Best Of DWR:  The Worst Idea Ever

| December 29, 2008 | 0 Comments

Editor’s Note:  The research team at Hyperion Financial Group has been working tirelessly all year to bring you great investment ideas.  Some of our ideas worked better than others.  Sometimes we were on the mark, sometimes we missed a bit.  Either way, we’re constantly striving to bring you original money making ideas in some of the toughest market environments.  Here’s a highlight from this year….

Originally published in the September 24 edition of The Dynamic Wealth Report…

The Worst Idea Ever

Let me ask you a serious question.  If you had a splinter in your thumb, would you listen to a doctor who suggested amputating your arm?  Would you just follow the advice blindly?  What if another doctor suggested a lung transplant because of a small cough?  Seems a little drastic don’t you think?

We’re witnessing the same kind of quack doctoring right now.  Only the inept doctor is the SEC, and the patient is the free market economy.

What am I talking about?

I’m talking about the Worst Idea Ever.  The SEC’s decision to place 800+ companies on an anti-shorting list.  Before you frown at me for climbing up on a soap box, let me tell you something.  This anti-shorting provision is impacting your trading accounts.  And it’s directly changing important parts of the market.

What’s most upsetting?  Nobody’s saying anything about it.

You’re losing your rights, and you don’t even know it.

First, let me speak my piece.  I find this decision to limit shorting un-American.  No, it’s actually anti-American.  In the financial world people do stupid things all the time.  They buy houses they can’t afford.  They take money out of their retirement plans – additional taxes and fees be dammed.  They borrow money to invest in high-risk trading strategies. They spend more money than they make.

None of those stupid things even come close to touching anti-shorting provisions.

It just makes me sick . . . and mad.  There’s huge global implications to this stance.  I’ll address those in a minute.

Last week the Dow Jones Industrial Average was the most volatile ever. You don’t need me to tell you how gut wrenching the 1,000 point fall in two days was.  You don’t need me to tell you how confusing the immediate 1,000 point rebound was.  (And you wonder why traders swig Pepto-Bismol like water.)

The government has a knee jerk reaction.

Let’s eliminate short selling.  Let’s hand pick upwards of 800 companies and stop people from shorting.  Seriously, shorting is not the problem.

I equate these anti-shorting arguments to being anti-American.  That’s how strongly I feel about this topic.  Investors can make money when stocks go up . . . why can’t investors make money when stocks go down?  Let’s be honest.  The investors who short stocks didn’t create the real estate problems.  They didn’t start the mortgage and credit crisis.  They didn’t cause banks to write off hundreds of billions of bad loans.

All the short sellers did was turn a profit.  If they were wrong they’d have lost lots of money.  (And my bet is you wouldn’t see them up on Capitol Hill asking for a bailout).  But they were right and they made lots of money.  Let me ask you, what’s wrong with that?

If the government thinks this anti-shorting ban is a solution, they don’t know the first thing about free markets.

Ok, I’m off my soap-box now.

More importantly, I want to tell you why you should care about this provision.

Do you have an account where you trade stocks and options?  If you do, this anti-shorting rule is already impacting you.  Don’t believe me?  Just keep reading.

Because of this SEC ban on shorting stocks – your brokerage firms are changing the way they operate.  They’re limiting what you as a customer can do in your account.  They’re limiting the types of trades you can make.

Let me give you an example.  If you sell call options (which give someone the right to buy stock from you at a fixed price) you might end up short the stock.  That means you’re breaking the law.

Do you buy put options?

Many investors use put options to profit from falling stock prices or to hedge their portfolio.  I know I do.  If you wanted to exercise that option, you might be breaking the law.

If you own put options, this changes the way you’ll trade.  And more importantly it possibly changes their value.

Different firms are dealing with these problems in different ways.

Some are limiting you ability to exercise the options at all.  Others will only let you exercise an option if you won’t be short in the account (even for a split second).  Oh, and heaven forbid that you’re assigned a put or call option.  Your firm will force you to cover the position immediately.  Knowing how that works they’ll probably go right ahead and do that for you – then tell you afterwards.

Don’t believe me?

Call up or e-mail your brokerage firm.  Ask them a simple question.  “How does the SEC’s anti-shorting provisions impact my put options?”

Scary isn’t it?

Now, earlier I stated the policy of the SEC has global implications. Unfortunately, countries around the world are adopting the anti-short stance.  They’re blaming the short trader and threatening to tar and feather anyone who thinks of shorting stocks.  London followed suit shortly after the SEC announcement.  Now I’m reading of exchanges in Asia doing the same thing.

Of all the things we could export, this is the worst ever.

And just to put to rest all you market watchers who think this anti-shorting provision’s going to help . . . it won’t.  The markets have fallen since this new anti-short provision was put in place.  Do you know what the worst performing industry group’s been?  Financials.  (If it wasn’t so serious I’d be laughing right now.)

One last fact.

General Motors was added to the anti-short list recently.  Apparently they own a bank or part of a bank (the logic is a bit fuzzy).  The stock managed to fall more than 11% the day after being added to the list.  I guess not shorting stocks is a huge help.  It proves you can’t save a horrible company in a struggling industry.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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