -- was an out-and-out short-selling ban. That was ludicrous, but what do you expect from this SEC that eliminated the uptick rule right in the teeth of the greatest bull market and allowed naked shorting to go on illegally?

What an interesting time, my friends. Seriously, we're going to look back on this period and laugh about it (maybe, depends on how much you lost, I guess). Not only has the government become one huge hedge fund as the new cliche goes, but perhaps the oddest thing about this entire episode was the ban on short-sellers.

Well, they weren't totally banned. There was a list of stocks that couldn't be shorted, and they were tied to financial businesses. For instance, General Electric (NYSE: GE), a stock I own, was on the list. Why? You see, even though it makes everything from movies to healthcare equipment, a large chunk of the conglomerate deals with financial transactions. Now, the short-selling ban is gone, and financial stocks are once again subject to the whim of the trading technique.

I hated, absolutely hated, the restriction on short-sellers. It never made any sense (check out Tom Taulli's perspective on this subject).

Look, I can understand and appreciate the fact that the government had to get into the business of capitalism. At some point, there was no choice. If we all could choose, we would choose capitalism over helping a bunch of Wall Street goofballs who became intoxicated on noxious greed and who are laughing at us right now for being bleeding-heart enough to do it. We would. But, there was no choice, sad to say.

I've been screaming to anyone who will listen that the SEC's ban on short selling in financial stocks is bad for the market, the economy, and the world. It's good to see that someone far more knowledgeable than I am is also speaking out. In an op-ed piece in today's Wall Street Journal, renowned short seller and fraud buster Jim Chanos traces the history of scapegoating shorts:

In the 1630s, England banned short selling after tulipmania collapsed in the Netherlands to prevent a similar fallout in England. More recently in Malaysia and Pakistan, short sellers have been faulted for stock-market busts. In the U.S., we've seen how corporate executives have tried to place the blame for their failures on short sellers instead of on themselves. In the end, short sellers -- not management -- defended honesty in the pricing of shares by demanding accountability. Short sellers openly warned about the problems at Enron, Tyco, Fannie Mae and Freddie Mac before their meltdowns. . .

The huge losses and evaporation of storied companies underscores the need for short selling, not the danger of it. New rules requiring that short sellers disclose their positions cross the line, and will subject investors to harassment and "issuer retaliation" in the form of frivolous lawsuits filed by corporate executives who don't like people betting against their stocks. That's dangerous because short sellers are often the first people to warn other investors of malfeasance and excessive risk-taking at public companies.

When we look back on the current market mess with the perspective of a few years, it will be clear the short sellers had nothing to do with the current crisis.

The New York Times reports that, with David Einhorn target Lehman Bros. (NYSE: LEH) filing for bankruptcy, "some investors are afraid that fund managers like him will take advantage of the climate of fear stirred up by the troubles of Lehman to target other weak financial firms whose declining share price would bring them rich rewards."

Over the weekend, heads of major banks begged regulators to reinstate a rule making short sales in the financials more difficult, but regulators said no.

The New York Times also inexplicably states that "A rapid plunge in the shares to below $4 last week ultimately created the conditions that brought the 158-year old firm to its knees on Sunday."

Here's the problem with that logic: The Federal Reserve and all the major banks spent the weekend trying to find a way to avoid a Lehman bankruptcy filing. Anyone willing to assume all of Lehman's liabilities could have had the company for whatever price he wanted, less than a dollar even. But no one wanted it! Lehman's problems were not liquidity, they were solvency. The company had no equity. Bank of America (NYSE: BAC) could have had Lehman for a can of baked beans and a roll of toilet paper, but instead went and paid something like $35 billion for Merrill Lynch (NYSE: MER). There is no rational way to pin the mess that is Lehman on short-sellers.

Intel Corp.'s (NASDAQ: INTC) quarterly earnings results are like a canary in a coal mine for investors. If the world's largest chipmaker beats Wall Street expectations later today, then shares of every gadget, widget and internet company will raise in sympathy. If things go awry, tech investors better run for cover.

Interestingly, Wall Street analysts are forecasting growth at the Santa Clara, Calif.-based company to slow to a crawl in the quarter but most consider the stock a buy. Revenue is expected to increase 7% in the second quarter, down from 12% in the previous three quarters, according to analysts surveyed by Bloomberg News who are calling for sales to rise 4% this year, half the rate of 2007. Analysts expect the company to earn 26 cents per share on revenue of $9.33 billion.

Earlier this year, tech research firm Gartner reduced its worldwide sales forecasts for personal computers, citing the weakening economy and cautioned that growth could drop into the single digits. But what's driving Intel these days is notebook computers, where sales remain robust. Dell Inc. (NASDAQ: DELL) reported better-than-expected results in May because of growth in laptops sales.

Yesterday I blogged, with a good degree of skepticism, about the SEC's announcement that it is cracking down on rumor-spreading fear mongers looking to profit from declines in stocks like Fannie Mae and Freddie Mac. In one of his daily email newsletters, hedge fund manager/all-around smart guy Whitney Tilson quotes one of his friends:

Thank God someone is doing something about this. Because, as we all know, our financial regulators have done such a good job in overseeing the institutions that are suffering from this evil conspiracy. What would be even better is if the SEC, NYSE, etc. could identify and "bring to justice" those hedge funds and short-sellers that, through a vast conspiracy with the ever-compliant press, forced bank/brokerage management teams to make the trillions in bad loans that now imperil our economic system.

Exactly. Regulators did nothing to protect investors and consumers from this mess, and have sat idly by while so many companies have failed to level with investors about their problems. The reason that the rumors have such impact on the market is that many investors have concluded, correctly, that they can't rely on these firms to provide timely updates about their prospects. If BEAR STERNS COS INC (NYSE: BSC) was a victim of rumor-spreading short sellers, it was also a victim of its diminished credibility that created an opportunity for manipulation in the first place. The SEC should focus on actual problems, not rumors which, last time I checked, have always been part of the market.

In a press release issued on Sunday -- presumably meant to be a warning to traders before the opening bell on Monday -- the SEC announced that "the SEC and other securities regulators will immediately conduct examinations aimed at the prevention of the intentional spread of false information intended to manipulate securities prices."

Cash-bleeding train wrecks like Bear Stearns and Lehman Brothers (NYSE: LEH) have complained that rumor-mongering has damaged investors by causing a precipitous slide in their stock prices. Bear Stearns executives have essentially blamed short-sellers for the company collapse which is, interestingly, the same argument made by Enron's former head honchos. Just saying.

I don't doubt that there's a fair amount of hanky panky on the part of short-sellers looking to profit from declines in share price, but I think that massive writedowns and a lack of transparency at these companies have been larger factors. As DealBreaker recently noted, "if a company can be brought down by the corporate equivalent of 7th grade girls passing notes in class, perhaps it doesn't deserve to exist anyway."

The Wall Street Journal notes (subscription required) that "The need for such a move by the SEC took on new urgency after a brutal week in the U.S. stock market, where major financial firms such as Lehman Brothers Holdings Inc., Fannie Mae and Freddie Mac were battered as rumors about everything from government bailouts to possible mergers flew across Wall Street."

This just in: Fed to rescue Fannie Mae, Freddie Mac. Apparently those mean short-selling trash-talkers were onto something.

Either short sellers don't think a merger between Sirius (NASDAQ: SIRI) and XM Satellite (NASDAQ: XMSR) will happen, or they don't believe that the deal will save the two debt-laden companies. Short interest in Sirius rose 20.2 million shares for the period ending April 15 compared with March 31. Total shares sold short hit 157.9 million. Shares short in XM also pushed up 6.3 million to 22.7 million.

The bets may be smart ones. The delay in approving the deal at the FCC has probably made it less likely that the merger will get the green light. A number of members of Congress have loudly protested that the new company would be a monopoly, They reason that a new entity would eventually raise rates sharply because there will be no competition to dampen prices.

The core problem with the merger may be more profound. Subscriber growth rates at the two companies are slowing. Both also have negative net income. At this point, neither company has predicted when it might make a profit.

The biggest burden that the companies have is their debt. Each has over $1 billion in long-term obligation to repay bonds and loans. In a poor credit environment, it is hard to see that paper getting refinanced at better rates.

A new company, even with some cost savings, could have enough debt to sink it.

Douglas A. McIntyre is an editor at 247wallst.com.

The New York Times fingers hedge fund manager William Ackman for yesterday's down market. That's because Ackman has been a vocal pioneer of the idea that bond insurers lack the capital to back their bets on the solvency of the bonds they insure and they might lose $24 billion as a result. And the holders of those bonds are banks and insurance companies which will be forced to write-down the value of those bonds -- to the tune of $70 billion more -- if the bond insurers lose their AAA ratings.

I wrote about Ackman's bet against bond insurance last May. If you had followed my suggestion to follow Ackman's short sales of MBIA (NYSE: MBI) and Ambac Financial Group (NYSE: ABK) you would have profited from the respective 81% and 89% declines in these stocks since then. And as a protege of Harvard Business School Professor Michael E. Porter -- with whom I worked -- I admire Ackman's analytical skills and his willingness to put money into his bets. Moreover, Ackman pledged to give the profits from his bond insurance short sales to charity.

But Ackman's estimate of the losses from downgraded bond insurers is big and scary. His report yesterday predicted that MBIA and Ambac might lose $24 billion on the CDOs they guaranteed. That $24 billion is a significant percentage of the $1 trillion in municipal, corporate and mortgage debt that they insure with their AAA ratings. Unfortunately, ratings agencies like S.& P. and Moody's Investors Service may downgrade them due to a lack of capital relative to their potential losses.

Wall Street certainly does not like Level 3 (NASDAQ: LVLT) anymore. It not only had the largest short position of any stock traded on the Nasdaq as of November 30, it also had the largest increase in shares sold short compared to the number on November 15.

Short interest in Level 3 is now 165.4 million shares, a rise of 14.4 milion during the last two weeks in November.

Investors have soured on Level 3 for two reasons. The first is that the company has not been able to make money on a promising business. The company owns a huge IP backbone, used for moving everything from data to video to VoIP. With the big jump in broadband demand, stockholders think the company should be doing much better. Level 3, however, seems to make a new acquisition every month and that may well be taking precious time away from a management that should just be running what it already owns.

The other knock on Level 3 is its debt load. With the credit markets in trouble, companies with big debt, which probably cannot be refinanced, are really out of favor. The company has $6.8 billion in long-term debt.

Level 3 has dropped from a 52-week high of $6.80 to $3.45. Some investors believe it is heading lower.

Douglas A. McIntyre is an editors at 247wallst.com.

The Associated Press interviewed James Keyes, who became CEO of beleaguered rental chain Blockbuster Inc. (NYSE: BBI) in July. Not surprisingly, Keyes is optimistic about the future. The company is investing aggressively to move into the digital age and become relevant, and Mr. Keyes predicts that someday, customers will head to Blockbuster to download movies onto their cell phones, or burn them onto CDs.

But there's just one problem: what exactly is Blockbuster's competitive advantage? The large stores that the company has are more of a headache than anything else. If they really were a valuable means of moving the company into the new era, competitors like Netflix (NASDAQ NFLX) would be gunning to establish a brick and mortar presence, but they're not. Blockbuster is trying to spin its retail presence into an asset. But the $4 billion that the company lost from 2002 to 2005 exposes the stores for what they really are: a liability.

And what of Blockbuster's technological investments? They're great, but any other company can invest in new technology; and a lot of companies with much stronger balance sheets are. I'm reminded of Warren Buffett's decision to close the Berkshire Hathaway mills in 1958. The mills were antiquated and unable to compete on costs with lower-cost producers overseas. Buffett was shown plans to modernize the mills through aggressive investment, but ultimately passed. He explained the decision by saying that anyone else could modernize too, and that the cost savings would filter down to the consumer, not revive the New England textile industry. Of course, Buffett was right, and a lot of less prescient operators who did move to modernize lost their shirts.

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

Bally Total Fitness Holdings Inc. (Other OTC: BFTH), which I suggested shorting back in November, has filed for bankruptcy. According to Reuters, Bally listed $396.8 million of assets and $761.3 million of debts as of December 31. Its bankruptcy plan would wipe out common shareholders reduce debt by $150 million and provide $90 million of capital through a rights offering. Bally also lined up $292 million of financing to fund operations during and after bankruptcy proceedings. Today's announcement is confusing since it reportedly filed for bankruptcy in June, as well.

When I first suggested shorting Bally, I thought it was losing so much money that it would not be able to pay back its debts. It also had lots of accounting problems and was in violation of the terms of its lending agreements. But I was concerned that JPMorgan Chase & Co. (NYSE: JPM) had offered a rescue finance package and that hedge fund guru, Stevie Cohen was a big Bally investor.

But I turned out to be right and investors who had followed my advice and covered today would be 709% richer since Bally dropped from $2.59 to $0.32.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Bally.

The Dow Jones Industrials Average closed at a new record today, gaining 283.86 to finish at 13,861.73. Why? Your guess is as good as mine. But the popular explanation seems to be the combination of M&A activity and better-than-expected retail sales, including a strong June report from Wal-Mart Stores, Inc. (NYSE: WMT).

I am always skeptical of these explanations and believe that the people who know what is really going on -- namely the traders of huge blocks of shares -- are not the ones talking to the press. I would have thought that the market would have declined on the good retail sales numbers because that would mean that the Fed saw the economy as stronger -- and thus more prone to inflation -- leading investors to reduce the odds of a rate cut.

My favorite explanation for today's 232 point gain is that investors who were betting on tepid retail sales had sold short shares of those retailers. And when the report turned out to be better than expected, they scrambled to cover their short positions to pay off their stock loans.

This explanation appeals to me because I saw today that margin debt -- that is borrowing to finance stock purchases and sales -- hit a record $353 billion last month according to the Wall Street Journal (subscription required). Such leverage can magnify up and down movements in the market. That's why private equity firms like to borrow money. Unfortunately, what goes up can also go down.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Wal-Mart.

General Electric Co.'s (NYSE:GE) stock has had a nice run recently. It is up 10% over the last three months, outpacing the S&P. However shares in Its major rival, Siemens AG (NYSE:SI) are up 30% despite a bribery scandal that cost both its chairman and its CEO their jobs.

With the sales of its plastics unit, investors want to believe that the company will dump some of its dogs and focus on businesses that have high margins and good growth prospects. GE management continues to insist that its forays into India and China will help pump revenue in the years ahead.

The concern about GE that lingers is that it is not a company, but rather it is a collection of companies which have little to do with one another. The structure disguises the real value, or lack thereof, in each part.

On April 13, GE announced first quarter earnings. Net was up 2%, hurt in part by sub-prime mortgage issues at the company's financial services business.

Short interest in GE's share rose 6.4 million to 60 million shares between May 15 and June 15. Perhaps the market realizes that most of GE's recent gain was on rumors that the company might be broken into two or more pieces. Barring that, GE will slip back into a pattern of meeting modest earnings. But, that will be the extent of it.