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Wednesday, June 25, 2008

The Truth About Naked Selling: Those Who Don't Learn From The Past

Investor's Daily Edge
 
Wednesday, June 25, 2008
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Are You Being Yanked by the Shorts?

By Dr. Russell McDougal

Can you make your life’s fortune swimming upstream? Yea, I think you can. Stay within the school and you’ll receive what the masses historically receive… a portion of bread and a ton of circus. Make that bread and CNBC if you will.

You are wise not to get caught up in the day to day and minute to minute pabulum thrown your way by the NY/DC axis of weasels. The knee jerk reactions they illicit are best left to the orthopedic surgeons.

Let’s look at some big picture stuff. The most gullible people on the planet, overall, have U.S. zip codes. It is nothing short of astounding how many citizens buy into the official stats our government regularly dispenses. Distraction may just play a part in that problem. Life is complex and I confess to being easily distracted. We must insist on focus.

Today we’re going to look into a criminal enterprise that would make Al Capone blush. He’s turning over in his syphilitic grave and kicking himself for not being the first to think of it. Lacking imagination, that guy.

Here’s the deal. I’ll start with a poem… “he that takes what isn’t hizzen, pays it back or goes to prison”.

Talk about an outmoded ditty. These days you can take what’s not yours, sell it, and not go to prison. White collar folk seldom do hard time in case you wondered. They just pay back 10 to 20% of their ill gotten gains.

Would you like unlimited access to trade a market in your desired direction?

Most of us simply buy stocks and go long that position. We are convinced it’s going higher. You can also short a stock. Say, for example, you believe IBM is going lower. You can sell IBM even though you don’t personally own it. You can call your broker tomorrow and sell IBM and the money from this sell will then appear in your account.

This type of transaction is legal because the intermediary (your broker) can borrow IBM stock from a different client and sell this stock into the market. “Shorting” is a completely normal market function. You can go long or you can go short. It’s all good.

Where’s the problem? You are not supposed to be able to short a stock unless you can actually access that stock. Do you think you could hold sway over a market if you were given unlimited access to that particular position? You don’t have to own it personally and you don’t even have to borrow it.

It’s called a naked sale. You sell something you don’t own and have no access to. You can influence and actually dominate any market you choose with this mechanism. This is completely illegal if the intent is to force share prices lower. Unfortunately, the security laws regarding this type of fraud are not enforced.

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Naked short sells are commonplace. U.S. hedge funds appear to be the primary abusers. Small cap stocks are the frequent targets. Some companies have more shares sold short than they have issued! This is an obvious fraud. Dishonesty has been institutionalized.

The junior exploration stocks have long been abused by these activities. Recent events suggest this is about to cease. A gentleman named Jim Sinclair has just pledged his full attention and personal fortune to the cause of ending this fraud. Sinclair has been an absolute giant in the world of gold for decades. He knows his stuff. He is also completely fearless.

His recent proposals put illegal short sale offenders on notice that they stand to be criminally prosecuted. A $50,000 gold reward is part of this picture. So is organizational activity. Expect more perp walks in the coming months and years.

I strongly believe that the entire junior exploration and mining share sector has been under the influence of both legal and illegal shorting activity. This is a partial explanation for their recent failure to keep pace with various commodity prices. Their historic leverage to mineral prices has been M.I.A. for an extended period of time.

We’ve definitely been swimming upstream, but the currents are now changing. It will just take a few exposures to put an end to illegal naked short selling. No one wants to spend their days alongside the deposed Elliot Spitzer.

When, not if, the naked short-selling drag is removed from these small stocks, they will begin a price appreciation process. Those who are shorting them legally will have to close out their positions. The only way this can be done is to buy the shares back. The shorted companies will turn upward. Possibly with a vengeance.

All small stocks are particularly vulnerable to targeted shorting. It’s not just those in the resource sector. The Enron debacle is more representative of our markets than most care to believe. We demand and deserve better.

Invest Resourcefully,

Rusty

P.S. Jim Sinclair’s considered opinion is that gold is next heading above $1600. I don’t doubt him. Being short anything gold related when we head in that direction will be financial suicide.

P.P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

Market Watch

It's Déjà Vu All Over Again

By Charles Delvalle

Ford (F), General Motors (GM), and Chrysler haven’t been paying much attention to their past. The truth is every single problem they have today could have been avoided if they had just learned from their past.

Back in the 1970’s, during the last oil shock, the big three saw sales drop off a cliff. At the time the big three’s mainstream cars were blazing fast,  and had 400 cubic inch engines that produced in excess of 400 horsepower… and drove you about 13 miles on a gallon of gas. Click this link to see the top ten gas guzzlers of the 70’s.

Japanese manufacturers, on the other hand, had fleet averages of 19-21 MPG. As you can imagine, Americans flocked to Japanese built cars in search for fuel economy.

The big three eventually responded by pushing up fuel economy standards. But since the late 80’s, fuel economy in an American car actually moved down.

Did they learn anything at all from the 70’s? It doesn’t look like it.

Had they just put what they learned to practice, American manufacturers would have had the technology to make cars more fuel-efficient. But instead, they decided to dedicate over half of their sales to gas guzzling trucks and SUV’s.

Now that gas prices are over $4 a gallon and sales of gas guzzlers have plummeted, American manufacturers will have to scale down in a big way. Expect this transition to take years… not months. And in the meantime you’ll continue to see multi-billion dollar losses.

As Yogi Berra would once said “It’s Déjà vu all over again”.

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The Market Minute

A rally waiting in the wings... that’s what you’d think if you realized that 317 of the 500 stocks in the S&P 500 index (a whopping 63%) are oversold. When a stock is oversold, it usually means that there are few sellers left. If this is the case, the remainder of the week could see some bullish momentum as buyers enter the market.
 

 
KISS
 
In The Markets
 
Last
Change
YTD
Dow 11,807.43 none34.93 -10.99%
Nasdaq 2,368.28 none17.46 -10.71%
S&P 500 1,314.29 none3.71 -10.49%
Gold 888.80 none5.10 6.66%
Silver 16.64 none0.14 12.66%
Oil 136.95 none0.21 42.69%
Nat Gas 13.02 none0.16 74.06%
 
Newsworthy

John McCain hopes to solve the country's energy crisis with cold hard cash.

The presumed Republican nominee is proposing a $300 million government prize to whoever can develop an automobile battery that far surpasses existing technology. The bounty would equate to $1 for every man, woman and child in the country, "a small price to pay for helping to break the back of our oil dependency," Mr. McCain said in remarks prepared for delivery Monday at Fresno State University in California.

Mr. McCain said such a device should deliver power at 30% of current costs and have "the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars."

The Arizona senator is also proposing stiffer fines for automakers who skirt existing fuel-efficiency standards, as well as incentives to increase use of domestic and foreign alcohol-based fuels such as ethanol.

In addition, a so-called Clean Car Challenge would provide U.S. automakers with a $5,000 tax credit for every zero-carbon emissions car they develop and sell.

-WSJ.com

 
RTL
 
Meet the Team

MaryEllen Tribby - Publisher
Jedd Canty - Business Director
Rick Pendergraft - Managing Editor
Jon Herring - Editor
Nicole Reynolds - Marketing


Analysts / Editorial Contributors
Michael Masterson
Charles Delvalle
Andrew M. Gordon
Dr. Russell Mcdougal D.D.S.

 

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