by Addison Wiggin & Ian Mathias
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Since it worked so well before: Germany bans short selling… what’s to follow
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SEC, Alan Knuckman assess the aftermath of the recent “flash crash”
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Bill Bonner on the market that could “lead the world into a return of the Great Correction”
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And who could have seen this coming? Congress announces possible tax hikes and benefit reductions for Social Security… go, Team America!
It’s illegal to get naked in Germany… at least in your shorts… for now.
As of midnight last night, “naked short” positions — in which the seller doesn’t own the underlying security — in Germany’s 10 largest banks, European government bonds and sovereign credit default swaps have been banned.
This is an egregious attempt at a coverup. Something we’re getting used to here in Beijing.
The U.S. tried it first in 2008. Greece tried it too, a year and a half later. But we know from those experiences, the Germans have, in fact, done nothing to protect their banks and bonds.
Greek and American shares plunged after their respective bans.
We’re sure the Bundestag meant well. But here’s what they’ve really done:
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Highlighted the 10 German stocks most likely to fail
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Changed the rules suddenly, without warning
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Alienated investors who have otherwise been willing to go along to get along.
And… confirmed most subscribers’ suspicion that euro bonds are vulnerable
“Here we go again,” our sell-side strategist Dan Amoss says with glee, “More ad hoc policy announcements from politicians who don't like the consequences of their own actions. Have European politicians learned nothing from 2008?
“Restricting honest short selling (i.e., brokers locate and borrow the reference security that's sold short in a reasonable time frame) sucks liquidity out of markets. After the U.S. ban on selling short financial stocks in September 2008, we had a brief rally followed by a breathtaking free fall — mostly because the liquidity provided by "evil speculators" disappeared.
“Maybe rampant ‘naked CDS’ speculation is, in fact, driving European sovereign bonds down to ridiculously low prices. I don't know. But what I do know is that if prices were truly lower than the fundamentals justified, then value-seeking buyers would enter the market, and the short sellers would cover their positions.
“The bottom line is that if politicians don't like market prices for their sovereign bonds, then they should take the action necessary to restore investor confidence and the liquidity that goes along with that confidence.”
[Ed note: We have it on good word, that Dan’s next issue of Strategic Short Report (SSR), due out Friday, will recommend shorting “a company very exposed to weakness in both the euro currency and eurozone economies.” You can get access to this report, and test-drive a month of Dan’s sell side advice, for just $1.
Here’s how European traders feel about the German decree:
Perhaps Germany should consider banning selling altogether? Better yet, why not just mandate that all shares go up? Wouldn’t that be more effective?
Good grief.
Markets in the U.S. are struggling today, too. After a calm day of trading yesterday, the S&P 500 has resumed its downward trend. It fell 1% within the first hour of trading this morning.
The SEC can’t help themselves either. The agency announced yesterday that it is temporarily installing “circuit breakers” on all S&P 500 stocks, so as to prevent another computer-driven crash like we saw earlier this month. The new rules will force a brief rest period if a stock rises or falls more than 10% in five minutes.
We can all agree, can’t we? A movement up and down like that in such a short amount of time deserves a period of cooling off. Bravo to the smooth talkers at the SEC. And yet the system has already become so cold…
“The ‘flash crash’ can be partially attributed to excessive program selling,” comments our resource trader Alan Knuckman.
“Computer models were also designed to remove the pools of liquidity that support the market when conditions hit extremes. These machines are not set up to be realistic in their logic — for instance, when a blue chip stock like P&G moves down 30% in a matter of minutes from buy orders being pulled. More perilously, some name stocks collapsed to pennies when nobody was there to stand up with purchase prices for support.
“Like it or not, computers programs have filled most of the human roles on the trading floor at the financial exchanges around the world. While the electronic markets provide instant access to opportunities that were largely unavailable before, there are trade-offs, as witnessed by the recent extreme volatility. Program trading doesn't really ‘think’ it wants to sell, it just does.
“Before electronic markets, trading was completely controlled by a “market maker” — whose role in options was to provide a two-sided market for buyers and sellers to enter and exit the market (these market players are also referred to as “specialists” in stocks).
“Their ever-dwindling ranks keep transactions and balance in a sometimes emotionally overweight flow of trading. That common-sense skill to prevent price vacuums is now being eliminated as more and more wise old souls leave the floor.”
You might say the Thai stock market is looking “emotionally overweight” today:
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The Thai stock exchange was set on fire this morning by Red Shirt protestors now entrenched in Bangkok.
We never understand events like this… even when we’re much closer to ground zero than usual.
“First impression,” our founder Bill Bonner wrote today, staying just a few rooms away from us in the Grand Hyatt in Beijing this morning, “China is not the same country it was a quarter of a century ago. The last time we were here, there were almost no private cars. Everyone dressed in drab grey outfits and rode bicycles. There were no shiny new buildings. There were almost no restaurants. And if you saw a truck, it was likely to be broken-down beside the road, with a couple legs sticking out from beneath it.
“Second impression: Wow! So many daring new buildings… such broad streets… so many construction cranes… so many fancy cars… so many electric bicycles. There is no doubt that China is far outpacing Europe and the U.S. in many respects… that the 21st century will be defined by what happens here, not what happens in the West.
“Third impression: China is in trouble. The Shanghai Composite Index suffered its biggest drop of the year Monday — down 5%, after losing 20% since January.
“According to the papers, the market has been spooked by the government's efforts to restrain real estate speculation. The Chinese have a lot of money. And Chinese investors have relatively few places to put it. They tend to buy real estate… or stocks. This has pushed up property prices by as much as 100% in some areas over the last 12 months. And it has caused the government to worry about a bubble.
“Is the Chinese economy a bubble? Most likely — yes. Will it blow up? Again, most likely, yes. In fact, it seems to be blowing up right now. After leading the world in the bounce phase, it now may be leading the world in a return of the Great Correction.”
In the States, Congress is starting to mull the inevitable tax hikes and benefit cuts needed to save Social Security. Sometime this year, for the first time ever, the fund will begin paying out more than it collects. By 2037, the current projections suggest, it’ll be out of money entirely. Clearly, something’s got to give.
So… who’s going to pay more, and who is going to get less? The Senate Special Committee on Aging published a report this week with a few suggestions on plugging the gap. According to the report:
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The whole $5.3 trillion budget gap over the next 75 years could be filled if payroll taxes were increased 1.1 percentage points, to 7.3%, for both employees and employers
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If all wages were taxed for SS, not just those under $106,800, that would fill the gap, too
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75% of the shortfall could be wiped out by reducing cost of living increases 1 percentage point every year
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About 25% could be saved by bumping the “full benefits” age from 67 to 68.
Heh, so pick your poison. We wonder if any politician will have the stones to campaign this year on a “more taxes, fewer benefits for the elderly!” ticket. Hmmm…
We recommend you start beefing up your own retirement plan. Our Jim Nelson has been feverishly creating a strategy you can use to avoid the “sooner-than-expected” breakdown of Social Security, and how you can avoid the consequent fray. You can find all of Jim’s work at Lifetime Income Report.
Last, the dollar is actually falling along with stocks today. The dollar index slipped over half a point, to 86.5, as the euro seemed to be the sole beneficiary of Germany’s short ban. It’s up to $1.23.
Commodities, as we reviewed yesterday, are still getting hit. Oil lost its grip on $70, while gold is barely holding onto $1,200 an ounce.
“It's a little-known fact,” a reader writes, “that the true reason for the disparity between gold and silver is because three big banks, including J.P. Morgan, hold thousands of silver contracts net short.
“No other commodity is allowed to be held short in such a large quantity as silver. Supposedly, the CFTC has been investigating this for at least 20 months. It probably cannot come out and force the banks to rid themselves of the short positions, because it would cause a panic in the silver market, and the banks hold too large a club over the CFTC's head.”
The 5: For the record, that might not be a “fact,” insofar as that the CFTC is only publishing letters of complaint on this matter. It hasn’t announced an investigation or suit.
That being said, the scam has been making its way around the Internet lately, and has found some relatively credible supporters. We’ll keep an eye on it.
Regards from Beijing,
Addison Wiggin
The 5 Min. Forecast
P.S. Germany’s ban on short selling is a stark indicator that the market is overweight… or at least you can bet the “authorities” think so.
Stocks plunged everywhere after Greece kicked short sellers in the shins earlier this year. A similar level of bruising occurred after U.S. regulators banned shorts during the credit crisis in ’08.
Following yesterday’s losses, the U.S. market could be ready for another round. But you don’t have to take it lying like a dusty wet rug. For $1, you can learn Dan Amoss’ strategy for positioning your portfolio during a sturdy second leg down. One dollar, right here.
P.P.S. Another way to move away from financial assets? These coins.
Please keep in mind that we do have a business relationship with First Federal Coin Corp. whereby we receive an advertising fee for coins sold. Before buying any coins, we recommend you check out our Beginner’s Guide to Coin Collecting report. You'll learn the differences between bullion and rare/collector coins, how to sell your coins, the importance of grading and much more.