Replies to post #299001 on $Stock*Shop*Charts*News*Option$

[Tuff-Stuff]

The SEC "may" adopt an alternative uptick rule next month, curbing short sales if a stock falls 10% in a day.


SEC May Approve Restrictions on Short Sales When Stocks Plunge


By Nina Mehta

Jan. 23 (Bloomberg) -- Concern that short-sellers accelerate stock declines may prompt the Securities and Exchange Commission to adopt a rule next month aimed at curbing bearish bets when equities are plunging.

The regulation would require the trades be executed above the best existing bid in the market when shares fall 10 percent in a day, said Brian Hyndman, the senior vice president in transaction services at Nasdaq OMX Group Inc. In a short sale, an investor borrows an asset and sells it, hoping to profit from a decrease by repurchasing it later at a lower price.

Forcing short sellers to wait for a stock to rise above the best price bid may prevent them from flooding the market with sell orders and causing losses to multiply. Some exchange officials say the restrictions known as uptick rules don’t work, citing studies that show they may be less effective during panics that drive prices down and volatility up.

“There is no empirical data to support the introduction of a new rule,” Hyndman said yesterday at a securities industry conference in Chicago. “But this is the least intrusive of the proposals the SEC was considering.”

Hyndman expects the SEC to adopt a so-called alternative uptick rule that includes a 10 percent trigger, changing regulations that were eliminated from U.S. markets in 2007. The commission asked the public last April to comment on strategies to cushion the impact of short selling following criticism that hedge funds and other speculators used trading tactics to deepen market retreats that began in 2008.

SEC spokesman John Heine declined to comment.

Computer Upgrades

The Standard & Poor’s 500 Index dropped 9.1 percent in September 2008 after New York-based Lehman Brothers Holdings Inc. filed the biggest-ever bankruptcy. The SEC implemented a ban on short selling more than 900 financial stocks that month after Morgan Stanley Chief Executive Officer John Mack and New York Senator Charles Schumer blamed the practice for driving companies to the brink of collapse.

The implementation date for the new rule is likely to be later in the year, according to Hyndman, who didn’t say what he was basing his estimate on. He said exchanges and brokers will probably have 180 days to upgrade their computer systems to accommodate the regulation.

Nasdaq in New York, Kansas City-based Bats Exchange and Jersey City, New Jersey-based Direct Edge Holdings LLC, which operates two alternative trading centers, have told the SEC that no new restrictions on short selling are needed. Paul Adcock, executive vice president in charge of trading at NYSE Arca, a unit of New York-based NYSE Euronext, said that while most exchanges oppose a new regulation, it’s probably inevitable.

Potential Impact

“Because the politicians and the public are all banging the drums, we’re not going to get away with this one,” Adcock said about the reluctance of exchanges to support new short- selling restrictions.

The SEC discussed the potential impact of such a rule when it proposed the alternative uptick last August. Because it would restrict short selling more than other proposals being considered, the regulation might “lessen some of the benefits of legitimate short selling, including market liquidity and pricing efficiency,” the commission said.

When the SEC proposed the alternative uptick rule, it said it would be easier for exchanges and brokers to implement than the former regulation that operated on the New York Stock Exchange for almost 70 years before its removal in 2007. That rule would no longer make sense in a marketplace of automated trading, the commission said.

No Trigger

The rule was proposed to the SEC last March by NYSE Euronext, Nasdaq, Bats and the Chicago-based National Stock Exchange. NYSE Euronext last June said it preferred a different bid test with no 10 percent threshold.

NYSE Euronext’s Adcock raised concern at yesterday’s conference that so-called circuit breakers setting off the restriction might keep stocks from falling as much as they should when a company reports bad news.

“Do you trigger the 10 percent when the stock should be trading down?” Adcock said. The trigger would be mandated uniformly across trading venues when a stock declines by the specified percentage.

Daniel Aromi and Cecilia Caglio, economists at the SEC in Washington, said in a December 2008 report to former Chairman Christopher Cox that even with uptick rules in place, short sellers in a simulation executed trades 25 percent faster on average when stocks plunged than when prices were steady.

[Stock Lobster]

TisM: 'Dr Doom' predicts share falls in late 2010

Andrew Oxlade, This is Money.uk
22 January 2010, 9:35pm

'Dr Doom' economist Nouriel Roubini, one of the few to predict the financial crisis, has renewed his warnings about the stock market rally.

He says the bull market may end in the second half of the year as the recovery in the world economy runs out of steam.
He also expects deflationary pressures to limit gains in profits for companies. That warning comes despite a sharp rise in inflation in recent months. UK CPI inflation went from a low of 1.1% in September to 2.9% in December, up from 1.9% in November.

Roubini (pictured above), a New York University professor who predicted the financial crisis in 2006, told Bloomberg in Hong Kong that he feared 'unraveling and a significant correction of asset prices which will be damaging to global and regional economic growth.'

World shares have risen nearly 75% since the market low in March. Rises in several emerging market countries, such as Brazil, exceed 100%.

'The real economy is gradually recovering but since March, asset prices have gone through the roof,' Roubini said. 'If I'm correct, by the second half of the year, there's going to be a slowdown of growth in US, Europe and Japan. That could be the beginning of a market correction because the macroeconomic news is going to surprise on the downside.'


Any decline in commodities may be limited because of demand for raw materials from emerging markets, he said.

Roubini warned investors several times last year not to get tempted into a sucker's rally.

Roubini's recent calls

Professor Nouriel Roubini, a US economist feted for forecasting the credit crunch as early as 2006, remained extremely gloomy about economic prospects in May 2009, expecting American unemployment to rise to 11%.
- Roubini warns on 'sucker's rally'

...and in August he stepped up warnings of a double-dip. In October 2009, he warned the property market may yet undermine the recovery and warned again on the stock market rally.

http://www.thisismoney.co.uk/news/article.html?in_article_id=497992

[Stock Lobster]

Mauldin: It's The Delveraging Stupid!

What Happens When the Fed Stops Quantitative Easing?

Interest-Rates / Quantitative Easing
Jan 16, 2010 - 12:33 PM
By: John_Mauldin

When the Fed Stops the Music
Who Wants the Old Maid?
It's the Deleveraging, Stupid!

Last week we delved into the uncertainties that face us and that make forecasting for 2010 problematical. Will the government actually increase taxes as much as they say, with unemployment still likely to be at 10%? Or will cooler heads prevail? Would such an increase cause a recession? Will the markets anticipate the effects of such a major increase in advance? How will the mortgage market react when the Fed stops buying mortgage securities at the end of March? There are so many things in the air, and today we explore more of them, as I continue (perhaps foolishly) to try and peer into what is a very cloudy crystal ball.

When the Fed Stops the Music

The Federal Reserve has been very clear about the fact that they intend to stop the quantitative easing program at the end of March. What that means in practice is that they are going to stop buying mortgage securities. That does two things. As Bill Gross so aptly points out, those mortgage purchases helped keep mortgage rates low. But they also financed the US government fiscal deficit, albeit indirectly. It seems that funds and banks that sold the mortgage securities turned around and bought US government debt or put the cash right back at the Fed.

Foreigners bought about $300 billion of the $1.5 trillion in new government debt. The rest came from the US, courtesy of the Fed buying mortgages. But that program stops (theoretically) at the end of March. The government still plans to run yet another $1.4-trillion-dollar deficit (give or take a few hundred billion). The question is, who will buy the debt? Foreigners will kick in another $300 billion, unless they decide to stop selling us stuff, or buy other less liquid or physical assets. So far there is no sign of that.

But as I asked last year, who is going to buy the multiple trillions in government debt that the G-7 countries want to issue? Who is going to buy another $1 trillion here in just the US? That is 7% of GDP. That means that consumers and businesses will have to save an additional 7% of GDP just to finance government debt at the federal level, not counting state and local debt. As Bill Gross concludes in his recent column (www.pimco.com):

"The fact is that investors, much like national citizens, need to be vigilant, and there has been a decided lack of vigilance in recent years from both camps in the U.S. While we may not have much of a vote between political parties, in the investment world we do have a choice of airlines and some of those national planes may have elevated their bond and other asset markets on the wings of central bank check writing over the past 12 months. Downdrafts and discipline lie ahead for governments and investor portfolios alike. While my own Pollyannish advocacy of 'check-free' elections may be quixotic, the shifting of private investment dollars to more fiscally responsible government bond markets may make for a very real outcome in 2010 and beyond. Additionally, if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009. It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this 'juice' was being squeezed into financial markets. If so, then most 'carry' trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their 'sugar daddy.'"

This is yet another uncertainty. We simply have no idea, no relevant marker, for what happens when a country goes so cold turkey, coming off a central bank bond-buying binge. And this in the midst of a massive deleveraging and with stock market valuations basically where they were in 1987 - except there was at least large earnings growth then.

Who Wants the Old Maid?

Why, therefore, would anyone want to be long the dollar or treasuries? The dollar may be the worst currency in the world, except for all the others. What's an emerging-market central banker to do? Where do you put your reserves?

The dollar? With large fiscal deficits and low interest rates? "What are my other choices?" they must be asking themselves. The euro? Really? The euro is not a currency, it is an experiment.

Everyone knows the problems of Greece. There is no political will in the country (so far) to do what Ireland has done, and really cut their budget. I think Spain is an even bigger nightmare for the EU when compared to relatively small Greece. Italy? Belgium? Portugal? All those countries (and their voters) will be watching to see how the EU deals with Greece. The potential for volatility in the euro is just huge. I hope the euro survives. The world is better off with the euro. But there are very large pressures facing the Eurozone.

And what about the British pound? Already down 20% (a little relief for my London trip next week!), and their problems are every bit as large as those in the US. What about the yen? The government has let it be known they are not happy with the rise in the yen, and seem ready to actually do something about it.

What about the Renminbi? Oh, wait, you can't get enough of them, and the Chinese manipulate their currency. Same for most other Asian currencies.

The dollar may rise against the major currencies during the first part of the year. As I wrote weeks ago, world trade is slowly picking up. While that growth has not been very visible in the US, it is becoming evident among the emerging-market countries that were not overly leveraged when the crisis began. And trade is still in dollars.

Businesses sold their dollars during the crisis, as they did not need them for trade. But now, with trade picking up, they once again have to buy dollars. That is one reason for the recent bull market in dollars. The other is that the markets are massively short the dollar. When everyone is on the same side of a trade, that trade may have run its course, at least for a while. And that seems to be the case recently for the dollar.

So, where are the strong currencies going forward? The Canadian dollar is on its way to parity. I would want to own the Aussie, if I was a trader. Maybe the Swiss franc, although it is so high on a parity-value basis right now.

But the currency I want the most if I am a central banker is that barbaric yellow relic, gold. Just as India has recently bought 200 tons of gold, I think central banks in other emerging nations will want to buy more, too. They all have relatively little gold as a percentage of their reserves. Look for that to change.

I also like gold in terms of the euro, the pound, and the yen - more than I like it in terms of the US dollar, but even there I like gold long-term, at least until we get some fiscal sanity.

It's the Deleveraging, Stupid!

The reason this recession is different is that it is a deleveraging recession. We borrowed too much (all over the developed world) and now are having to repair our balance sheets as the assets we bought have fallen in value (housing, bonds, securities, etc.). A new and very interesting (if somewhat long) study by the McKinsey Global Institute found that periods of overleveraging are often followed by 6-7 years of slow growth as the deleveraging process plays out. No quick fixes.

Let's look at some of their main conclusions (and they have a solid ten-page executive summary, worth reading.) This analysis adds new details to the picture of how leverage grew around the world before the crisis and how the process of reducing it could unfold. MGI finds that:

- Leverage levels are still very high in some sectors of several countries - and this is a global problem, not just a US one.

- To assess the sustainability of leverage, one must take a granular view using multiple sector-specific metrics. The analysis has identified ten sectors within five economies that have a high likelihood of deleveraging.

- Empirically, a long period of deleveraging nearly always follows a major financial crisis.

- Deleveraging episodes are painful, lasting six to seven years on average and reducing the ratio of debt to GDP by 25 percent. GDP typically contracts during the first several years and then recovers.

- If history is a guide, many years of debt reduction are expected in specific sectors of some of the world's largest economies, and this process will exert a significant drag on GDP growth.

- Coping with pockets of deleveraging is also a challenge for business executives. The process portends a prolonged period in which credit is less available and more costly, altering the viability of some of business models and changing the attractiveness of different types of investments. In historic episodes, private investment was often quite low for the duration of deleveraging. Today, the household sectors of several countries have a high likelihood of deleveraging. If this happens, consumption growth will likely be slower than the pre-crisis trend, and spending patterns will shift. Consumer-facing businesses have already seen a shift in spending toward value-oriented goods and away from luxury goods, and this new pattern may persist while households repair their balance sheets. Business leaders will need flexibility to respond to such shifts.

You can read the whole report at their web site. The ten-page summary is also there.
http://www.mckinsey.com/mgi/publications/debt_and_deleveraging/index.asp

The Lex column in the Financial Times this week observes, concerning the report:

"It may be economically and politically sensible for governments to spend money on making life more palatable at the height of the crisis. But the longer countries go on before paying down their debt, the more painful and drawn-out the process is likely to be. Unless, of course, government bond investors revolt and expedite the whole shebang."

And that is the crux of the matter. We have to raise $1 trillion-plus in the US from domestic sources. Great Britain has the GDP-equivalent task. So does much of Europe. Japan is simply off the radar. Japan, as I have noted, is a bug in search of a windshield.

Some time in the coming few years the bond markets of the world will be tested. Normally a deleveraging cycle would be deflationary and lower interest rates would be the outcome. But in the face of such large deficits, with no home-grown source to meet them? That worked for Japan for 20 years, as their domestic markets bought their debt. But that process is coming to an end.

James Carville once famously remarked that when he died he wanted to come back as the bond market, because that is where the real power is. And I think we will find out all too soon what the bond vigilantes have to say.

And so we have uncertainty all around us. What will our taxes look like in the US in just 12 months? Health care? Who will finance the bonds, without a credible plan to reduce the deficit? And any plan that has Nancy Pelosi as its guarantor is by definition not credible.

There is just so much that is uncertain, and all we can do is wait to see how it unfolds. My best guess is that we see a solid GDP number posted for the 4th quarter (which will get revised down over time), due mostly to stimulus and inventory rebuilding. By the middle of the year the stimulus will be far less. And while inventories are rebuilding and that is good for the GDP numbers, the sales-to-inventories number has not risen. And final demand is what drives inventory rebuilding.

The latter half of the year looks to be weaker, and then we hit what right now looks like the largest tax increase in history, much of it on the small businesses that are the drivers of job creation. The National Federation of Independent Businesses just released their latest survey. It was brutal. There is little optimism in it.

The Fed is going to stop the music in March. There will be a scramble for the chairs. This is a huge experiment with no precedent. The entire developed world is the test subject. Risk assets will be subject to uncertainty. And markets hate uncertainty.

Hopefully, we can Muddle Through this year before a relapse into recession in 2011 (because of the tax increase). I wish I could see it like Larry Kudlow, but I don't. I would be very cautious about being long the stock market. It is now a trader's market. I would not be buying long-duration bonds. It is still an absolute-return world.

London, Monaco and Zurich

It is getting time to hit the send button, and still no word about Walt. But they are still rescuing people from the hotel. Life is so uncertain. I just didn't see that one coming - which is how it is with surprises.

Next week I am off to Europe to be with Niels Jensen and my partners at Absolute Return Partners, meeting with clients, prospects, and funds. Then I have nothing scheduled until I go to the Singularity University's 9-day Executive Program from February 26 through March 6. As for how I feel about it, the fact that I would devote nine days to it basically says it all. They have a very powerful faculty brief a rather small group about how the future of a variety of technologies will impact all aspects of business and the economy. It is not cheap, at $15,000, but I think it will be worth my time. They have had more applications than they have slots, but they have said they will give my readers special preference (as far as possible). You can go to www.singularityu.org and click on the link to the conference to find out more. I have been told the names of some of my fellow attendees, and let me say, the list is impressive. I am really looking forward to it. Hope to see some of you there.

Again, please help if you can with Haiti. The needs will be so great. I think I need more time with my kids this weekend.

Your learning to embrace uncertainty analyst,

By John Mauldin

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

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Copyright 2010 John Mauldin. All Rights Reserved
John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staff at Millennium Wave Advisors, LLC may or may not have investments in any funds cited above. Mauldin can be reached at 800-829-7273.

http://www.marketoracle.co.uk/Article16535.html