Via Forbes:

What could be the beginning of a broad crackdown on short-sale abuses came Tuesday, when Securities and Exchange Commission Chairman Christopher Cox told a Senate committee the agency was moving swiftly to prevent mischief in the trading of shares of Fannie Mae (FNM) and Freddie Mac (FRE), the battered mortgage finance companies.

The SEC will also be providing cover for brokerages including Lehman Brothers, Goldman Sachs, Merrill Lynch, and Morgan Stanley. I suspect other financial companies, including regional banks (and possibly insurers with heavy exposure to mortgage-backed securities) are not far behind.

For those just joining, the SEC is targeting naked-short selling, a process which by traders short the stock without borrowing the shares as required. It’s usually a quick process - short and cover before settlement date, although sometimes it is just done for efficiency sake. If the stock is widely held, some firms allow shorting from the list - they make sure the stock is borrowed on the trader’s behalf after execution, and they generally have pre-arranged dealers for this purpose. Now, short-sellers will be required to secure the stock before they short, at least for this handful of issues.

I am sure the SEC means well here - they are trying to slow down the “rumor trade.” But they are favoring obvious short targets, using rules that are already technically in place (since 1934), and making the markets somewhat less equitable in the process (i.e. little guys may see more “cancelled” notices on their trading screens while the big guys with direct lines to stock loan departments will continue business as usual).

I wonder how many “fail to deliver” notices were handed back over Fannie, Freddie, and Lehman shorts to push them in this direction.

UPDATE: Barry Ritholtz says it’s akin to “idiots fiddling while Rome burns.” There certainly is a deer-in-the-headlights aspect to all this.

UPDATE 2: Here’s a list of the affected issues…

- Allianz SE
- Bank of America Corp.
- Barclays PLC
- BNP Paribas Securities Corp.
- Citigroup Inc
- Credit Suisse Group
- Daiwa Securities Group Inc
- Deutsche Bank Group AG
- Fannie Mae
- Freddie Mac
- Goldman Sachs Group Inc
- HSBC Holdings Plc ADS
- JPMorgan Chase & Co
- Lehman Brothers Holdings Inc
- Merrill Lynch & Co Inc
- Mizuho Financial Group Inc
- Morgan Stanley
- Royal Bank ADS
- UBS AG

Mark Cuban has an interesting post on shorting stocks, entitled I feel so dirty….Naked Shorts.

While most of Mark’s post targets SEC rules regarding stock loan regulation and its related market impact, I am not going to argue with him about shorting as he is right on target (most of the time). I short stocks as well - in fact I short more stock than I buy. Reason being something similar to what Mark says about bias.

Analysts heavily weight recommendations towards the long side. I think the balance of positive to negative recommendations is something like 15:1, but don’t quote me on it (just correct me - I’ll learn something new).

Everyone looks at bears as pessimists. I look at them as opportunists. If everyone is consistently long biased (and they are, right up until a crash), then the general market trend should be up. Now if a stock starts skidding, it is bucking the market forces. All the long bias isn’t helping, and that means it is in trouble.

I short stocks AFTER they have started their downward moves. What I do as far as the size of the position, setting stops, etc. is beyond the scope of this post, but let’s just say I am careful.

It works.

But then again, I am not a billionaire, so if anything here falls contrary to what Mark has said in his post, take his advice.

Eweek recently presented an article entitled Boggled by Google: Wall Street Way Off Mark. I say forget the analysts, and good for Google. Keep’em guessing boys, while you continue to beat the pants off even your own internal estimates. The game that is generally played between analysts and the companies they follow is getting turned on its head here. Google has a complex business model; one that a white-shoed analyst with a fresh Harvard MBA is going to have tough time picking apart (that is, unless he or she also has a PhD in mathematics from MIT).

Let’s cut to the chase folks. Sell-side equity analysts exist for one purpose, selling stock. These analysts mock up a spreadsheet based on what they heard in the last conference call, publish a report setting a “new target price” of “X”, then pass it on to their brokers. The brokers call all their clients, pushing said stock, using this fantastic report as justification.

Now in an environment where company “Y” is selling widgets, and every man, women and child needs exactly one widget, and each widget lasts exactly 1.5 years, maybe an analyst serves some purpose. Who has the time to extrapolate the widget manufacturer’s future results, using their present cost structure, the next five years’ demand for widgets from population growth estimates, and a probability factor for new companies entering the widget market? Not me.

But Google isn’t selling widgets. They are selling an extremely dynamic advertising model, one which has to take into account new AdWords clients, new AdSense publishers, ever increasing keyword rates on a virtually unlimited combination of said keywords, competition entering and leaving the nascent market, and a host of other variables. Furthermore, they have a slew of services they have not even applied a business model to yet, and they aren’t talking; this makes me believe they are up to some even bigger things.

And they don’t really need to talk. They have an ever growing pile of cash, and an issue with a thin float (as compared to many companies their size). They don’t have to impress anybody outside of themselves. I couldn’t think of a better position to be in, as a public entity.

If a glorified marketing assistant (which is essentially what a sell-side equity analyst really is) thinks they have a snowball’s chance in hell of actually predicting results on a company like Google, then please introduce yourself. If you can hit Google’s results, or the results of any other company like them (without being handed the financial statements the night before their release), I would like to follow you, or better yet, work for you, as you would obviously be a genius beyond compare that I could learn volumes from.