The Greatest Ever Short Squeeze?
September 19, 2008 – 8:05 pmHi folks. Back after a long couple days drafting an op-ed for this Sunday’s Baltimore Sun. Thought I’d contribute my two cents about today’s rally. The reason the market spiked had nothing to do with fundamentals. The shorts got squeezed.
Here’s a basic tutorial for you. To sell a stock short—that is, place a bet that it is going to go down—you borrow the stock and then sell it. Say I borrow 100 shares of IBM from my buddy Jim today and sell them for $115. I have $11,500! Yippee!
Even though I get to decide when, at some point I have to give Jim back his shares. That means eventually, I’ll have to buy 100 shares of IBM and give them back. I profit if the stock goes down and I can buy them back cheaper. Say it goes down to $100 and I buy the shares back for $10,000. My net profit = $1,500.
But say the stock gets to $130 and I decide I was wrong, maybe IBM is going to keep going up. Well then, I plunk down $13,000 for the 100 shares and return ‘em to Jim. So my loss is -$1,500.
What would happen if LOTS of people were short a particular stock and they ALL decide to close out their position at the same time? All those people would have to buy shares in order to exit their short positions. And lots of buyers buying simultaneously will drive a stock up.
The short interest on financials was astronimical leading into today. Some huge companies with millions of shares outstanding had no shares available to borrow. Virtually every share that was available to borrow had been.
Overnight the Feds rolled in and said they were going to save the banks with a new trillion-dollar bailout (more in my next post). Also the SEC took the extraordinary step of banning short-selling of financial companies.
Both put immense pressure on short-sellers to cover their positions. So they all bought en masse, squeezing to get through the exit at the same time and driving up financial stocks spectacularly.
If you want to see a picture of how violent a stock’s price can fluctuate during a short squeeze. Check out today’s chart for ZION. Yesterday it jumped $10 on news something was coming. In the first 10 minutes of today’s trading day, the stock went from $45 to $107 and then back to $50.
All in ten minutes.
My point is that I don’t think today’s rally was based on fundamentals. The shorts were squuezed out of financial stocks, that’s all.
We’re still in the deepest pile of financial shit this country has ever seen.
Posted in Wall Street, shorts, stocks, tutorial |
18 Responses to “The Greatest Ever Short Squeeze?”
Absolutely true. But I’m not crying crocodile tears for the shorts.
By Doug on Sep 19, 2008
Doug: The market needs both longs and shorts.
In capital markets, (notice I left out the word “free”) there has to be a balance, or two sides to the trade. This is meant to discover a price that is fair value for the said stock. When buyers of puts purchase and the basic fundamentals of the stock are in good shape at some point buyers for calls will emerge. This keeps the said stock’s price in balance. When the government manipulates the situation by not allowing short sales guess what side of the trade everyone will swing to? The intervention, or better yet manipulation by the SEC (namely Chris Cox ..ucker) has rigged the game much further than his previous attempts have. This has left the financials sector to run wild to the upside creating values that are totally unrealistic. Mr. Mortgage is correct that fundamentals are right out the window here. This trick however will not work and isn’t intended to work for a long period of time. It is meant to allow companies with bad assets to dump them at an inflated price. However, many of these equities have such toxic balance sheets, they will come crashing down, much harder then they would have if things would have been left to correct for themselves. Also this will destroy many hedge funds as they are not allowed to trade fairly. Mr. Cox should perhaps concentrate on tracking down the hiding of bad assets and lack of disclosure on financials balance sheets..this would be his job…but he has not investigated one suspect company for any such infractions..and there are dozens out there. Changing the rules (one day before options expiration I might add) in the middle of the night shows the desperation not only to North American, but world markets. This will go down in history as one of the most idiotic moves of an SEC official IMHO.
Sorry for the rant..Just venting.
By 5755hsa on Sep 19, 2008
Some thoughts..
The shorts can and do cushion some nasty stock swings !
expect the following without them…
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While these stocks will enjoy an exaggerated rise for now…(since no short seller will be there to moderate the rise up with their selling / (providing supply to meet the demand)
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Next time they drop there will be NO buying by short sellers to cover / (providing cash to remove excess supply) and the stock price fall could be much more exaggerated than we’re used to.
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what is scaring me is all the bailouts and how to finance them.
What we really need to think through is how will we entice foreigners to buy even more than the 2 billion dollars a day of our debt they are already taking off our hands without a dramatic rise in interest rates? (the weakening dollar will need to be offset by a good return) If rates up / economy down, if the debt is monitized (printing presses on hyperspeed) inflation up /economy down. If taxes go up / economy down.
May be we should outsource the fed, the treasury, etc to an efficient Co. in India or China ? It’s supposed to work for business why not for government ? Oh well I suppose we could just wait until they foreclose on us and run them anyway.
Thomas
By Thomas on Sep 19, 2008
Stupid morons. When the shorts are gone, I suppose that the shares will explode in price like magic. The morons and the crooks in Washington think that people will be swallowing that junk without a blink. It’s the best time for those who were long to sell sell sell. The fireworks will last about two weeks. And at the first whiff of a new scandal or terrible loss, it will take about 24 hours or less to see the junk crashing again. Cox is really a stupid moron.
By Marc Authier on Sep 19, 2008
Well, I’m not reel sofiskated like most y’all, but it does seem there’s somethin’ not-quite-right about that there nekkid short sellin’.
Rules & all…
But hell, ain’t rules made to be broken or at least circumvented?
Just don’t let Tony know you made a bet with money you ain’t got.
By shinola on Sep 19, 2008
“we’re still in the deepest pile…”
Yep, that’s right. But I’m more pissed off at the AIG loan/bailout than anything else.
Why should a bank do a loan modification if they can collect on an insurance policy? Why should anyone act responsibly or think through their actions if they know there’s a cushion if they fall–the US taxpayer’s backs!
AIG should fail–that would put all institutions on notice to really clean up their balance sheets and stop the shell game nonsense of balance sheet keeping.
The correction will still happen. They’re making it a long and painful as possible.
By Lisa on Sep 20, 2008
Rolfe, from what you said, one might draw some evidence for the strength of an investment by how much of a bounce it took today. As an example, 3M popped up 3%, Fidelity’s consumer staples mutual fund (FDFAX) went up only .35% and Fidelity’s emerging market fund (FEMKX) went up 9.5%. That would accord pretty well with their current relative risk, I’d say.
In shorting, isn’t there a cost to borrow those shares? Nobody is going to lend shares for nothing, and it would be fixed at the time of borrowing, I’d assume. How is that cost determined?
By CB on Sep 20, 2008
liabilities in the good ole us of a is roughly 70 trillion dollars. that is in addition to the trade and budget deficits. that is retirement, medical benefits, etc that has been promised to future beneficiaries. that alone says it all.
By jimbo on Sep 20, 2008
It is very educational to read you guys column and comments. I do follow your markets closely and plan to move to California. By that time I hope “Fall street” ( Wall Street), the traitor department,(the treasury department) the goons (the government), the banks and all it’s “thief executive officers” (CEO or TEO) will conclude their connivance as I guess they will run out of trickery soon. Pay attention to what the market is doing in London and the same tricks might follow you guys.
By Nand on Sep 20, 2008
Yours is an excellent site. I have bookmarked in several places. Thanks Yahweh for guys like you.
By Joses Chan on Sep 20, 2008
It was a feeding frenzy when the shorts brought down Lehman and others. Without them, the market can calm down.
Shorts will be allowed back when the situation has stabilized. I expect new rules on shorts and longs.
By panyusg on Sep 20, 2008
Mr. Panyusg:
A feeding frenzy did occur with Lehman and others, but ask yourself , why was that?
The short sellers didn’t create the toxic assets and frivolous accounting standards, that seriously degraded there fundamentals. If there business was solid, the long players would have seen value in the stock price and came in crushing the shorts. That’s how it is supposed to work and has worked for many years. Companies that have bad managment and accounting standards often fail. We don’t need any new rules for options players, regulators like MR. Cox just need to enforce the ones we have. Now the SEC will pump up (albeit temporarily) the prices of many companies with these shady balance sheets. This will result in hyperinflation and a very likely a depression. Stock prices will soon fall, taking even some good companies with them. Chris Cox and the FED old boys club of bankers and wall street shills have just lowered the American standard of living for most people. Future generations will be paying dearly in the form of higher taxes, commodity prices, medical expenses and lost pensions. This goes way beyond calming down the markets. The question I have is, Where do we drawn the line for bailouts? How will things work if companies are not allowed to fail? Hyperinflation/Depression here we come, a very sad state of affairs.
Again just my .02
By 5755hsa on Sep 20, 2008
There is no doubt (none whatsoever) that we are headed for the same consequences paid by (and still plaguing) Argentina.
Soon comes the deflation, then the flight of wealth, then the hyperinflation, and then the ”Austerity Programs.”
In the 200+ years of it’s existence, the citizens of the USA have never seen the kind of hardship (including “The First Great Depression”), that is now coming to America.
The Bush Administration is feeding us to the wolves, and you can ”bet the farm” that the next president (WHICHEVER candidate wins) is nothing more than the next Pitchfork used to shovel us into the wolves dining den.
Americans will learn to DREAD the word “Austerity.” Lives will end abruptly, in a healthcare vacuum, as the word “Austerity” rings in their ears.
By Gregg on Sep 20, 2008
it’s about saving grandma GS, and less importantly MS, and killing ALL the GS shorts. After the slaughter, ban all shorting.
Imagine another week without action, MS and GS will be gone. that cannot happen, not when Hank is in the chair.
As for the RTC stuff, it won’t do much to the falling house price. the pain is long from over.
By pete on Sep 20, 2008
IT might be interesting to find out who starts selling financial stocks Monday will it be the insiders cleaning out the house before cutting and running leaving rest of the ponzi schema tumbles
By gin on Sep 20, 2008
What ZION are you talking about? I tried different ways to find the jump from $45 to $107 and I couldn’t find a stock that did that. I use TD Ameritrade for my feed.
By Aldon Maleckas on Sep 23, 2008
Yup, that’s the ticker. Trust me, it got that high. The most likely problem with your chart is that the intervals are too wide. The spike was so violent and so quick, unless the intervals are by second, you might miss the spike to the top.
By RolfeWinkler on Sep 23, 2008
Rolfe,
Was listening to you on WBAL, it is amazing that we have people in charge of our fates and they know a lot less about the subject of which they are voting on then we do.
We are bankrupt now, and I think by end of next week the market could get VERY UGLY, today if at all a SQUEEZE could be played it wasnt. UYG up modestly and I dont see PANIC buying, so I can only assume chances are MUCH lower prices down the road. WE got SOLD OUT!
D
By Duratek on Sep 25, 2008