Sunday, September 21, 2008

Naked Short-Selling & Yo 11

Casino craps is the only mainstream gambling game where a wager can be placed to lose, thereby winning. You have to place your bet that the person tossing the dice will lose. (Yo 11 is part of the craps jargon where a six-five is rolled on the first throw and is an automatic winner to all except those making the aforementioned contrarian bet).

Short-selling is a quite simple yet arcane method of placing a "bet" that the price of a particular stock will fall. While most analysts are looking for the vitamin D fortified, the short-seller is looking for the clabber. Short-sellers are often seen as the National Enquirer of the investment world. But while the mainstream media was "going long" on John Edwards, the National Enquirer was doing their research and ended up pocketing some major Ben Franklins.

Short-selling 101: shares of ABC Corp. are currently trading at $100 per, but Abel believes they are valued at $50 each and that the share price will soon drop. So Abel "borrows" 500 shares of ABC from Baker and immediately sells them for $50000. A full moon later the shares are indeedtrading for $50 apiece so Abel spends $25000 to buy 500 shares and pay Baker back. You do the math.

BVDs are allowed while playing the naked short-selling game. The difference is that the "borrowing" is never done. There are regulations against doing that. There are also loopholes. The clifford BIG red DOGS play naked with loaded dice. They are also buying a form of insurance derivative that bets that companies will default on their loans. The term is "credit-default swaps" and the number of people who fully understand them approximate the number of people who know the secret handshake at Wally's Barber Shop. Swaps remain unregulated for institutional investors, insurance companies and individuals with a net worth above eight figures. Warren Buffett prefers to play bridge. There becomes so much downward pressure placed on a company or sector that they are in effect throwing banana peels in front of someone on crutches.

The SEC has temporarily (until Oct. 2) halted short-selling on 799 financial stocks.

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