Patriot's Day

Today is Patriot's Day in Massachusetts - the holiday celebration of the Battle of Lexington and Concord in 1775 that showed how determined people could protect their freedom from oppression with some organization, bravery and personal firearms kept in their homes. One can read about this battle - really a series of skirmishes - in many books. From a purely military perspective, a British raid to the interior was stopped and then seriously mauled by a swarm of individuals and small companies of militia.

The celebrations here include re-enactments and the running of the Boston Marathon.

Some Déjà Vu Again

Hmmm ... it's April 20. Where is the financial industry re-regulation plan ? It's probably bogged down in a mud wrestling match with a swarm of lobbyists.

Perhaps some bashing of the short sellers is in order. A relative sent me the links to some interesting and partially illuminating video clips on the bear raids on Bear Stearns and Lehman and has data on the absolutely huge amounts of fraudulent short selling - aka "naked" short selling that occurred in those events. And what has the SEC done ? Nothing. Take a look at the clips and I'll suggest why the SEC has done nothing.

Illegal Naked Short Selling ...
Parts 1, 2 & 3 ...

http://www.youtube.com/watch?v=xUKSU1qahgE&annotation_id=annotation_177033&feature=iv

http://www.youtube.com/watch?v=NcjssQSthNU&feature=related

http://www.youtube.com/watch?v=Q48eSoTNByQ&annotation_id=annotation_911154&feature=iv

Pretty interesting, no?

Here's what the videos miss.

First, I suspect that a huge amount of the naked short selling was by the market making writers of the put options on Bear Stearns and Lehman Brothers. Yes, by the Street itself. Their trading desks have programs to hedge their positions in those options dynamically and they must do that or cover their open put writes. So yes, the hedge funds did initiate the positions, but the huge wave of naked shorts was principally from the Street itself. The analogy is a group of sharks feeding on one of their own who is wounded.

How does the Street do this ? Actually it was and still is legal due to the "Madoff Rule" - remember him ? The SEC in its "wisdom" - or maybe as a payoff - years ago at the prompting of Bernie Madoff made it legal for a "market maker" (read: The Street) to do naked short selling to hedge their book or to temporarily fill an order. And even last year when the SEC put on temporary restrictions on short selling, they exempted the Street "market makers". So all bear hedge funds had to do if they could not get a borrow was to buy lots of put options and the Street did the naked short selling for them.

What a world ! Is the SEC not completely corrupt ? If not corrupt, then completely incompetent ? In either case, why does it still exist ?

Second, the videos miss the huge role of credit default swaps. The bear hedge funds bought the puts and then put in large orders to buy credit default swaps against Bear Stearns and Lehman Brothers. Who could write such insurance against default ? No one. Those firms were in the position of borrowing overnight every night huge amounts of capital. Any fear would cause that necessary funding to dry up. [OK, they were inordinately stupid to fund themselves that way ... but that's another issue.] So the bear raiders tossed a smoke bomb via the credit default swaps to create panic. and then profited hugely on the put options. The Street did the rest.

A recent article by George Soros in the WSJ lays out his agreement with this blog on this matter. I wrote about George's agreement and congratulated him on reading this blog at the time. [ ;) joke ]

Overall, those videos are quite worth watching as they provide good facts, even if important aspects were missed.

Markets

Maybe we'll see a pullback this week. Lots of money is on the sidelines, looking for either a sign to get in, or a good entry point. But without bad news (GM perhaps ?) I suspect pullbacks will be limited. I have some money to invest but also want a good entry. I'll be patient.

Word of the Day

"Chiaroscuro" - noun [$10] from the art world
Chiaroscuro means 1. the treatment of light and shade in drawing and painting; 2. the use of contrast in literature; 3. (attrib.) half-revealed. From italian chiaro 'CLEAR' + oscuro 'DARK', 'OBSCURE'.
Sentence: Does not most public commentary on the stock market use an allegory of chiaroscuro with forces of darkness - the 'evil' bears - battling with the forces of light - the 'good' bulls ?

Le Mot du Jour

"Outil" - noun, masculine
Outil means implement, tool. Outillage [NM] means a set of tools.
La Phrase: Rambo a dit que le meilleur outil est l'esprit. Je suis d'accord.
Sentence: Rambo said that the best tool is the mind. I agree.