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Qtec
11-30-2010, 04:06 AM
Imagine a company [a furniture, whatever] with lots of stores. This company has issued a million shares and they are priced at $100.
In the middle of the night, a hedge fund borrows 2 million shares, sells them on the market for $100 or slightly less and drives the price down.

When the price hits $50 they start buying again. At the end of the night, the price has gone up again to say $80.

What happened ?

The hedge fund made a nice little profit and the company lost 20% of its value.

Q

LWW
11-30-2010, 04:35 AM
How would they "borrows 2 million shares" when the company had only issued one million shares?

How would they sell what they don't own?

How would they replace the shares they had borrowed?

How would they have profited?

[Edited because he did know the answers.]

LWW

Stretch
11-30-2010, 04:47 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: LWW</div><div class="ubbcode-body">How would they "borrows 2 million shares" when the company had only issued one million shares?

How would they sell what they don't own?

How would they replace the shares they had borrowed?

How would they have profited?

Just fess up ... you have no clue what you are talking about.

LWW </div></div>

That never stoped you before...... St.

LWW
11-30-2010, 05:09 AM
Can you answer the questions asked?

Of course you can't.

Do you have anything to add to the conversation?

Of course you don't.

LWW

Qtec
11-30-2010, 06:08 AM
I must confess, I didn't understand it the first time I heard it either.

link (http://www.youtube.com/watch?v=E1tMjiVxhfc)

naked short selling (http://www.youtube.com/watch?v=3wdg9__Oq9w)

You see, to sell the shares, you don't even have to have them in the first place!

Q

LWW
11-30-2010, 06:47 AM
Kudos.

I'm impressed that you researched it and I extend my apologies.

Now, you are beginning to get a grasp of what fascist economics looks like.

Let's review what the possibilities are under the current situation:

1 - The naked short works, in which case the brokerage pockets the profit.

2 - The naked short fails, the brokerage goes belly up, and the losses are communalized to the taxpaying public, the brokerage then has been recapitalized by the fed, and they do it again..

Next, since you seem to be accepting Mr Taibbi as credible ... what do you think of his opinion that Obama has sold out to Wall Street and Goldman-Sachs?

LWW

Qtec
11-30-2010, 07:14 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: LWW</div><div class="ubbcode-body">Kudos.

I'm impressed that you researched it and I extend my apologies.</div></div>

Thanks. Actually I researched this stuff at the time of the credit crisis.

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Now, you are beginning to get a grasp of what fascist economics looks like.</div></div>

I thought this was capitalism at work?

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Let's review what the possibilities are under the current situation:

1 - The naked short works, in which case the brokerage pockets the profit.</div></div>

I disagree. This is how you can have more shares on the market than actually exist. Like Matt says, its counterfeiting.

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">2 - The naked short fails, the brokerage goes belly up, and the losses are communalized to the taxpaying public, the brokerage then has been recapitalized by the fed, and they do it again..</div></div>

If you are saying Wall st gambled, lost and the govt repaid their losses then I agree.

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Next, since you seem to be accepting Mr Taibbi as credible ... what do you think of his opinion that Obama has sold out to Wall Street and Goldman-Sachs?

LWW </div></div>

I totally agree. I can't blame Obama for seeking advice from experts on the derivitives and the CDS etc because lets face it, these things are so complex that nobody really knows the whole picture, but Larry Summers!!!! The guy who was partly responsible for the whole mess?


Obama has surrounded himself with the same gang [ the wrong people], the Goldman Sachs gang. They pervade the Govt and their recent success while all others were in trouble says a lot to me.

Q

Stretch
11-30-2010, 07:49 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: LWW</div><div class="ubbcode-body">Can you answer the questions asked?

Of course you can't.

Do you have anything to add to the conversation?

Of course you don't.

LWW </div></div>

Not to your liking? Boo-whoo. I enjoy watching you answer all your own inane questions. Babbling at yourself like a schidsophrenic moron makes for a great case study of obsessive compulsive posting disorder. St.

sack316
11-30-2010, 09:22 AM
Q, there was an episode of American Greed on CNBC the other night that talked about this. It was about Anthony Elgindy

http://www.cnbc.com/id/35058462

You'd probably enjoy that episode if you're interested in this stuff and how it all works/is done.

Sack

Chopstick
11-30-2010, 02:17 PM
Naked shorts are illegal in US markets. They have been since 1933. They were a primary contributor to the crash of 1929. You will go to prison for doing it. A guy from my firm did. It still goes on in the European markets. I thought they had banned it by now but I guess they haven't gotten around to it yet. Here is a fairly recent article on it.

Naked short ban in Europe. (http://www.independent.co.uk/news/business/news/eu-push-to-crack-down-on-naked-short-selling-1996088.html)

The way short selling works is the firm that clears or settles your trades has a pool of stocks on hand for short sales. When you sell/short a stock you are borrowing shares from the short pool and sell them on the market. The idea being that the stock will go down and you buy them back at a lower price and return the shares to the short pool. If a stock is thinly traded, meaning very low daily volume, it may not be readily available in the short pool. You then have to do what is called a "locate" where the firm will locate and secure the shares for you to sell. Even high volume stocks can come up on the hard to borrow list if enough traders are shorting it. When that BP rig blew up in the gulf, all of the oil drillers with offshore operations went "hard to borrow".

If you look at the market on a down day and the last 20 minutes it suddenly turns around and shoots up into the close, it's the short sellers buying in their positions because they don't want to carry overnight.

sack316
11-30-2010, 03:34 PM
lookie at you Chop... that edumacation sounds like it sure is paying off!

Seriously, wonderful explanation!

That story on Anthony Elgindy mentioned that because he had done it so often at some... I forget the term... but something like sweatshop firms that push these types of stocks on unsuspecting investors to increase their own profit margin when they pull "the move".

Anyway, it mentioned he was able to look at certain numbers or data, and quickly identify whether this company was legit or doomed to be on of "those" types of stocks. Are you aware of any key elements an amateur investor should look for to avoid such pitfalls... other than the obvious "if it's too good to be true..." idiom?

Sack

Qtec
12-01-2010, 01:46 AM
<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Naked shorts are illegal in US markets. They have been since 1933. </div></div>

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Naked short selling has been illegal in the United States since 2008, as well as some other jurisdictions, as a method of driving down share prices. Failing to deliver shares is legal under certain circumstances.[2][3] In the United States, naked short selling is covered by various SEC regulations which prohibit the practice.[4] Many advocates on both Wall Street and Main Street, including Overstock.com's Patrick Byrne, have advocated for stricter regulations against naked short selling. In 2005, "Regulation SHO" was enacted, requiring that broker-dealers have grounds to believe that shares will be available for a given stock transaction, and requiring that delivery take place within a limited time period.[2][5] As part of its response to the crisis in the North American markets in 2008, the SEC issued a temporary order restricting short-selling in the shares of 19 financial firms deemed systemically important, by reinforcing the penalties for failing to deliver the shares in time.[6] Effective September 18, 2008, amid claims that aggressive short selling had played a role in the failure of financial giant Lehman Brothers, the SEC extended and expanded the rules to remove exceptions and to cover all companies, including market makers.[7][8] </div></div>

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Securities Exchange Act of 1934

The Securities Exchange Act of 1934 stipulates a settlement period up to three business days before a stock needs to be delivered,[12] generally referred to as "T+3 delivery." </div></div>

Q...?

Gayle in MD
12-01-2010, 08:18 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body">lookie at you Chop... that edumacation sounds like it sure is paying off!

Seriously, wonderful explanation!

That story on Anthony Elgindy mentioned that because he had done it so often at some... I forget the term... but something like sweatshop firms that push these types of stocks on unsuspecting investors to increase their own profit margin when they pull "the move".

Anyway, it mentioned he was able to look at certain numbers or data, and quickly identify whether this company was legit or doomed to be on of "those" types of stocks. Are you aware of any key elements an amateur investor should look for to avoid such pitfalls... other than the obvious "if it's too good to be true..." idiom?

Sack </div></div>

/forums/images/%%GRAEMLIN_URL%%/crazy.gif

You must be kidding?

sack316
12-01-2010, 11:01 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Gayle in MD</div><div class="ubbcode-body"><div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body">lookie at you Chop... that edumacation sounds like it sure is paying off!

Seriously, wonderful explanation!

That story on Anthony Elgindy mentioned that because he had done it so often at some... I forget the term... but something like sweatshop firms that push these types of stocks on unsuspecting investors to increase their own profit margin when they pull "the move".

Anyway, it mentioned he was able to look at certain numbers or data, and quickly identify whether this company was legit or doomed to be on of "those" types of stocks. Are you aware of any key elements an amateur investor should look for to avoid such pitfalls... other than the obvious "if it's too good to be true..." idiom?

Sack </div></div>

/forums/images/%%GRAEMLIN_URL%%/crazy.gif

You must be kidding? </div></div>

No I'm not. Why, would you care to answer? Or did you just want to add in a pointless condescending post that you would berate me over were this exchange reversed?

There are certain patterns that such junk stocks follow in their trading and financial statements. Elgindy was a master of weeding these out and exposing them, as his firms had taken part in doing so in his first two jobs on Wall Street.

If you happen to hold that wisdom in your head, then by all means please do share. Otherwise it had nothing to do with you.

Sack

Gayle in MD
12-01-2010, 11:11 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body"><div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Gayle in MD</div><div class="ubbcode-body"><div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body">lookie at you Chop... that edumacation sounds like it sure is paying off!

Seriously, wonderful explanation!

That story on Anthony Elgindy mentioned that because he had done it so often at some... I forget the term... but something like sweatshop firms that push these types of stocks on unsuspecting investors to increase their own profit margin when they pull "the move".

Anyway, it mentioned he was able to look at certain numbers or data, and quickly identify whether this company was legit or doomed to be on of "those" types of stocks. Are you aware of any key elements an amateur investor should look for to avoid such pitfalls... other than the obvious "if it's too good to be true..." idiom?

Sack </div></div>

/forums/images/%%GRAEMLIN_URL%%/crazy.gif

You must be kidding? </div></div>

No I'm not. Why, would you care to answer? Or did you just want to add in a pointless condescending post that you would berate me over were this exchange reversed?

There are certain patterns that such junk stocks follow in their trading and financial statements. Elgindy was a master of weeding these out and exposing them, as his firms had taken part in doing so in his first two jobs on Wall Street.

If you happen to hold that wisdom in your head, then by all means please do share. Otherwise it had nothing to do with you.

Sack </div></div>

How can I be condescending when I haven't written a single word?

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Otherwise it had nothing to do with you.

</div></div>

LOL, So what does anything I write, have to do with you?

bobroberts
12-01-2010, 11:14 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Gayle in MD</div><div class="ubbcode-body"><div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body"><div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Gayle in MD</div><div class="ubbcode-body"><div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body">lookie at you Chop... that edumacation sounds like it sure is paying off!

Seriously, wonderful explanation!

That story on Anthony Elgindy mentioned that because he had done it so often at some... I forget the term... but something like sweatshop firms that push these types of stocks on unsuspecting investors to increase their own profit margin when they pull "the move".

Anyway, it mentioned he was able to look at certain numbers or data, and quickly identify whether this company was legit or doomed to be on of "those" types of stocks. Are you aware of any key elements an amateur investor should look for to avoid such pitfalls... other than the obvious "if it's too good to be true..." idiom?

Sack </div></div>

/forums/images/%%GRAEMLIN_URL%%/crazy.gif

You must be kidding? </div></div>

No I'm not. Why, would you care to answer? Or did you just want to add in a pointless condescending post that you would berate me over were this exchange reversed?

There are certain patterns that such junk stocks follow in their trading and financial statements. Elgindy was a master of weeding these out and exposing them, as his firms had taken part in doing so in his first two jobs on Wall Street.

If you happen to hold that wisdom in your head, then by all means please do share. Otherwise it had nothing to do with you.

Sack </div></div>

How can I be condescending when I haven't written a single word?

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Otherwise it had nothing to do with you.

</div></div>

LOL, So what does anything I write, have to do with you? </div></div>


Gayle your a twit.A lonely women looking for what i can't tell.
Maybe you should get a job or volunteer for something for you have way to much time on your hands. Go back to dancing with the stars or Idol.

sack316
12-01-2010, 11:28 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Gayle in MD</div><div class="ubbcode-body">
How can I be condescending when I haven't written a single word?</div></div>

Crazy face followed by "You must be kidding?"

How should I take that?

Sack

Chopstick
12-01-2010, 11:44 AM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body">lookie at you Chop... that edumacation sounds like it sure is paying off!

Seriously, wonderful explanation!

That story on Anthony Elgindy mentioned that because he had done it so often at some... I forget the term... but something like sweatshop firms that push these types of stocks on unsuspecting investors to increase their own profit margin when they pull "the move".

Anyway, it mentioned he was able to look at certain numbers or data, and quickly identify whether this company was legit or doomed to be on of "those" types of stocks. Are you aware of any key elements an amateur investor should look for to avoid such pitfalls... other than the obvious "if it's too good to be true..." idiom?

Sack </div></div>

They were called bucket shops. The book "Reminiscences of a Stock Operator" gives a good inside look into them. Fundamental Analysis is an ongoing study for me. I haven't been keeping up lately. I have the definitive work on the subject, "Securities Analysis" by Benjamin Graham. Benjamin Graham is the guy who taught Warren Buffet. I have a problem with that book. The guy takes 30 pages to make a point that could have been made in four sentences. I found the book "Fundamental Analysis for Dummies" to be more useful. This is a pretty good website for the Graham/Buffet value investing style.

http://www.oldschoolvalue.com/

Basically it boils down to this. What is a fair price for the stock? Is the company making any money? The determine fair price, lots of people look at price to earnings ratio P/E but that changes every quarter. I was taught to look at the price to book P/B which is the book value of the company divided by the number of shares. It doesn't move around as much as P/E and it gives you an idea of how much of the companies actual value is represented in the price of the stock. A price to book ratio of greater than 5 or 6 is where you are getting away from a value investment and into a speculative trade. If it's 20 to 1 and the company has no earnings to back it up, then you have to question why anyone is buying it. There is a saying about bio-techs. If you trade bio-techs you don't have to worry about checking earnings because there aren't any. Just because a stock has a price to book of less than one does not make it a good discount. You have to question what is going on at a company if the stock is trading for less than the actual value of the company.

Earnings are a little more complicated. Companies are required to file their financial information with the SEC and this reports are publicly available. I use the Reuters website for most of this. Yahoo is not bad. Money Central is good for looking at earnings at multiple time frames like 1 year, 5year, etc. They all have it but Money Central puts it out front where it is easy to find. If I am really curious about a company I go to the SEC site and dig up their financial statements.

So if the price to book shows reasonably value and the company is making money, that's two probabilities in your favor. Professionals do not trade the money, the company, or the market. They trade the probabilities. The more probabilities you favor the better the odds are that you will have a successful outcome.

Now days a big probability to look at is debt. How much debt is a company carrying? When does it come due? Are the earnings sufficient to cover the interest payments and the principal when it comes due? These guys explain it better than I can:

Debt to Equity Ratio (http://www.investopedia.com/university/ratios/debt/default.asp)

A company can look good for price and earnings but if they are carrying a mountain of debt, that ain't cool. Also different sectors have different levels of debt. It is normal for a real estate investment trust (REIT) to have a higher debt ratio than say a manufacturing stock.

There are other things to look at like how is the stock performing in relation to it's direct competitors and the other stocks in it's sector. It goes on and on. I mostly stick with the basics. Is it a fair price? Are they making money? Are they able to pay their bills and still have a profit left? How long have they maintained that pattern?

I never listen to what those talking heads on TV say.

sack316
12-01-2010, 11:51 AM
Thank you Chop, exactly what I was asking.

I've done a little valuation in finance classes and all, but the brief time spent on it more or less just gives the pure basics of how to do it, and not so much on the red flags one may want to look out for while doing it.

I appreciate you taking the time to answer.

Sack

Chopstick
12-01-2010, 12:06 PM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: Qtec</div><div class="ubbcode-body">
<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body">Securities Exchange Act of 1934

The Securities Exchange Act of 1934 stipulates a settlement period up to three business days before a stock needs to be delivered,[12] generally referred to as "T+3 delivery." </div></div>

Q...? </div></div>

The Securities Exchange Acts of 1933 and 1934 were both drafted in congress at the same time. Short sale rules and other market manipulation regulations were included in the 1934 act. Regulation SHO is the recent incarnation in the ever evolving mountain of securities laws. If you sell a security and you can't make delivery on settlement date, you are in deep trouble. They will immediately seize everything. Your bank accounts, you house, your car, everything, and haul you off to jail.

The question is, why is this practice still allowed in European markets? Why are European traders allowed to pound companies into dust just by pushing a button over and over while American traders must possess or demonstrate the ability to actually produce the security before they are allowed to trade it?

Chopstick
12-01-2010, 12:34 PM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body">Thank you Chop, exactly what I was asking.

I've done a little valuation in finance classes and all, but the brief time spent on it more or less just gives the pure basics of how to do it, and not so much on the red flags one may want to look out for while doing it.

I appreciate you taking the time to answer.

Sack </div></div>

One thing I forgot to mention. Companies that look too good. If you have say 7 probabilities on your list you want to look for companies that meet three or four. No company is perfect. If you get say four with, two against and one neutral, take the trade. If you get all seven or ten or whatever going with, never take the trade, because......somebody is lying. /forums/images/%%GRAEMLIN_URL%%/laugh.gif

sack316
12-01-2010, 12:40 PM
yeah, the "too good to be true" idiom is the one thing I was certainly already aware of.

But I also imagine if one is keenly aware enough, they could possibly take advantage too? Like (and I may oversimplify this), but take a stock a bucket shop would push. What if one were to get "in and out" before the proverbial poop hit the fan? Obviously one would be doing so at great risk, but if executed properly couldn't a savvy lay investor identify and take advantage for a quick payday?

Sack

Chopstick
12-01-2010, 02:30 PM
<div class="ubbcode-block"><div class="ubbcode-header">Originally Posted By: sack316</div><div class="ubbcode-body">yeah, the "too good to be true" idiom is the one thing I was certainly already aware of.

But I also imagine if one is keenly aware enough, they could possibly take advantage too? Like (and I may oversimplify this), but take a stock a bucket shop would push. What if one were to get "in and out" before the proverbial poop hit the fan? Obviously one would be doing so at great risk, but if executed properly couldn't a savvy lay investor identify and take advantage for a quick payday?

Sack </div></div>

That kind of trade will only work at certain times of the day. I only trade from the open until Europe closes at 11:30. From 11:30 until the pit traders come back from lunch at 1:40, it is only sharks and robotic monsters in the pool. They are just cruising for retail traders and inexperienced prop traders like me. I don't mess with them. I have met some of the sharks that are out there. If the computers don't get you, they certainly will.

I will take a correlated pair at the close occasionally if it looks really stretched out. Other than that I stick to just the morning trades because that is when the heaviest volumes of the day are.