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Friday, September 19, 2008

Goodbye, Free Market! SEC Says It Will Ban Short-Selling on Financial Stocks!

From CNBC last night ...

The Securities and Exchange Commission says it will issue a temporary ban on short-selling CNBC has learned. SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's plans to take the extraordinary step of interfering with the market's regular functioning. Short-selling is a trading strategy of selling borrowed stock in hopes it falls and can be repurchased at a lower price.

This morning, the SEC elaborated that the ban is on 799 financial stocks for 10 days. But it reserves the right to extend the ban to all stocks, and for 30 days, if it sees the need.
"This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress," [SEC Chairman Christopher] Cox said.

The market sees this as good news. In fact,combined with the new Federal bailout for failing financial companies, this is a 1-2 boost for the markets and the greenback. See: US Drafts Sweeping Plan to Fight Crisis and Dollar Soars Against Euro, Yen on U.S. Asset Plan. But is this a free market? No!

How does this affect you? Well, if short selling is effectively banned, the longer that ban holds, the more the risk that the capital markets as we know them will cease to function.

In the short-term, we should see ...

1) An enormous short-covering rally
2) Once the shorts have covered, then fund managers will be able to sell their holdings at valuations much higher than they should be. So, effectively, it's a bail-out for Wall Street's fat-cats (again).
3) Once that's done, with the short-sellers out of the market, we will have fewer participants in the market and less liquidity. International funds will likely go where the rules are more free and fair -- aka not where the government comes in and waves a magic wand to change the rules every day.
4) Larry Kudlow, you can sit down and be quiet now. Free market capitalism is essentially suspended in the US ... at least for the near term.

And here’s a question for you: What if it doesn’t work? What happens next?

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