April 14, 2009
POSSIBLE SOLUTIONS TO REINSTATING THE UPTICK RULE AS IT PERTAINS TO THE PROPER PRICE DISCOVER OF ANY STOCK:
THIS COMMENT IS BASED ON TWO COMPARISONS:
1. Proper price discovery of a stock should be compared to the idea that TODAY, the average PE ratio for ALL stocks that trade in America, trade at an average PE ratio of about 14.
2. A distressed stock should be compared to what the average PE of all stocks that trade in America SHOULD have, a PE ratio of no more than 2.
WHY COMPARE THESE TWO IDEAS?
As it relates to idea 1:
If a healthy company is considered a good buy to go long, that has a PE ratio less than 14 compared to all stocks in general, then it might be considered a buy from a historical perspective.
And short selling rules should be instated in a way to keep up the historical trend of all stocks on average being traded in general, at an average PE of 14 in order for proper price discover and to not allow a stock's PE to go too high.
As this relates to idea 2.
Short selling rules should be instated in a way to encourage all stocks in general be worth no more than a PE ratio of 1-2. Because, if a company is only worth say a $1 per share, and for the sake of arguement, there is no debt, and said company is sold, the company is only TRULY worth $1 per share to stockholders and SHOULDN'T be worth a theoretical $14 it might be sold at under the current PE average of all stocks as it pertains to idea 1, in order to achieve proper price discovery, all things considered equal.
POSSIBLE SHORT SELLING SOLUTIONS AS IT PERTAINS TO IDEA 1:
If the average price of a theoretically, relatively healthy company that is the largest capitalized stock on the DOW JONES, declines an average of, say, 3% over 30 days of trade, in price, from closing price to next day low price then any stock, distessed or healthy should be allowed to be shorted until it has fallen 3% in one trading day. Intraday, after that, a circuit breaker could kick in where that stock can not be shorted for the rest of the day unless the last trade was on an uptick or zero uptick of at least 1 cent on whatever exchange that stock is being traded, not a nation wide imposed uptick.
And the next day, short sellers can short a stock down 3% again, then the zero/uptick 1 cent will kick in again. And each day - so on, and so on.
This should allow proper price discovery of any stock that trades that has less than the float of the biggest company on the DOW, to ensure that it never gets shorted too fast too soon, nor, trades too high so that the average retail investor couldn't buy nor trade too low, too soon, that even a great company could be bear raided to oblivion.
And this method should ensure the average PE of all stocks that trade in America, should trade in more proper proportion to the historical PE ratio of 14 for all stocks.
POSSIBLE SHORT SELLING SOLUTION AS IT PERTAINS TO IDEA 2:
THE WAY ALL STOCKS SHOULD WORK?
In the short term (1-2 years?), simply reinstate the uptick rule the way it was. Allow the DOW to balloon to about 10-11,000 so the investors who bought at this level and above, can get out of the market with less of a loss or a slight gain.
MEANWHILE, encourage all, and ultra conservative large financial institutions (like Citigroup, Bank of America, JP Morgan, etc.) to create inverse ETF's that specialize in shorting so they can include them as a part of investment alternatives to pitch average John and Jane investor, who just want to hand their money over to be managed so they can forget about it, as a hedge against a possible downturn.
Then, eliminate or reduce the uptick rule to a zero tick and/or eliminate the rule altogether.
This will allow the market to more quickly correct where the DOW possibly should be, about 530-750, where all stocks have an average PE of 1-2.
Then:
John and Jane retail investors shouldn't have lost money because their advisors would have moved them into the inverse ETFS that special in shorting all sectors. Then they can go long again when the DOW hits the 530-750 range.
Volume trading should increase roughly 13-14 fold. Admittedly, computers will probably have to advance to cope with the larger volume.
Big institutions make money AND retail investors make money.
Few lose their life savings afterwards when the DOW goes to 530-750, because the market won't be able to crash like the 14k-6900 DOW drop.
The gap between the rich and poor should narrow.
Stocks will be worth what they more or less should be, a PE ratio of 1-2.
And the SEC should come out proving they truly care about levelling the playing field for all investors.
I hope these ideas can either be expanded upon to achieve the TRUE value of any stock, or, help inspire a way of thinking that may lead to the best solution of the proper price discovery of any stock.
PERSONAL DISLOSURE - At the time this was written, I am:
Long ETF: FAS.
Long: Visa.
And, long: GNBT.