The crisis on Wall Street - Is all in your head?

Reaganomics started it back in the 1980s with Phil Gramm and John McCain leading the pack - end government regulation to encourage a free market, reduce taxes to the movers and shakers, and wealth would trickle down to all of us.  We've had Republican control of the Whitehouse or Congress or both for 26 of the past 28 years and these policies have held.

Now we have news of a major financial disaster that Alan Greenspan called the worst he's seen. 

Phill Gramm said that the current crisis is all in our heads - we are a nation of whiners  http://www.youtube.com/watch?v=1mHsuL6FfY4

McCain temporarily distanced himself, but now Gramm is back full force as McCain's economic advisor.  Can we expect more of the same failed economic policies that got us into this mess?  where does McCain really stand on the economy?  Do his recent statements like this one at Townhall.com point to him abandoning the policies he's adhered to for decades and advocating regulation? 

"Our economy, I believe, still, the fundamentals of our economy are strong, but these are very, very difficult times, so I promise you: We will never put America in this position again. We will clean up Wall Street," McCain said."

What do you think?  How's this all working out for you so far?  Do you believe the economy is strong?

I just love that, as I am reading all of this, I am slightly distracted by the ad in the top-right of the page for the Deathstar! (AT&T)

Original Post by yountsmonster:

1) Essentially, a stock price is a function of how much the greatest fool thinks a company is worth divided by the number of shares outstanding.  The vast majority of corporations have overvalued stock prices.  NYSE loves buyers... they even skew the rulebook so as to bring in more buyers and deter sellers.  For more information on how they do this, read some material from Seth Klarman, Graham and Dodd, and Warren Buffet.

2) You don't "buy" a short.  Essentially, you are borrowing someone else's shares and giving them an IOU for the number of shares they lent you.  There is no monetary value attached on the loanership.  The shares you BORROWED are then immediately sold on the market and you now have $xxx in your margin account.  At some point in the future, you have to fulfill the IOU.  What a shorter is hoping is that if he borrowed and sold the shares at $10 each, then it will cost him less than that to repurchase the shares when he covers (ie. gives the shares back).

There is nothing inherently bad about shorting.  Instead of Buying and then Selling, you Sell, then Buy.  In the end, they balance out.  If we are going to reward people for correctly predicting that a company is going to go up in value, why shouldn't we reward those who correctly predict a company's value will fall?

3) Naked shorts exist when you aren't borrowing shares from anyone, but instead are essentially illegally selling shares that don't exist.  When naked selling occurs, SUPPLY increases without any change in DEMAND.  Everyone knows that this results in a decrease in price.  Tons of problems then ensue such as Failures to Deliver (FTDs) which screw everything up.  The Nasdaq Threshold List has tons of companies that have been attacked by naked short selling and therefore have tons of FTDs.

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To address IG's theory on what will happen when banning short selling:

If you eliminate short selling, essentially you are removing a large percentage of the SALES that will occur.  With fewer shares on sale, supply of the stock available to buy will decrease and assuming demand stays the same, the price will then go up.  As the price goes up, people who have not covered their shorts yet will begin to lose money and therefore cover their shorts by BUYING shares to fulfill their IOU.  This is what we call a shortsqueeze and it usually involves extremely rapid appreciation of share price.  Eventually, all of the short sellers will cover their shorts and the price will balance out higher than it was before.

Unfortunately, this price will NOT be a proper indicator of the company's worth and instead will be inflated.  Banning short selling ultimately creates bubbles.

Quoted to bring to next page.

Wouldn't permanently banning selling short mean that buyers and sellers couldn't artificially raise or lower the price?

Why is short selling a stock any more artificial than taking a short-term long position. It's a trade. I say bring back the up-tick rule :)

Hey Iggy if you're out there and see this, can you take a look at #202? I really never paid much attention to this kind of stuff and don't fully understand. Any input would be nice.

Original Post by figurethefat:

Why is short selling a stock any more artificial than taking a short-term long position. It's a trade. I say bring back the up-tick rule :)

Yes!  Bring back the up-tick rule and the SEC needs to FREAKIN DO THEIR JOB and regulate naked shorts.

moonikins:  There are MANY other ways to artificially manipulate a stock.  Read up on Market Makers.

Why not make take away as many ways as possible to prevent artificial manipulation of stock prices?

What's the uptick rule? Why is it good? Why was it taken away?

I fully admit I need simple explanations for this type of stuff.

Short selling isn't artificial manipulation.

The uptick rule was a rule that you can only short after an uptick (an increase in the stock price by atleast 1 penny.)  This meant that you couldn't short a stock that was plummeting, you could only short stocks that were going up or were steadily wavering up and down.

Some means of manipulation are completely legal and can only be caught if you carefully watch the person do it.

@204 - see 208

Just a piece of advice so you don't ever fall prey to manipulators, NEVER use Stop Loss Limits... EVER.