Complain! Complain! Complain! There’s been a lot of whining going on about the abolishment of the “Uptick Rule” for shorting.

Cramer has sensationalized it like only he can with unsubstantiated assumptions and extrapolations. Click here for Cramer’s take.

Herb Greenberg has “de-Cramerized” it as only he can with actual facts. Click here for Herb’s take.

Here’s my Uptick Uptake, I don’t care which argument is right or wrong. I deal with the rules that are in place right now.

There are many market forces and identifying one or the other as a primary cause of total market movement is very simplistic and dangerously ignorant. The idea that the uptick rule would have prevented us from declining a whopping 15% off the record high is absurd. I tend to place more emphasis for the selloff on the credit crisis, declining corporate profitability and the general contraction in the economy. Those seem to be pretty fair reasons for a market decline if you ask me.

But rather than just messing around debating specific reasons why bulls are having the wealth they feel entitled to “stolen” from them, why don’t we just skip past all that and prevent anyone from selling a stock for any reason? Of course I am kidding, but that would certainly accomplish the record highs the bulls want back. Why stop at reinstating the uptick rule to supposedly end the market’s problems? Why not just ban short selling altogether? That’s been debated before and has actually happened in some places. How did that work out?

Just look at Malaysia who banned all shorting for over 8 years after the 1997 Asian crisis and blamed it as a primary cause of the Malaysian market decline of 52%. So when they reinstituted shorting in March 2006, you might wonder how the Malaysian market capitalization could have risen from $193 billion to about $350 billion at its recent peak.

As I wrote in October, bulls complain about something when they don’t get their way. Never mind that the uptick rule was removed in July and the market reached record highs a few months later. Oh and nevermind that the uptick rule was in place for over 70 years and did not prevent periods of increasing volatility or market declines or October 1987 or more recently, the 7% decline over a few weeks last February and March.

The reality is that the market has a tremendously bullish bias caused by human nature and the brainwashing that over the long-term stocks always go up. By “human nature” I mean that most people are hopelessly optimistic. I am often accused of being overly negative so what do I know about human nature!?! Does it matter that my negativity has been correct or that HEDGEfolios has performed as well after the uptick rule change as it did before the change?
Regardless, there are many bullish forces that are much stronger than making it easy for a shortseller to put on a position.

Paramount among these is that the vast majority of all volume comes from long-only investors. Even at record levels of short interest, according to Bespoke, shares short on the S&P 500 only represent 5.4% of the total float. The power of short sellers is greatly exaggerated, even in a bear market and especially during a bull market.

Since the uptick rule went away last July, how many rallies were started by rumors that scared the shorts?How many rallies were started by the Fed screwing the shorts? How many rallies were started without short covering rallies? Seems to me that the ease of shorting has a pretty severe downside and is a convenient target to spike the market higher. Throw in the cheerleader media and it is pretty absurd to hear complaints that shorts have an unfair advantage in any way, and certainly not because they don’t have to wait a few trades for an uptick.

It reminds me of the argument about keeping South Africa’s double-amputee sprinter, Oscar Pistorius, from competing in the Olympics with the “disadvantaged” athletes who have to suffer with perfectly healthy (but apparently inferior) human legs. Somehow, I think Oscar would prefer to give it a shot without the prosthetics.

Shorting is extremely difficult in any market and I don’t advocate it for anyone except for real experts - with or without an uptick rule.

This argument about the uptick rule or any other “unfair” advantage for shorts will disappear once we have a real rally.

“You will look back on this 6 months from now and wish you had bought here.” - Who said this? Way too many people who are looked at with great respect in the markets. But you will never hear that from me.

Think about it. Did any of these wishful thinkers who put themselves out as market sages say this in September - “You will look back on this 6 months from now and wish you had SOLD here.” I doubt it. More likely, they said the same permabull line as they are saying now.

I have no idea what will happen 6 months from now. All I can say is… “Be careful what you wish for. You might not get it.”

I have great respect for Larry Lindsey of The Lindsey Group and as you know, that is a hard thing for me to say about most economists. He has more vision and accuracy with his forecasts than anyone else I can think of. Larry was on CNBC this morning and discussed the risks in the automotive credit market(click here). Many people seem to believe that the credit market problems primarily have to do with subprime mortgages, CDOs and associated crappy derivatives. That is a simplistic and dangerous assumption. While it is getting most of the attention, subprime is the priority because it was first to go and because it involves the house component of the American Dream.  But remember that average Americans usually have two big assets - their house and their vehicle. For many renters, their car or truck is it.

I tried to call attention to this issue 6 months ago when I wrote about Subprime Auto Loans, but this topic has largely been ignored until now. As Larry said this morning, the majority of car sales are financed and that financing is heavily involved in the securitization process. The similarities between where we were a year ago with the emerging mortgage crisis and where we are today with automotive credit are very scary. Much of the subprime mortgage mess was created when all the deal terms were determined by the payment amount. It didn’t seem to matter what kind of house you needed, you got the one that fit with your payment. Hearing about the increasing prevalence of car loans being stretched out as far as 8 years to reduce the payment and move the inventory should ring some bells.

Politically and economically, the two biggest industries I can think of are home construction and automobile manufacturing. Evaluate the efforts our government has undertaken to bail out the housing and mortgage industry and then throw in the impact of union involvement in the politically charged automotive industry.  It’s one thing to foreclose on someone’s house, but they have an option to return to renting for their shelter. It’s another thing to repo someone’s car.  Are they going to walk to work, ride a bike, carpool, take mass transit?  As the recession takes hold, auto delinquencies are rising and they will get worse.  As people lose their jobs, they will lose their cars.  As people lose their cars, they will lose their jobs.  Somewhere down the road, investors will evaluate the tranches of defaulting auto receivables in various Asset-Backed Securities and we will revisit the problems with the commercial paper market and CDOs.  In some ways, it’s already happening(Click here).

It will be interesting to see what kind of government program will be set up for the automotive bailout.  They are going to need a pretty big parking lot to hold all that collateral.

I do not expect that everyone reading my blog understands exactly what I am getting at. In fact, I do it intentionally and I prefer that some posts require readers to work hard to understand what I am hinting about. Just know that if something is confusing or seems irrelevant or seems untimely, it has a distinct purpose for being so. Many “journalists” love to tell you what to think or what to do. Apparently, they have a need to express how smart they are. Fortunately, I am not a journalist and I have no such need. My intelligence is important to me. My intelligence should be of little or no importance to you. Your intelligence should be preeminent. There are times when some topics are much more meaningful when they provoke your independent thought and that is much more important than just reading what I write and understanding every word.

Thank you for contacting the New York Fed. We will respond to your e-mail within 5 business days. For more information, please visit our website at http://www.newyorkfed.org.

That was the Fed’s reply to the following question I emailed them on March 12, 2008 at 2:22 pm est:

What are the impacts of the TSLF haircuts on the mark-to-market requirements for the collateral that is being offered, especially as it relates to the first quarter accounting period that will end within the first 28-day window?

Hey, I know it was an auto-reply. I know the Fed either doesn’t know me or if it does, it probably doesn’t like me.

Maybe they didn’t like the question. Maybe the question was stupid and not worthy of a reply.

Maybe they didn’t like the question. Maybe the question was not stupid and they didn’t know how to reply.

Maybe my email found its way into the junk mail folder. Maybe it accidentally got deleted.

Nonetheless, I am waiting for my reply from the Fed. I waited 5 business days per their promise. I waited another 5 business days just to be fair. Anyone wonder how many additional 5 business day periods I will wait to get my reply.

There are two key themes to the Financial Brainwashing of Americans and they have been growing for well over 100 years.

• The first is that Home Ownership is a key component of the American Dream. The majority of Americans own their home.
• The second is that stock ownership is the best asset class to achieve wealth. The majority of Americans own stocks.

Sadly, this brainwashing has gotten us to the point where we expect that these must be true. And that we must do everything we can to preserve them and to make sure that they remain true.

I suspect most Americans reading this feel entitled to these beliefs and more importantly, entitled to the assumption that housing prices will always increase over the long term and that stocks will always seek out new record highs. Any short term drop is just that - short term. And that once things are worked out, we will recover these losses over the years.

I suspect that if we suspended these beliefs, many Americans would have a hard time knowing what to do. It would scramble our social systems, our political systems and our economic systems.

We are now hostage to the financial brainwashing. Our politicians are doing everything they can to keep it going. A decline in housing? Oh no! We must avoid that at all costs. A decline in stocks? Oh no! We must avoid that at all costs.

It’s a given ….right? Of course we would do those things. What else can we do?

On August 13, 2007, I wrote a post discussing the importance of finding Good Reasons To Invest and avoiding hype that media or market participants love to push. If you remember that date last August, the markets were really starting to crumble and we kept hearing about hedge fund losses and redemptions. To allay fears that Goldman’s hedge funds were in trouble, they took a very rare approach and publicly mentioned the names of individual investors Eli Broad and Hank Greenberg and Perry Capital as people who showed confidence by investing $1 billion of new capital in addition to Goldman adding $2 billion of the firm’s money into the Global Equity Opportunities Fund. CNBC and Bloomberg had a great time hyping this story over and over. It was all hands on deck to encourage people not to request hedge fund redemptions and suggest that all was well if the smart guys were adding new money. It worked at the time. For a while. Maybe as long as it needed to avert a crisis.

Except for some light coverage, the media has avoided placing the same attention on the fact that at the end of February Goldman removed 90% of the $2 billion it put into GEO in August. According to the FT, Eli Broad pulled his money out as well. It seems that redemptions must not be so bad anymore if Goldman can do it in their own funds without anyone really caring. HMMMM? Maybe they could use the cash.

Here’s an excerpt of what Goldman CFO David Viniar said in August about redemptions and the future success of GEO:

“I certainly would hope that even if people were going to redeem, and I don’t know who would have and who wouldn’t have, they obviously would see that we’re pretty confident in the future success of the fund and would not. But I don’t know that that’s going to be the case, but that’s what we’d hope.”

I’ll let you decide what “future success” and being “pretty confident” means.

Supposedly, the quant fund only has $1.2 billion of net assets left compared to more than $5 billion after the August rescue. It’s interesting to see the reverence quant funds get for being able to make money with complex formulas and compare that to the facts of their performance when facing their first real test in the second half of 2007 until today. Are you still impressed?

The market action since the Bear Stearns fiasco has obviously been optimistic, but the positive vibe is troubling to me. It rests on the hope, belief and happiness that the Fed and Treasury will stop at nothing to prevent the system they failed to regulate to suffer any of the extreme downsides of capitalism. I understand how that makes many investors happy and relieved. It just does not work that way for me because I actually believe in success and failure as a consequence of capitalist behavior involving reward and PUNISHMENT for taking risks.

Personally, I am still trying to figure out how the Fed’s actions with regards to the initial $30 billion (now $29 billion) is legal. Forget about whether it averted a crisis. Was it legal? If someone does something that benefits the planet but they kill someone along the way to make that happen, was it legal for them to do so?

I’ve heard a bunch of people say they were acting in their capacity as lender of last resort. Really? To whom were they lending? When I think of the lender of last resort concept, I actually imagine lending to the bank in trouble. That was Bear Stearns and they did not get a loan. I understand the legal application of Section 13-3 of the Federal Reserve act for the conduit loan to JPM they made on Friday March 14th. However, as things eroded over the weekend and on Sunday night, it appears that the Fed did not advise Bear Stearns that the PDCF would be announced until the deal was signed with JPM. It didn’t become the lender of last resort to investment banks until after it excluded Bear Stearns.

I don’t care about Bear Stearns or their investors and I have had no personal position affected directly by this transaction. I do care about the integrity of our system and this deal is not filled with integrity. It is filled with the Federal government picking winners and losers in a “direct credit” environment. It is filled with using obscure clauses within the Federal Reserve Act. It is filled with deception. It is filled with making up new lending facilities (PDCF) coincidentally within hours of this transaction. It is filled with rule bending by and at the permission of the federal government such as allowing JPM to acquire 39.5% of Bear Stearns. If the Fed’s actions are not illegal, then the legal trickery to justify their position just goes to how messed up this deal is.

I understand why this deal was done. It averted a crisis of potentially epic proportions in the meltdown of credit default swaps and the counterparty risk problem. Many people are happy and relieved by that. At what cost? At any cost? But was it done legally to the point where it is perfectly defensible? Does the legality not matter as long as it temporarily averted a crisis? Does the legality not matter because the Federal Government was taking the action? Do the actions not matter regardless of the damage done to capitalism?

I am intrigued by the transfer of the $30 billion worth of assets. If it is not done as part of a bankruptcy / receivership….what right does the Delaware LLC being formed by JPM have to manage these assets? When did or will this transfer take place? Before or upon the acquisition of BSC by JPM? If this deal gets delayed long enough and if Bear Stearns has to file bankruptcy on its remaining operations, will this transfer not be a fraudulent conveyance?

And finally, how will the marking of the new entity’s assets be handled? It will be interesting to see how this will be handled given that the Federal Government will benefit from or be hurt by the mark-to-market or mark-to-model choices. And whatever they do will become the de facto standard for everyone else. If the government can do it, then certainly every other investment bank can do it. Does anyone wonder how transparent the financial reporting will be on this new LLC? I cannot wait to see it.

Last fall, a crisis was averted in the commercial paper market by the Fed intervention. It was not solved. When I see investors return to optimism, they are doing so as a result of something bad not happening, not something good happening. I’ll be optimistic when I believe the bad stuff has either played out or has been solved. That has not happened with the mortgage crisis despite all the freezes and Hope Now policies. Similarly, with the Bear Stearns “taking of last resort” a crisis was averted. But the crisis was not solved. The CDS disaster was just delayed.

Every time I hear a financial acronym I cringe (LBO, TAF, TSLF, PDCF, CDO, CDS, CPDO, SIV, ABCP, ARP, VIE…..)

WTF? I’d like to start hearing a financial acronym that is not a POS!

There’s been a lot of attempts to identify and measure bubbles lately. The housing bubble and the commodity bubble are still floating around and yet, they are not the ones I worry about. In my opinion, the largest bubble on the planet is the derivatives bubble and except for ultra-sophisticated finance gurus and central bankers, its size is roughly equivalent to how much it is ignored. Michael Panzner has a fantastic post about this topic on his site and it is one of the few times I have ever called another blog a must read. Please click here and read it.

As I have written here repeatedly over the past few years, I do not respect most financial innovation although I do fear it. With notional values of approximately $500 trillion and global GDP at about $50 trillion, it should not be confusing to anyone where the greatest financial risk lies. And yet, I’ve read and been told that I am exaggerating this risk and that the real exposure to derivatives is a small fraction of $500 trillion. 1/100th is a small fraction but that comes to $5 trillion. 1/1,000th is a small fraction but that comes to $500 billion. What small fraction is nothing to worry about? The deniers and downplayers of CDS and other derivative risk have used many of the arguments that the subprime defenders did by minimalizing it and saying it is “contained.” That was wrong. So is this.

I believe the Countrywide / BAC deal was done to avoid a CDS meltdown. I believe the Bear Stearns / JPM deal was done to avoid a CDS meltdown. And yet, nothing changed really. Yes, some people lost more than they should have. Others gained more than they should have. But as for the derivatives market, it did not change. It is not healthier. No amount of regulation will change it.

Personally, I’d like to see the derivatives market shrink dramatically over time. Unfortunately, it is much tougher to do that than it was to grow it exponentially over the past 10 years. In the first BIS Triennial Survey (as of June 30, 1998) the notional amount of OTC derivatives contracts was $72 trillion. Now it’s $516 trillion. This is the largest bubble. Please read the current Triennial Survey by clicking here.

Our global economy may be bigger than it was 10 years ago, but it is not less risky. The derivatives market is supposed to be the way to reduce risk. On an individual contract if all goes well, that is certainly true. However, as a system, it is not true. Counterparty risk is upon us and while it can be dealt with by bailouts by the US government and others around the globe, the consequences are extreme. There is a tipping point where the assumption of failed risk management by private financial institutions like Bear Stearns will make the value of the underlying assets worth less than the derivatives.