Hedge funds that have been shorting heavily may now be insolvent and could cause another market collapse.

Market forces

That would be the capitulation we are all waiting for… the market bottom.


Yesterday the markets experienced a trader short squeeze that resulted in a large influx of cash with relatively few shares changing hands thus resulting in the enormous share price rise. Hedge funds that have been shorting heavily may now be insolvent.

Yesterday cash flowed into the market not from the sidelines but heavily from the market’s short side buying back many of the stocks that were previously shorted. The cause was new concerns that the SEC will institute a price up-tick rule and prosecute hedge funds and brokers that deal in naked short selling.

Naked short selling is an abuse that has gone unchecked for years. When stock holders refuse to allow brokers to loan out their shares to short sellers, some brokers began to pretend they were allowed and loaned out the shares anyway. When they were not prosecuted for those illegal transactions they took it a step further. The brokers began loaning out shares that did not exist. It is very similar to counterfeiting money but does not require a printing press. It is evident that these illegal actions were not even reported to the SEC and made it theoretically possible for hedge funds to short more shares of a company than the company had issued. That gave short sellers the financial power to drive a stock down to zero and buy it back. They depended on the SEC chairmen to be either inept or amoral corrupt liberals who thought making the New York and Washington party circuit was all they had to do to earn their tens of $millions. These are not conservative down to earth people they are people who think our money is their money and they are paid to look the other way.

We know this activity was going on under the SEC protection as well as possibly many other Bernie Madoff type Ponzi schemes. Cox and other SEC chairmen should be arrested imprisoned and have all their family assets confiscated for allowing illegal activities under their noses. In China they would take them out under a bridge and shoot them all.

We saw the evidence of naked short selling when financial stocks would stop plummeting the moment short selling was restricted by the SEC and then would plummet again each time the restriction was removed. Short selling can be stopped if the laws are obeyed and the stock holders do not allow their shares to be borrowed by short sellers. However devastating price declines cannot be stopped when illegal naked shorting is tolerated and especially when the short seller does not have to wait for an up-tick but simply sells the counterfeit stock down continuously.

One might conclude that this current trader short squeeze may be almost over and the markets will collapse again because there are few investors involved. But the squeeze could continue and wipe out many more hedge funds that have heavily shorted. We know they exist because they are the only funds that made money during the last six months. We could see the stock market rise about 20% more before the short squeeze is over and all the short funds including short ETFs are bankrupt. That will wipe out two or three $trillion more in 401 and other investor accounts. Pro shares would also be wiped out by the whipsaw and the market would then plummet so rapidly that the Fed and the Treasury might have to intervene. That will then be the time to buy.

Market Outlook

The financial press at this moment is exaggerating foreign market news as they try to put lipstick on the short squeeze that is devastating previously profitable hedge funds, ETFs, and the new derivative pro-share experiments.

Asian shares were up slightly last night with Shanghai up 0.6%, India up about 0.5%, Japan up 3.3% and Hong Kong up about 3.4% following the American short squeeze on Monday. The short squeeze probably will not be as bad in foreign markets because their SEC’s are not as corrupt and inept as the US SEC.

European markets are mixed in the range of down 0.9% to up 0.5% mid way through their day.

American market futures are down today before the market opens. The squeeze may resume and the market could rise until the affected funds are bankrupt. A major sell-off is expected when the squeeze is exhausted and especially when the world realizes the pork barrel socialist medicine is poison to American intellectual and economic survival and the world's capitalist growth engine is being dismantled and sold off to provide for the new socialist state.

Private companies are now invited to participate with the government in buying up toxic assets. Beware; any company that partners with the Obama Administration will be nationalized before this is over.

The American economic engine of capitalist innovative creative destruction is all the world recently has had to propel it forward. But the socialists are about to kill it and feast on its carcass just as great socialist economic cannibals have done to capitalism in the past. That is the new toxic socialist plan that will replace the toxic socialist mortgage program that caused the financial melt down in the first place.