New SEC Governance: Mixed Blessing

The SEC has decided that short selling has gotten out of hand. The practice in which shares are borrowed and sold, hoping to be bought again at a lower price and returned in order to generate profits when a stock is falling, is a common practice among investors who feel a stock is overpriced. Financial stocks have been shorted heavily in the past year, Bear Sterns Cos (BSC) being case in point. When it was rumored to be in trouble, millions of shares were shorted, aiding the downfall of the company.
Today the SEC moved to curb excessive short selling by eliminating 'naked shorting' in which shares aren't actually borrowed. The idea is that as long as the institution could obtain shares it can allow shorting, it doesn't actually have to go through with the process of finding them. Starting Monday the practice will no longer be considered legitimate. Financial stocks which have bear ed the brunt of the short sellers rose hugely today, as investors bet the prices will start to rise once naked shorting is ended. Examples include Lehman Bros (LEH) which has risen over 50% since Tuesday, and Citigroup (C) which rose over 18%. Also seeing some day light are government backed Fannie Mae (FNM) and Freddie Mac (FRE) which are up 12.33% and 17.16% respectively.
This ruling is in a way a double edged sword for financial stocks. In the short term, it provides much needed relief from the battering their stocks were taking from short sellers. Also, it gives confidence to investors that the government will not stand for speculation to get in the way of the macro economy functioning. This can be seen from the recent price jumps. However, in the longer term, it may end up keeping profits down in the future. Many of these companies profit from not only arranging naked shorting, but do it themselves. The elimination of the practice, and continuing regulation by the government could cut into the incomes of these financial stocks in the future.
I am overjoyed that the market actually had a couple successful days among the weeks of crap we have seen, but I do find it interesting that this may come back to haunt the same institutions that are reaping the benefit currently. I'm hoping that the bulls can find their legs again, at least among deserving companies. I think that they may have gotten a little closer these past couple days.

What To Do Now

While watching the market tank everyday-many days opening high and then crashing after a couple of hours-has me down. As I said before, I thought that the worst was behind us, and I was wrong. Since I started sharing my long term picks on this site (see lower left) The S&P 500 is down more than 5%, but the worst part is that the market had jumped over 7% before losing it all and then some. This makes me sad because I feel like a optimistic dumb-ass. I lost about 15% on holding Citigroup (C) long, and finally closed out a little while ago, feeling that I might as well cut some losses. I also closed out the long position on Vale ADR (RIO), as I felt bears were swamping almost all stocks, and I'd like to preserve some gains.
However, I did add one long position to my portfolio: Wal-Mart (WMT.) As I have talked about before (See My recession article ) I think WMT is a great play when the economy is doing ugly things. While low consumer sentiment, high unemployment and even higher gas prices may seem like big negatives for a retailer, WMT is different. Wal-Mart provides really cheap, yet quality goods, which is good for people who feel the economy is doing poorly and don't have jobs but still need food and toilet paper. Also, WMT has pretty much everything you could need at one location, and so for those who don't feel like driving around on $5 gas it serves as a one stop shop. All of these bode well for WMT. They keep costs low, drive away competition because of it and when people are short on cash, look incredibly attractive when it comes to buying the necessities. They also look good to me as a company that can survive these dire times.

The Market

So a while back, when I first started this blog, I thought that the market had bottomed out. March 10 was the day I thought to be the bottom. Right around this time Bear Sterns had collapsed and been partially saved by the Fed and partially saved by JP Morgan. The S&P 500 Index hit 1273.37, and began to slowly, with great volatility move upwards. However, since the 08 peak in May, the market has lost almost all of its gains. Its down a little more than 10% since May 19th, and currently just above 2008 lows. If the market moves below this, which has been acting as a support, stocks could continue to fall for months.
Because I'm beginning to realize I was premature in calling a bottom (though theoretically March 10 still is the bottom) I think that some of my stock picks should be reassessed. I picked Citigroup back in March, with a price of 20.71 a share. Obviously now is a better time to buy, as you can get shares for 3 bucks cheaper. However, I would hold off on C, wait for any more write downs, analyst downgrades or macroeconomic bad news. Citi might drop even further, which could spell an even better entry point for what I still believe to be a good long term play.
I want to reiterate that most of my picks have done well regardless of the current demise because they are strong companies which were completely undervalued during the last round of market lows. There are many more out there, and even more that overall market sentiment is down so far.
I'm waiting for a sell off in companies like Apple and other solid companies who are not affected directly by sub-prime/credit losses. I missed getting in on this sell off last time (except I did recommend buying AAPL) and I've regretted it. Below I've included a couple of entry points for some stocks I'm watching. These entry points are based on the previous sell off, some technicals and looking at price valuations.

Google Inc. (GOOG)
Buy target: $500
Fwd P/E at this price: 24.85

Apple Inc. (AAPL)
Buy target: $150
Fwd P/E at this price: 28.85

Research in Motion (RIMM)
Buy target: $100
Fwd P/E at this price: 25.77

Wal Mart Stores Inc. (WMT)
Buy target: $55
Fwd P/E at this price: 15.89