Post by jannikki on Nov 12, 2005 10:34:27 GMT -4
Regulation SHO – Let the “Bear Raids” Begin - February 12, 2005
David Patch
Have we seen yet the Wall Street corrections to the oversold, under settled securities deemed “threshold securities” by the SEC’s newly created regulation SHO? Apparently not!
When the SEC created Regulation SHO the intent was to address the market abuses of naked shorting. As the SEC went our for comment on this new reform then President Ralph Lambiase of the North American Securities Administrators Association (NASAA) called upon the SEC to address the “Bear Raids” of unscrupulous market members that victimized investors of Wall Street. The NASAA addressed the weaknesses in the proposal and the lack of deterrent to the fraud. Finally, when the reform was released the SEC promised all including the oversight committees of Congress that this would fix the problem. The SEC released SHO neglecting the recommendations of the NASD and NASAA in the process.
Today’s snapshot has already highlighted the weakness to their regulation. According to published reports, SEC spokesman John Heine maintains that the SEC has yet to study the new proposal affects and has to formal plans to do so.
Well we have and it stinks.
Consider some of the NYSE and NASDAQ Issuers whose stocks were highlighted prior to January 3 as having settlement problems yet stand uncorrected today.
Krispy Kreme (KKD) – Down 50% since January 3; 81% since May 3, 2004
NovaStar Financial (NFI) - Down 32% since January 3; 52% from its 52 week high
TASER International (TASR) – Down 54% since January 3; 57% since its December 29 High.
Cal-Maine (CALM) – Down 13% since January 3; 28% since December 22, 2004
Silicon Graphics (SGI) – Down 27% since January 3; 36% since December 14, 2004
Travelzoo (TZOO) – Down 46% since January 3; 51% since December 27, 2004
Conolog Corp (CNLG) – Down 22% since January 3; 43% since November 26, 2004
Delta Airlines (DAL) – Down 27% since January 3; 30% since December 13, 2004
The list goes on.
In fact, of the original 101 NASDAQ NMS and Small cap stocks listed as threshold securities on January 7, 2005, 48 remain there today. Of the Original 101, the decliners out paced the advancers by slightly more than 4:1 and of the 48 remaining on the NASDAQ list the ratio is only slightly improved at 3 decliners for every one advancing.
So how does this all work? The SEC created a new law that was intended to address the abusive selling of securities without the settlement of trades. Regulation SHO was imposing mandatory buy-ins on fails yet, the stocks listed as being oversold are seeing remarkable increases in volume; sell side increases. The fails however are not being closed or are being closed slowly to maintain levels of profitability.
There are two ways to close-out a position you failed to deliver on, buy in that stock at present fair market values or, as appears to be the case here, drive fear into long investors and have them sell into your required buy-ins. In the crash of 1929 that was referred to as a “Bear Raid”. Drive people out in fear as you profited on the way down. Today our regulators, with market surveillance responsibilities, are sitting back and watching this activity develop all the while watching innocent shareholders lose it all.
To explain this “Raid” tactic, consider Krispy Kreme. While financially struggling, Krispy Kreme has been identified as having excessive fails since at least December 3, 2004. Krispy Kreme maintains Institutional and Mutual Fund ownership at 68% of the reported float and has a reported short position of 44%. Kripsy Kreme has traded a daily average of 4% of their public float over the past three months but has risen to a daily average of 7% over the past ten trading days. Krispy Kreme has also dropped in market capitalization slightly more than 30% since January 19th. The question being, who is driving the sell side volume in Krispy Kreme at nearly two times the three month average?
Consider that the Institutional ownership of Krispy Kreme has stayed relatively flat, 68% of the float is locked up in Institutional Holdings dropping only 3% from the last quarter reports. That leaves only 32% of the relative float available for daily trading with Institutions holding long. Recalculating daily volume based on a more realistic float, the 7% daily volume increases to 25% of the trading float. The stock turns over once every four trading sessions and is closing down each day. Finances aside, the stock remains a threshold security that has abusive fails and has traded down 50% since restrictions were placed on short selling. Who then has the ability to continue to sell down the stock one full cycle every four trading days? Market Participants, the ones Regulation SHO was intended to address. It is the exemptions they are provided to “protect us”.
Krispy Kreme turned over the public float two times in the past two weeks and still the fails remain above abusive levels. You would have expected Wall Street compliance to have addressed these fails by now as clearly there has been an opportunity to cover, at a profit, being available. Unless of course you assume that half or more of the recent trading volume was nothing more than market participants creating an aura of liquidity that was not based on actual stock owners and true investor supply and demand. It was created to instill fear.
Regulation SHO became a law that forced Wall Street to drive investors out of threshold securities to protect profits. Threshold securities we all own as part of our mutual fund portfolios. The business fundamentals are lost as the goal for Wall Street at the present time is to force settlement of failed trades and not to maintain an orderly market based on fundamentals. Companies are tanking on good news, positive financial reports, and contract awards. Their only setback is that they are listed as threshold securities that restrict additional short sale abuses and force the abusers to cover.
The time to call for change is now not next month, next quarter, or next year. We all are affected by these stocks as their institutional owners are holding positions in our Mutual Fund portfolios. The 30, 40, 50% losses in market capitalization in these companies is coming right out of our retirements and it is happening because Wall Street is protecting their fraudulent past.
The SEC created this mess when they grandfathered in all past settlement failures and now it is the SEC’s responsibility to address the most recent “Bear raids” on our retirement savings. More than 4 companies to 1 lost market capitalization at a time when Wall Street was forced to settle up their trades by buying stock. It is not coincidence that their exemptions created volatility that raided our investments.
While I have no direct evidence to support any theories herein and do not want to imply that all of Wall Street is involved in these activities, it is clear something must be done. Logic does not follow when good companies continue to be tanking at a time when Wall Street themselves are being told to go out and buy-in their unsettled trades. On one stock I know of that is a threshold company that keeps falling, Wall Street was offering as much as 12% to investors who would be willing to loan out their shares to cover fails. Others have gone as high as 20% to borrow non-marginable shares. This is only happening because Wall Street has a problem and is looking for a financially economical way out. The SEC already gave them one out – Grandfather Clause on past fraud – Will they give them yet another?
Remember, companies with Institutional owners and held in Mutual funds are companies we own indirectly. The abuse of their fair market pricing does affect us all even when we do not see these names in our brokerage portfolios.
Disclosure: I do not personally own, nor have I owned, any of the companies listed in this article. The data being provided has been done so based on public data made available from financial sites on the internet.
David Patch
Have we seen yet the Wall Street corrections to the oversold, under settled securities deemed “threshold securities” by the SEC’s newly created regulation SHO? Apparently not!
When the SEC created Regulation SHO the intent was to address the market abuses of naked shorting. As the SEC went our for comment on this new reform then President Ralph Lambiase of the North American Securities Administrators Association (NASAA) called upon the SEC to address the “Bear Raids” of unscrupulous market members that victimized investors of Wall Street. The NASAA addressed the weaknesses in the proposal and the lack of deterrent to the fraud. Finally, when the reform was released the SEC promised all including the oversight committees of Congress that this would fix the problem. The SEC released SHO neglecting the recommendations of the NASD and NASAA in the process.
Today’s snapshot has already highlighted the weakness to their regulation. According to published reports, SEC spokesman John Heine maintains that the SEC has yet to study the new proposal affects and has to formal plans to do so.
Well we have and it stinks.
Consider some of the NYSE and NASDAQ Issuers whose stocks were highlighted prior to January 3 as having settlement problems yet stand uncorrected today.
Krispy Kreme (KKD) – Down 50% since January 3; 81% since May 3, 2004
NovaStar Financial (NFI) - Down 32% since January 3; 52% from its 52 week high
TASER International (TASR) – Down 54% since January 3; 57% since its December 29 High.
Cal-Maine (CALM) – Down 13% since January 3; 28% since December 22, 2004
Silicon Graphics (SGI) – Down 27% since January 3; 36% since December 14, 2004
Travelzoo (TZOO) – Down 46% since January 3; 51% since December 27, 2004
Conolog Corp (CNLG) – Down 22% since January 3; 43% since November 26, 2004
Delta Airlines (DAL) – Down 27% since January 3; 30% since December 13, 2004
The list goes on.
In fact, of the original 101 NASDAQ NMS and Small cap stocks listed as threshold securities on January 7, 2005, 48 remain there today. Of the Original 101, the decliners out paced the advancers by slightly more than 4:1 and of the 48 remaining on the NASDAQ list the ratio is only slightly improved at 3 decliners for every one advancing.
So how does this all work? The SEC created a new law that was intended to address the abusive selling of securities without the settlement of trades. Regulation SHO was imposing mandatory buy-ins on fails yet, the stocks listed as being oversold are seeing remarkable increases in volume; sell side increases. The fails however are not being closed or are being closed slowly to maintain levels of profitability.
There are two ways to close-out a position you failed to deliver on, buy in that stock at present fair market values or, as appears to be the case here, drive fear into long investors and have them sell into your required buy-ins. In the crash of 1929 that was referred to as a “Bear Raid”. Drive people out in fear as you profited on the way down. Today our regulators, with market surveillance responsibilities, are sitting back and watching this activity develop all the while watching innocent shareholders lose it all.
To explain this “Raid” tactic, consider Krispy Kreme. While financially struggling, Krispy Kreme has been identified as having excessive fails since at least December 3, 2004. Krispy Kreme maintains Institutional and Mutual Fund ownership at 68% of the reported float and has a reported short position of 44%. Kripsy Kreme has traded a daily average of 4% of their public float over the past three months but has risen to a daily average of 7% over the past ten trading days. Krispy Kreme has also dropped in market capitalization slightly more than 30% since January 19th. The question being, who is driving the sell side volume in Krispy Kreme at nearly two times the three month average?
Consider that the Institutional ownership of Krispy Kreme has stayed relatively flat, 68% of the float is locked up in Institutional Holdings dropping only 3% from the last quarter reports. That leaves only 32% of the relative float available for daily trading with Institutions holding long. Recalculating daily volume based on a more realistic float, the 7% daily volume increases to 25% of the trading float. The stock turns over once every four trading sessions and is closing down each day. Finances aside, the stock remains a threshold security that has abusive fails and has traded down 50% since restrictions were placed on short selling. Who then has the ability to continue to sell down the stock one full cycle every four trading days? Market Participants, the ones Regulation SHO was intended to address. It is the exemptions they are provided to “protect us”.
Krispy Kreme turned over the public float two times in the past two weeks and still the fails remain above abusive levels. You would have expected Wall Street compliance to have addressed these fails by now as clearly there has been an opportunity to cover, at a profit, being available. Unless of course you assume that half or more of the recent trading volume was nothing more than market participants creating an aura of liquidity that was not based on actual stock owners and true investor supply and demand. It was created to instill fear.
Regulation SHO became a law that forced Wall Street to drive investors out of threshold securities to protect profits. Threshold securities we all own as part of our mutual fund portfolios. The business fundamentals are lost as the goal for Wall Street at the present time is to force settlement of failed trades and not to maintain an orderly market based on fundamentals. Companies are tanking on good news, positive financial reports, and contract awards. Their only setback is that they are listed as threshold securities that restrict additional short sale abuses and force the abusers to cover.
The time to call for change is now not next month, next quarter, or next year. We all are affected by these stocks as their institutional owners are holding positions in our Mutual Fund portfolios. The 30, 40, 50% losses in market capitalization in these companies is coming right out of our retirements and it is happening because Wall Street is protecting their fraudulent past.
The SEC created this mess when they grandfathered in all past settlement failures and now it is the SEC’s responsibility to address the most recent “Bear raids” on our retirement savings. More than 4 companies to 1 lost market capitalization at a time when Wall Street was forced to settle up their trades by buying stock. It is not coincidence that their exemptions created volatility that raided our investments.
While I have no direct evidence to support any theories herein and do not want to imply that all of Wall Street is involved in these activities, it is clear something must be done. Logic does not follow when good companies continue to be tanking at a time when Wall Street themselves are being told to go out and buy-in their unsettled trades. On one stock I know of that is a threshold company that keeps falling, Wall Street was offering as much as 12% to investors who would be willing to loan out their shares to cover fails. Others have gone as high as 20% to borrow non-marginable shares. This is only happening because Wall Street has a problem and is looking for a financially economical way out. The SEC already gave them one out – Grandfather Clause on past fraud – Will they give them yet another?
Remember, companies with Institutional owners and held in Mutual funds are companies we own indirectly. The abuse of their fair market pricing does affect us all even when we do not see these names in our brokerage portfolios.
Disclosure: I do not personally own, nor have I owned, any of the companies listed in this article. The data being provided has been done so based on public data made available from financial sites on the internet.