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March 19, 2008
It Is No Longer Raining Shoes
As of Feb 29, 2008 a record 14,956,961,052 shares were short on the NYSE and, based upon market events in the first two weeks of March, you have to assume that this record short position increased substantially leading into this week. Quite frankly, short interest - already jumping by record amounts in early 2008 - may have increased by an unprecedented amount late last week as volatility and put activity spiked, financial stocks plummeted, and investors/commentators asked whether the U.S. financial system was about to be shattered.
With these trends in mind, enter this week: Bear Stearns gets bought out, the Fed cuts its discount rate on Sunday, the markets do not fall to pieces on Monday, Lehman and Goldman report that they are still alive on Tuesday, and a smaller than expected Fed rate cut yesterday actually helps spark a dollar rebound. Say what you want about the longer-term health of the U.S. economy and financial markets, but these events kicked-off one mother of a short covering rally over the last two days. Moreover, if some of the ‘sidelined’ money can be suckered back into equities, there is the possibility that more shorts will be bled as a sharp two-day rebound evolves into something more meaningful.
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It is greatly foolish to conclude that stocks will continue to rise because prices are rising (especially when panicked shorts were likely responsible for a large chunk of yesterday’s fourth largest point gain in Dow history). Quite frankly, the problems with the U.S. economy and financial markets stem, first and foremost, from the U.S. government and U.S. consumer living beyond their means. Save a period of painful adjustment, there is no long-term solution to these issues. Rather, currency debasement, asset inflation and, eventually, the abrogation of U.S. liabilities are remedies that have ominous maladies.
With that said, the dollar shorts have been hurt, gold has stopped surging for the moment, and equities have bounced. Far from being sound, the system is nonetheless sending out a disturbing pitch to those players still short waiting for the next shoe to drop.
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