Watching the stock market fall recently is a bit troubling.
Its not surprising since we have a lot of uncertainty in Washington now and that doesn't bode well for business prospects.
To a large extent stocks are more predictive than reactive, so the current sell off represents fear that the economy is headed to a recession.
It might be, we have the trade wars, the divided Government, the deficit, interest rate increases, but generally the economic picture isn't much different than it has been.
However just the chance of a recession will create selling and once it starts it can build on itself for awhile until either it is confirmed or it isn't.
If we were to actually enter a recession, it might be a stimulus to the market as the future would look better than the present.
One of the issues with large sell offs is that many baby boomers are in or near retirement age, and probably without much thought count on the increases in the stock markets we have seen before this year.
To see the amount in their 401k decrease is unsettling and most no longer have the safety of a defined company pension anymore.
If the loss causes you to move your money into something safe, remember you are only right if the sell off continues. It might but it also can easily reverse itself.
You can lock in losses just like you can lock in profits.
The latter is a much better option. Sell high, buy low, if you can.
Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
Monday, December 24, 2018
Tuesday, February 6, 2018
What Goes Up.....
The stock market has had a long run that actually started shortly after the financial crisis and rose from pretty bleak numbers to record after record highs.
We seem to have hit a speed bump.
The thing about stocks is that they aren't simply based on the facts, they rely upon human emotion.
People react to what they see and make decisions.
Most people react in very similar ways, so once selling starts it becomes a bit contagious.
Remember its a lot easier to sell than it is to buy, you don't have to have any money first.
Each day of losses inspires more sellers and therefore more losses and more sellers, etc. etc.
It will of course stop.
When depends once again on sentiment and we may see short term plateaus as buyers test the market.
Once it actually bottoms we should see a period of continued growth, but it may take a long time to return to its prior levels.
Its a story as old as time.
We seem to have hit a speed bump.
The thing about stocks is that they aren't simply based on the facts, they rely upon human emotion.
People react to what they see and make decisions.
Most people react in very similar ways, so once selling starts it becomes a bit contagious.
Remember its a lot easier to sell than it is to buy, you don't have to have any money first.
Each day of losses inspires more sellers and therefore more losses and more sellers, etc. etc.
It will of course stop.
When depends once again on sentiment and we may see short term plateaus as buyers test the market.
Once it actually bottoms we should see a period of continued growth, but it may take a long time to return to its prior levels.
Its a story as old as time.
Thursday, December 21, 2017
When to Sell
There's a very good chance the market will sell off fairly soon now that the tax law has passed, since stocks had a big run up waiting for it.
However it will probably be after the New Year because if you sell now you probably have taxable gains at a time when you can't do much about them.
Of course the stock market is always a balance between the short term and the long term so if you are willing to watch your value go down for a while, it still has good long term prospects since corporate profits will get a shot in the arm as the tax reduction hits.
We do have that pesky increased debt but in the short term we might see a bit of a boost.
The one thing we do know is that the tax law improves corporate profitability and how they use that money is going to depend largely on the corporation's goals.
Generally profits can be used in a number of ways increased dividends, increased stock buybacks, increased capital investment, increased bonuses or used for acquisition and mergers.
They can also retire debt, but at the current interest rates not sure they will do much of that.
Further looking forward the future increase can also result is some of the same things, but you might see a percent diverted to salary increases.
Each company will decide the best way to use the money. Some of those uses will have a bit of a stimulus impact, others will not.
The trouble is that the capital expansion investment will tend to reduce jobs as facilities are modernized to be more automated.
Of course stock buybacks and acquisitions also tend to have little impact on main street.
Increased bonuses and wages do, but it is question of how much of an impact this will have.
The small business, pass-thru companies may actually hire. There is so much variation there its just hard to tell and we don't have a lot of surplus labor right now. Guess retirees may be coaxed back.
Housing is the big unknown since owning has become less desirable depending of where you live and housing is the one area that impacts local employment directly. If housing values drop, as many are likely to, the loss of wealth may exceed any tax stimulus but it might not.
If everyone runs out and buys imported goods with that extra money well, the people building smartphones in China will have jobs.
Economics is the sum of millions of individual decisions when you come down to it and maybe the capital will be used to finance domestic things, like solar or wind based technology that will create local jobs.
Maybe not.
Cash is looking pretty attractive in the New Year.
I expect greatly increased volatility, of course I'm frequently wrong.
However it will probably be after the New Year because if you sell now you probably have taxable gains at a time when you can't do much about them.
Of course the stock market is always a balance between the short term and the long term so if you are willing to watch your value go down for a while, it still has good long term prospects since corporate profits will get a shot in the arm as the tax reduction hits.
We do have that pesky increased debt but in the short term we might see a bit of a boost.
The one thing we do know is that the tax law improves corporate profitability and how they use that money is going to depend largely on the corporation's goals.
Generally profits can be used in a number of ways increased dividends, increased stock buybacks, increased capital investment, increased bonuses or used for acquisition and mergers.
They can also retire debt, but at the current interest rates not sure they will do much of that.
Further looking forward the future increase can also result is some of the same things, but you might see a percent diverted to salary increases.
Each company will decide the best way to use the money. Some of those uses will have a bit of a stimulus impact, others will not.
The trouble is that the capital expansion investment will tend to reduce jobs as facilities are modernized to be more automated.
Of course stock buybacks and acquisitions also tend to have little impact on main street.
Increased bonuses and wages do, but it is question of how much of an impact this will have.
The small business, pass-thru companies may actually hire. There is so much variation there its just hard to tell and we don't have a lot of surplus labor right now. Guess retirees may be coaxed back.
Housing is the big unknown since owning has become less desirable depending of where you live and housing is the one area that impacts local employment directly. If housing values drop, as many are likely to, the loss of wealth may exceed any tax stimulus but it might not.
If everyone runs out and buys imported goods with that extra money well, the people building smartphones in China will have jobs.
Economics is the sum of millions of individual decisions when you come down to it and maybe the capital will be used to finance domestic things, like solar or wind based technology that will create local jobs.
Maybe not.
Cash is looking pretty attractive in the New Year.
I expect greatly increased volatility, of course I'm frequently wrong.
Sunday, July 12, 2009
AIG short selling
There are ongoing discussions concerning short selling of stocks. Those who use short selling extensively, and this includes many hedge fund managers are extremely defensive about the need for short selling. It certainly makes their job easier in the sense it provides a way to guard against downward movements in the market and actually make money while doing so.
The question that I have is has short selling become so commonplace that it has altered the very nature of the stock market? Yes short selling has been around for many years, but the tremendous growth of hedge funds, as opposed to regular mutual funds, and the increased use of short selling via discount brokers has made it a greater factor.
Clearly in a free market you can buy and sell product. It makes sense to buy and sell future promises related to those products in order to reduce risk. However, the idea of selling product that you have never owned becomes somewhat problematic. When short selling and especially "naked" short selling is a small percentage of total transactions it has limited impact. However, as the amount of short sales increase it creates a clear downward pressure on stocks that the short sellers never owned.
When short sellers start to see an opportunity because a stock hits certain indicators or simply because volume of short selling increases enough to get their attention, the number of shares for sale increase tremendously. There can be no counterbalancing group of buyers, except for early short sellers who cover earlier positions to lock in profits. The math on this is clear. For example if there is x stock in circulation, and it achieves a market price based on the number of sellers and buyers, an increase in sellers will cause downward pressure on the stock. For the short sellers who enter the market, there is no comparable group of buyers who can buy stock without actually owning it. Since the stock sold is actually still accounted for in someones account, effectively the number of shares in circulation is increased and the value receives downward pressure.
Yes, all short sellers must at some point cover their positions and effectively remove the fictitious stock from circulation. This theoretically will return the stock to its prior starting point, assuming the volatility hasn't scared of real investors.
Now, short sellers like to argue that they help to expose weak stocks. Not sure who asked them to do that and further, curious as to whether those stocks were that weak before the short sellers started a selling panic. Recently we saw shares of AIG hammered. Now, long term investors in AIG were punished as millions of shares of AIG stock were sold by people who had never owned it. It was such an obvious and easy target that the stock after undergoing a 1 to 20 stock split quickly lost 50 % of its value. Now when it was selling at penny stock levels, it wasn't that attractive a short selling target because there is a point when even a weak stock like AIG appeals to bottom feeders. Once the reverse split went into effect, short interest rose 14.5 percent in the company. About 262 million of the company's shares were held short, just below 10 percent of its shares outstanding on June 30, the day the company approved a 1-for-20 reverse split that was effective July 1.
After the stock plummeted, short interest declined as profit was taken and the stock had a modest rebound, with short interest down to about 8.5%. Now is AIG a bad company with a bad stock? I think that the answer to that is yes. However without short sellers how would the stock have behaved? For those investors holding the stock, many of them still holding on to it from earlier times when it was quite high, the likelihood that they would sell now was slim. There are no institutional holders of the stock so all the stock is actually held either by company employees or private investors, hoping for some eventual recovery. So the only real sellers would be that group of short sellers, that sold nearly 10% of the stock into a non receptive market.
What legitimate investment purpose was served by this? Yes, a number of short sellers made a lot of money and a lot of investors watched their holdings go artificially lower. As AIG has rebounded a bit, short sellers are going to have to cover positions and it is possible that the stock will return close to the level it had before the assault. Of course as it does rise, short selling will increase again.
Now clearly short selling is gambling. There are other ways to bet on whether stocks go up or down outside of actually owning them i.e. the options market, but when you sell a stock short you actually influence the market to some extent. When 10% of a stock is sold short, it is clearly significant enough to drive prices down. I have a problem with this, especially since the numbers involved have increased to the extent they have.
So should the SEC impose restrictions on short selling? I know free market advocates feel that it is unnecessary. I don't really care if people want to gamble. What strikes me as problematic here is that the gambling gets to influence the outcome. If the gambling was simply a bet on whether the stock would go up or down, i.e. options, it wouldn't directly influence the market. However, if a very large hedge fund wants to manipulate a stock, it can sell a large number of those shares short and in all liklihood drive the prices down somewhat.
So is market manipulation a good thing? For those doing the manipulation it is, but not for everyone else.
The question that I have is has short selling become so commonplace that it has altered the very nature of the stock market? Yes short selling has been around for many years, but the tremendous growth of hedge funds, as opposed to regular mutual funds, and the increased use of short selling via discount brokers has made it a greater factor.
Clearly in a free market you can buy and sell product. It makes sense to buy and sell future promises related to those products in order to reduce risk. However, the idea of selling product that you have never owned becomes somewhat problematic. When short selling and especially "naked" short selling is a small percentage of total transactions it has limited impact. However, as the amount of short sales increase it creates a clear downward pressure on stocks that the short sellers never owned.
When short sellers start to see an opportunity because a stock hits certain indicators or simply because volume of short selling increases enough to get their attention, the number of shares for sale increase tremendously. There can be no counterbalancing group of buyers, except for early short sellers who cover earlier positions to lock in profits. The math on this is clear. For example if there is x stock in circulation, and it achieves a market price based on the number of sellers and buyers, an increase in sellers will cause downward pressure on the stock. For the short sellers who enter the market, there is no comparable group of buyers who can buy stock without actually owning it. Since the stock sold is actually still accounted for in someones account, effectively the number of shares in circulation is increased and the value receives downward pressure.
Yes, all short sellers must at some point cover their positions and effectively remove the fictitious stock from circulation. This theoretically will return the stock to its prior starting point, assuming the volatility hasn't scared of real investors.
Now, short sellers like to argue that they help to expose weak stocks. Not sure who asked them to do that and further, curious as to whether those stocks were that weak before the short sellers started a selling panic. Recently we saw shares of AIG hammered. Now, long term investors in AIG were punished as millions of shares of AIG stock were sold by people who had never owned it. It was such an obvious and easy target that the stock after undergoing a 1 to 20 stock split quickly lost 50 % of its value. Now when it was selling at penny stock levels, it wasn't that attractive a short selling target because there is a point when even a weak stock like AIG appeals to bottom feeders. Once the reverse split went into effect, short interest rose 14.5 percent in the company. About 262 million of the company's shares were held short, just below 10 percent of its shares outstanding on June 30, the day the company approved a 1-for-20 reverse split that was effective July 1.
After the stock plummeted, short interest declined as profit was taken and the stock had a modest rebound, with short interest down to about 8.5%. Now is AIG a bad company with a bad stock? I think that the answer to that is yes. However without short sellers how would the stock have behaved? For those investors holding the stock, many of them still holding on to it from earlier times when it was quite high, the likelihood that they would sell now was slim. There are no institutional holders of the stock so all the stock is actually held either by company employees or private investors, hoping for some eventual recovery. So the only real sellers would be that group of short sellers, that sold nearly 10% of the stock into a non receptive market.
What legitimate investment purpose was served by this? Yes, a number of short sellers made a lot of money and a lot of investors watched their holdings go artificially lower. As AIG has rebounded a bit, short sellers are going to have to cover positions and it is possible that the stock will return close to the level it had before the assault. Of course as it does rise, short selling will increase again.
Now clearly short selling is gambling. There are other ways to bet on whether stocks go up or down outside of actually owning them i.e. the options market, but when you sell a stock short you actually influence the market to some extent. When 10% of a stock is sold short, it is clearly significant enough to drive prices down. I have a problem with this, especially since the numbers involved have increased to the extent they have.
So should the SEC impose restrictions on short selling? I know free market advocates feel that it is unnecessary. I don't really care if people want to gamble. What strikes me as problematic here is that the gambling gets to influence the outcome. If the gambling was simply a bet on whether the stock would go up or down, i.e. options, it wouldn't directly influence the market. However, if a very large hedge fund wants to manipulate a stock, it can sell a large number of those shares short and in all liklihood drive the prices down somewhat.
So is market manipulation a good thing? For those doing the manipulation it is, but not for everyone else.
Thursday, July 9, 2009
Thoughts on earnings
Where is the stock market headed, or maybe a better question is what should the S&P 500 be trading at? Generally the level is closely related to earnings and as earnings for the 500 have dropped since last year so has the market valuation. However, we are now in earnings season and as companies make announcements, the S&P is going to react.
There are a number of historical charts on the relationship between the S&P level and earnings. Generally the price/earnings ratio needs to provide a yield that is better than what you can get in US Treasuries since realistically, why take a risk if you are going to get less money than you would for not taking a risk? Right now this would require returns of at least 5% but that isn't enough of a premium so generally I think 7-8% is a better gauge. At 7.5% you would trade at 13.3 times earnings. Generally $55 is the current estimate for 2009 so the S&P lower limit would be in the 730 range. Now if you are will to accept the 5% return with the hope of future growth, the P/E ratio changes to 20 and we get an S&P at 1100. A more normal P/E ratio tends to be about 17 so a reasonable estimate is 935.
Now of course the estimate for earnings and whether it should be earnings from operations or GAAP earnings, (includes all accounting write-offs and additions) is the starting point. I prefer earnings from operations, since if you start using gains and losses from asset valuations, and other accounting requirements, you add a lot of individual company variability. I think those things are important is assessing the long term well being of individual companies, but distort the overall comparisons too much. As an aside, all those asset write-offs due to property and inventory valuations, may now actually be hidden assets if the valuations have any upside.
However at a P/E of 17 the return is around 6% (5.88) and it is fairly safe to say that the market want to get at least the treasury rate of about 4% plus protection against inflation. So if you expect inflation to be 1% we are back to a P/E of 20, at 2% 17, at 3% 14 etc.
So level of earning with return on treasuries and inflation expectations can give you a good estimate of where the S&P should be.
Concerning earnings, while revenue is down for most of the S&P companies we have seen aggressive cost cutting and inventory reductions (look at unemployment and commodities). This is likely to show some earning improvement despite the fact that the level of activity is reduced. Two things should be considered. I think companies need to adjust to a reduce level of consumer spending. This doesn't mean they can't be profitable, simply that they need to be profitable at a lower level of sales.
Growth will return, but barring an unexpected surge in real estate prices, consumers simply don't have the ability to spend like they used to. We also know that ugly reality has hit the baby boomer generation and that the comfortable retirement they envisioned from the equity in their homes and the gains in the stock market have vanished. They are now saving more and spending less. I don't expect this to change. However, if GM for example can be profitable selling 2 million cars a year, is it a bad investment? It won't be as big as it once was, nor will it employ as many people, but it may still be a good investment.
So I expect that we will continue to see earnings beat expectations because of the cost reductions, not revenue growth. In fact I believe what we saw from Alcoa may not be far from the norm, where the aggressive cost cutting allowed them to beat expectations, admittedly still losing money, by 30%.
It may seem a bit contradictory, but the cyclical industries hardest hit by the recession have had the best opportunity to do drastic cost cutting.
How will the Market react? Initial reaction to the Alcoa earnings is positive. I would think that as earning continue to beat estimates we will see the S&P go to the 935 level and possibly approach 1000. However, the naysayers will talk about a sluggish recovery with little job growth and reduced consumer spending. True enough, but if we accept that the economy isn't going to return to 2007 levels, have we recalibrated sufficiently to grow from where we are?
There are a number of historical charts on the relationship between the S&P level and earnings. Generally the price/earnings ratio needs to provide a yield that is better than what you can get in US Treasuries since realistically, why take a risk if you are going to get less money than you would for not taking a risk? Right now this would require returns of at least 5% but that isn't enough of a premium so generally I think 7-8% is a better gauge. At 7.5% you would trade at 13.3 times earnings. Generally $55 is the current estimate for 2009 so the S&P lower limit would be in the 730 range. Now if you are will to accept the 5% return with the hope of future growth, the P/E ratio changes to 20 and we get an S&P at 1100. A more normal P/E ratio tends to be about 17 so a reasonable estimate is 935.
Now of course the estimate for earnings and whether it should be earnings from operations or GAAP earnings, (includes all accounting write-offs and additions) is the starting point. I prefer earnings from operations, since if you start using gains and losses from asset valuations, and other accounting requirements, you add a lot of individual company variability. I think those things are important is assessing the long term well being of individual companies, but distort the overall comparisons too much. As an aside, all those asset write-offs due to property and inventory valuations, may now actually be hidden assets if the valuations have any upside.
However at a P/E of 17 the return is around 6% (5.88) and it is fairly safe to say that the market want to get at least the treasury rate of about 4% plus protection against inflation. So if you expect inflation to be 1% we are back to a P/E of 20, at 2% 17, at 3% 14 etc.
So level of earning with return on treasuries and inflation expectations can give you a good estimate of where the S&P should be.
Concerning earnings, while revenue is down for most of the S&P companies we have seen aggressive cost cutting and inventory reductions (look at unemployment and commodities). This is likely to show some earning improvement despite the fact that the level of activity is reduced. Two things should be considered. I think companies need to adjust to a reduce level of consumer spending. This doesn't mean they can't be profitable, simply that they need to be profitable at a lower level of sales.
Growth will return, but barring an unexpected surge in real estate prices, consumers simply don't have the ability to spend like they used to. We also know that ugly reality has hit the baby boomer generation and that the comfortable retirement they envisioned from the equity in their homes and the gains in the stock market have vanished. They are now saving more and spending less. I don't expect this to change. However, if GM for example can be profitable selling 2 million cars a year, is it a bad investment? It won't be as big as it once was, nor will it employ as many people, but it may still be a good investment.
So I expect that we will continue to see earnings beat expectations because of the cost reductions, not revenue growth. In fact I believe what we saw from Alcoa may not be far from the norm, where the aggressive cost cutting allowed them to beat expectations, admittedly still losing money, by 30%.
It may seem a bit contradictory, but the cyclical industries hardest hit by the recession have had the best opportunity to do drastic cost cutting.
How will the Market react? Initial reaction to the Alcoa earnings is positive. I would think that as earning continue to beat estimates we will see the S&P go to the 935 level and possibly approach 1000. However, the naysayers will talk about a sluggish recovery with little job growth and reduced consumer spending. True enough, but if we accept that the economy isn't going to return to 2007 levels, have we recalibrated sufficiently to grow from where we are?
Saturday, July 4, 2009
Happy 4th of July!
Certainly hope everyone has a safe and happy holiday!
I've been reading about how the SEC is considering putting restrictions on short selling. Now it seems likely they will reinstate the uptick rule, a requirement that you can only short a stock after an uptick, but it made me start thinking about short selling.
I guess the more I think about it the greater problem it seems to be. Yes, short selling has been around for a very long time but the capability for short selling and the amounts involved have exploded with the growth of hedge funds. Its easy enough to find how much short interest there is on any individual stock but not as easy to see the amount of short selling in total. I did see one old chart that showed the amount of short selling increasing exponentially between the early 1960s and the early 1990s. Based on some more recent data, short interest on the NYSE was said to be about 4% of total shares which would support that the increase has continued.
So what about short selling? Short selling is a way to bet that a stock will go down without actually owning the stock. Yes, the stock will eventually need to be purchased to cover the short position and it can be a risky strategy but the other impact is that it has some impact on the supply and demand of a stock. Now, when the amount of short interest is negligible it can be absorbed by normal market conditions. The situation that concerns me is when short positions become a significant factor in the number of shares outstanding.
Assuming stocks reach a supply and demand equilibrium because the number of buyers and sellers at a particular level are approximately equal. You can increase the number of sellers by taking short positions. Now, the impact of this clearly depends on the amount of short sellers. Now the number of short positions is not spread evenly across all stocks. Certain stocks either because they have had recent run-ups or because they have some negative news, attract a great number of short sellers. In those situations they have a multiplier impact on the stock, meaning that more shares are on the market than would have been otherwise.
This increases volatility of the stock price. Now if you think of the stock market as something akin to a casino, this is OK. However, if you think the fundamental purpose of the stock market is to provide for a fairly orderly place to raise capital, it may not be a good thing. However, there are clearly times when short sellers become so numerous for a particular sector or stock that they endanger companies. Near the end of 2008 the SEC banned short selling of financial stocks for a 2 week period, Britain banned it for financial stocks for a longer period and Australia banned it altogether. Whether these actions helped or not may be debatable. There is also a theory that if a stock has a large short interest, it has a built in demand level since all these short holders will eventually have to buy the stock to cover their positions.
So what should the SEC do? As I said earlier they will probably re institute the uptick rule. Should there be additional restrictions? One possibility would be to restrict the amount of short interest that could exist on any particular stock. Since there are other ways to bet that a stock will go down or up, puts for example, is short selling a good idea at all? It is clearly a speculative position that generates fees for the brokerage. It does provide a way for hedge funds to "hedge" but do we care about that?
I'll wait and see what the SEC decides. I will say that with the amount of retirement funds tied up in the stock market, the American people don't want it to be a crap shoot. Prices should not be inflated, but selling shares you don't own is gambling, plain and simple. It may expose overvalued stocks or it may depress values below where they should be. Either way it is not an investment.
I've been reading about how the SEC is considering putting restrictions on short selling. Now it seems likely they will reinstate the uptick rule, a requirement that you can only short a stock after an uptick, but it made me start thinking about short selling.
I guess the more I think about it the greater problem it seems to be. Yes, short selling has been around for a very long time but the capability for short selling and the amounts involved have exploded with the growth of hedge funds. Its easy enough to find how much short interest there is on any individual stock but not as easy to see the amount of short selling in total. I did see one old chart that showed the amount of short selling increasing exponentially between the early 1960s and the early 1990s. Based on some more recent data, short interest on the NYSE was said to be about 4% of total shares which would support that the increase has continued.
So what about short selling? Short selling is a way to bet that a stock will go down without actually owning the stock. Yes, the stock will eventually need to be purchased to cover the short position and it can be a risky strategy but the other impact is that it has some impact on the supply and demand of a stock. Now, when the amount of short interest is negligible it can be absorbed by normal market conditions. The situation that concerns me is when short positions become a significant factor in the number of shares outstanding.
Assuming stocks reach a supply and demand equilibrium because the number of buyers and sellers at a particular level are approximately equal. You can increase the number of sellers by taking short positions. Now, the impact of this clearly depends on the amount of short sellers. Now the number of short positions is not spread evenly across all stocks. Certain stocks either because they have had recent run-ups or because they have some negative news, attract a great number of short sellers. In those situations they have a multiplier impact on the stock, meaning that more shares are on the market than would have been otherwise.
This increases volatility of the stock price. Now if you think of the stock market as something akin to a casino, this is OK. However, if you think the fundamental purpose of the stock market is to provide for a fairly orderly place to raise capital, it may not be a good thing. However, there are clearly times when short sellers become so numerous for a particular sector or stock that they endanger companies. Near the end of 2008 the SEC banned short selling of financial stocks for a 2 week period, Britain banned it for financial stocks for a longer period and Australia banned it altogether. Whether these actions helped or not may be debatable. There is also a theory that if a stock has a large short interest, it has a built in demand level since all these short holders will eventually have to buy the stock to cover their positions.
So what should the SEC do? As I said earlier they will probably re institute the uptick rule. Should there be additional restrictions? One possibility would be to restrict the amount of short interest that could exist on any particular stock. Since there are other ways to bet that a stock will go down or up, puts for example, is short selling a good idea at all? It is clearly a speculative position that generates fees for the brokerage. It does provide a way for hedge funds to "hedge" but do we care about that?
I'll wait and see what the SEC decides. I will say that with the amount of retirement funds tied up in the stock market, the American people don't want it to be a crap shoot. Prices should not be inflated, but selling shares you don't own is gambling, plain and simple. It may expose overvalued stocks or it may depress values below where they should be. Either way it is not an investment.
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