The REAL Reason for the Naked Short Rule

Daniel Drew: "He who sells what isn't his'n must buy it back or go to pris'n."

The 600 point stock market rally last week was almost certainly created by SEC Chairman Cox's announcement that the naked short rule would be "imposed" beginning today. It is generally agreed that the rally was due more to short covering than a perceived buying opportunity. However, if naked short selling was already illegal, then why would Chairman Cox need to create such hubbub over it? If there was no real change in government policy, then why would the SEC say anything at all? How could they impose an already-existing law? Doesn't that seem a little absurd?

While Chairman Cox repeatedly clarified that only naked short selling was being banned, I believe that the true message being sent to the financial markets was that the government was taking a position to oppose all selling in the stock markets. Why else would a government official loudly proclaim that they were banning an activity that was already illegal? Why such timing to restate what was already the law? I'm convinced that it was intended as a subtle message to the markets that the government was going to do whatever was needed to shore up the stock markets, and to stop selling in a more general sense. The Plunge Protection Team was working overtime to subtly (or not so subtly) tell the market forces that they were intervening once again. This more subtle underlying message sent the stock market bears running for their hibernation dens.

However, now that the bears are in hiding for the moment, who is going to buy when the economic prospects, according to today's gloomy LEI numbers, are still depressing? Do government officials hope that investors will ignore or forget the downbeat prognosis and buy, despite the negative prospects? Perhaps this is an explanation for the somewhat renewed vigor in selling today, despite relatively good news from Bank of America. Investors have suddenly awakened to the realization that circumstances haven't really improved. There's still a lot of poisonous infection in the market. The bears smell blood! Thus, another government attempt to artificially prop up the market has met with only temporary success. Traders and investors alike should not be so gullible that they can be easily duped by government smoke and mirrors! This is just another government-engineered dog and pony show complete with neon lights, photo ops and cameras, confetti, and bubbly to cheer on the markets.

I don't buy it. Sorry, guys! I just don't buy it!