Slight of Hand

When the market moves in a big way, either way, its a sure bet that the news of the move will trump other important stories.  Here are a few that may have gotten lost, but are worth noting.

Bits and bytes:

Graham Shows S&P 500 Still Too High as Buffett Loses
Benjamin Graham, the father of value investing and mentor of Warren Buffett, would find most U.S. stocks expensive even after the Standard & Poor’s 500 Index dropped 56 percent in 17 months.
Alexis Xydias and Michael Tsang, Bloomberg, March 9, 2009
http://www.bloomberg.com/apps/news?pid=20601103&sid=aiRGwBBIVLTo&refer=us

Libor Creep Says Credit Markets Risk Freeze on Policy Distrust
The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.
Gabrielle Coppola and Liz Capo McCormick, Bloomberg, March 11, 2009
http://www.bloomberg.com/apps/news?pid=20601110&sid=afiuQTQqBTTA

Pimco Predicts Inflation, Joining Buffett, Marc Faber
“Inflation will rise in the medium term,” Pimco said in a report today on its Web site written by Chris Caltagirone and Bob Greer. Treasury securities that give investors protection against rising prices for goods and services are “attractive now,” the report said.
Wes Goodman, Bloomberg, March 11, 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ1ft2HEw6r8&refer=home

Nobody Says Mark to Market Doesn’t Matter as GE Falls (Update3)
The world’s biggest maker of jet engines and power turbines told shareholders last week that 2 percent of GE Capital Corp.’s assets are being valued based on market prices. The remaining $624 billion is being carried at levels that GE, the last original member of the Dow Jones Industrial Average, established in many cases years ago, according to CreditSights Inc.
Michael Tsang and Rachel Layne, Bloomberg, March 10, 2009
http://www.bloomberg.com/apps/news?pid=20601109&sid=aEFGnyE0LW1g&refer=home

SEC May Reconsider ‘Uptick Rule’
The Securities and Exchange Commission will consider as soon as next month restoring a rule that puts the brakes on short-selling in falling markets.  The SEC is expected to propose bringing back the “uptick” rule, which prevented traders from initiating a short sale unless the price of a stock in its most recent trade was higher than the previous price. In a short sale, investors borrow shares and sell them, hoping for the price to fall.
Kara Scannell, Wall Street Journal, March 10, 2009
http://online.wsj.com/article/SB123670796893885821.html#mod=testMod

Gold Sheds 2.4% to $895.60 an Ounce
The price of the thinly traded gold futures contract for March delivery shed $22.10, or 2.4%, to settle at $895.60 an ounce on the Comex division of the New York Mercantile Exchange. The contract fell to as far as $892.10 in electronic trading shortly after the floor session closed. That marked the front-month gold contract’s softest point since Feb. 10.
Matt Whittaker, Wall Street Journal, March 10, 2009
http://online.wsj.com/article/SB123673025194489443.html#mod=testMod

Foreclosed Houses Haunt Home Builders
As the normally hot spring selling season begins, two houses in the Inland Empire region of Southern California sum up the big problem facing many of the nation’s largest home builders.  One of the houses, a four bedroom built in 2006 that was seized by a lender in a foreclosure action, is listed for sale at $229,900. Meanwhile, in the same housing development, D.R. Horton Inc. is trying to sell a new house that looks nearly identical for $299,000, or 23% more.
Michael Corkery and Dawn Wotapka, Wall Street Journal, March 11, 2009
http://online.wsj.com/article/SB123672707657288607.html

Even Solid Firms Feel Pinch as Lending Remains Tight
“Loans are being replaced as they mature,” Standard & Poor’s fixed-income analyst Tanya Azarchs recently wrote, “but little new growth is occurring. That could mean that the slowdown in lending is just the opening act.”
Matthias Rieker, Wall Street Journal, March 11, 2009
http://online.wsj.com/article/SB123673494079290725.html

US companies pull out of retirement contributions
A wave of US companies are suspending payments to their staff 401(k) retirement plans in a bid to cut costs amid the economic downturn.  Saks, General Motors, newspaper group McClatchy, clothing company J.Crew, FedEx, UPS, Coca-Cola Bottling, Reader’s Digest, Motorola, Regions Financial and Sprint Nextel are among the growing list of companies which have suspended contributions in recent months.
Deborah Brewster, FT, March 10, 1009
http://www.ft.com/cms/s/0/7e69ec42-0db0-11de-8ea3-0000779fd2ac.html?nclick_check=1

Living in Motels, the Hidden Homeless
As the recession has deepened, longtime workers who lost their jobs are facing the terror and stigma of homelessness for the first time, including those who have owned or rented for years. Some show up in shelters and on the streets, but others, like the Hayworths, are the hidden homeless — living doubled up in apartments, in garages or in motels, uncounted in federal homeless data and often receiving little public aid.
Erik, Eckholm, New York Times, March 10, 2009
http://www.nytimes.com/2009/03/11/us/11motel.html?_r=1&hp

SEC Amendments to Regulation SHO In Effect Today

A recent and significant amendment to Regulation SHO, takes effect today.  Reg SHO, initiated in January 2005 was hardly enforced until the market gyrations of recent days.   This is a controversial change to the regulation which prior to today exempted buona-fide market makers from having to deliver securities. 

The effect of this are mostly going to be unknown for a while.  If I had to speculate, I’d say this may add to current volatility as market makers and traders try to decipher its effects.  Whether or not the short covering that might ensue will cause a dramatic rise, is unknown.  Simple analysis might lead to an expectation that equity options may become more expensive if market makers are no longer able  hedge out their risks.  If a customer wants to buy calls on GE and the specialist cannot locate stock that he can borrow to short, in order to hedge his book to write those calls, then the liquidity in the options market may dry up.  If there is a particular stock that a lot of people are demanding calls for, they may find the cheapest way to play the trade would simply be to buy the shares.   If so, we can expect some more rattling as the rules change…. 

For some background on Reg SHO and the new change, see the excerpts from the SEC document below:

SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 241 AND 242

[Release No. 34-58775; File No. S7-19-07]

RIN 3235-AJ57

Amendments to Regulation SHO

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY:The Securities and Exchange Commission (“Commission”) is adopting amendments to Regulation SHO under the Securities Exchange Act of 1934 (“Exchange Act”). The amendments are intended to further reduce the number of persistent fails to deliver in certain equity securities by eliminating the options market maker exception to the close-out requirement of Regulation SHO. As a result of the amendments, fails to deliver in threshold securities that result from hedging activities by options market makers will no longer be excepted from Regulation SHO’s close-out requirement. The Commission is also providing guidance regarding bona fide market making activities for purposes of the market maker exception to Regulation SHO’s locate requirement.

EFFECTIVE DATE: October 17, 2008….

…II. Background
A. Regulation SHO
Regulation SHO, which became fully effective on January 3, 2005, sets forth the regulatory framework governing short sales. Among other things, Regulation SHO imposes a close-out requirement to address failures to deliver stock on trade settlement date and to target potentially abusive “naked” short selling in certain equity securities. While the majority of trades settle on time, Regulation SHO is intended to address those situations where the level of fails to deliver for the particular stock is so substantial that it might impact the market for that security….

…As discussed below, after considering the comments received, the data, and the purposes underlying Regulation SHO, we are adopting amendments to eliminate the options market maker exception, as proposed. At this time, we are not acting on the proposed amendments to Rule 200(g) of Regulation SHO regarding long sale documentation. Instead, in a companion release we have adopted a “naked” short selling anti-fraud rule that, in part, targets seller’s representations regarding long sales. In addition, we note that we have adopted an interim final temporary rule, Rule 204T, which strengthens the delivery requirements for sales of all equity securities. Under temporary Rule 204T, fail to deliver positions resulting from short sales of all equity securities by options market makers must be closed out by no later than the beginning of regular trading hours on the settlement day after the fail to deliver position occurs. In conjunction with these short sale-related initiatives, and our goal of further reducing fails to deliver and addressing potentially abusive “naked” short selling, we believe that we must eliminate Regulation SHO’s options market maker exception.

Source:
Amendments to Regulation SHO
SEC, 17 CFR PARTS 241 AND 242; [Release No. 34-58775; File No. S7-19-07]; RIN 3235-AJ57

Click to access 34-58775.pdf