Tagged: shorts

Rotation

You’ve heard of 99-year leases?

Karen’s grandfather has had an exceptional lease on life. We were in Nashville last weekend as he marked the calendar a 99th time. Remarkably, in his lifetime headlines have been made by WWI, inventor Nikola Tesla, the Great Depression (he was a divinity student at Yale then) and Adolph Hitler.

Speaking of a lease, in a sense that’s what short volume is. We’re not talking about short interest, periodic reads on short positions outstanding. That metric today struggles for statistical significance. Short volumes marketwide the past 20 days averaged 44%. In our client base, the highest daily average was 63%, the lowest, 28%.

Recently, a noted client received public attention from a prolific Short (an investor who in the old-fashioned way borrows and sells shares to raise cash on a belief exposure can be covered later at a lower cost for an arbitrage profit between selling and buying). In weeks leading up, our client’s volume marked short instead of long (a trade is one of those two, or exempt from the rules, the latter true for less than 1% of all trades so 99% of volume is long or short) rose from 39.9% short daily to 71.9% the day before the news.

It’s hard to fathom so large a portion of daily volume short – leased, or borrowed. Yet consider other assets. Most Americans borrow to buy cars and houses and major appliances. We borrow to buy dinner by paying with credit when we eat out. Banks borrow to make loans today (not generally true before the Fed). Governments borrow for everything. In buying $3 trillion of Treasury bonds and mortgage-backed securities, the Federal Reserve borrowed from Americans’ future earnings and productivity. Borrowing is rampant (and no harbinger of health, but that’s another story).

Stocks are the same save that the ratio still favors owning over renting (at 44% to 56% the divide is no chasm). Tracking borrowing alone tells one little except that your stock’s health is dependent on or derived from borrowing. (more…)

“We determined that it was appropriate to re-examine the appropriateness of short sale price test restrictions.”

We copied that sentence from the SEC’s 334-page charter instituting Rule 201 amendments for short sales. While it’s amusing that the authors modified the word appropriate with the word appropriateness, what’s important is that the rule took effect yesterday, Feb 28. What is it and how might it impact investor relations?

It’s hard to summarize a document consuming 60% of a ream of paper in one sentence. But Rule 201 implements an uptick rule – which regulators removed as part of Reg NMS in 2007 – when securities drop 10% from the preceding day’s closing price. If that happens, an uptick rule will be enforced in which long sellers matching at the best bid or offer will be able to sell ahead of short-sellers, and shorts will only be able to sell if the price ticks up above the last bid.

The idea is that if long sellers get called up to the front of the line, it’ll promote investor confidence by reducing the severity of short-driven price swings. And it’ll improve market-efficiency by letting those with long positions off the boat, thus discouraging short sellers from trying to sink the boat. (more…)