Doug, there are very good reasons why people aren't allowed to short penny stocks in the US. Many new companies don't have the benefit of "big-house" IPOs that get them on NASDAQ, the more speculative the less likely. New mining stocks are very speculative and most start as pennies. Since there isn't a lot of capital involved, deep pockets can easily move penny stocks prices. Even my meager resources was moving MXAM when I was buying. Anybody with enough money can move thinly traded stocks. US rules recognize the potential abuse and risk that shorting would have to these start-up companies and prohibit shorting by individuals. Market Makers however are allowed to short term sell penny stock they don't own, they profess that their shorting is needed to maintain an efficient market in the stock. However, they can also abuse that privilege. The saving grace however is that Market Makers must balance their books (unwind their short position) regularly (I think the rule is monthly, someone correct me).
Since mining stocks are speculative, the “value” of those stocks is based on perceived value for some potential in the future. Stock price is an indicator of perception. Stock going up is viewed as indication that people in the know understand that a company's worth an investment. Many investors just use technical analysis (TA) and don't care if gold is yellow, or blue, or dances in paleo-channels. Others are more concerned about fundamentals than TA, but that don't have technical skills to personally evaluate technical issues will also use price as a proxy. There's the problem, price begets price. Since price is so easy to “force”, shorters will “manipulate” the price to satisfy their own objectives. They don't care if a company fails and other investors lose their money, it's all justified as “necessary function” for the market, the investment game. They probably even pat themselves on their back for the service they provide. However, the negative thinking is contagious, it finds new tricks to increase their leverage. They then work both sides of the market, first bid a stock up higher than market fundamentals can support and then sell the stock short to move the price down. The declining price then encourages further decline and the spiral continues. New companies also provide stimulus for this behavior to work because of their mistakes and missteps which occur in all companies. Fortune 500 companies make missteps all the time, but have earning to underpin their stock price, speculative pennies don't.
Our Canadian brothers, in some quirk of nature, are allowed to short pennies in Canada. Little does Canada appreciate why nobody in their right mind would ever invest in their penny stocks. Canadian penny stocks are thinly traded black holes. They will waste Canadian taxpayer money subsidizing startup companies only to allow shorters to eventually kill those companies.
Beyond just the legal offshore shorting, there is even a more sinister shorting form called naked shorting. There the evil greed of Market Makers and offshore deep pockets will sell short stock that they haven't even borrowed. Their financial resources are large and the “death” of a targeted company is the objective. Success by the desert dirts would significantly change mining, the naked shorters may even be secretly funded by conventional mining for all we know. Some posts on the desert dirt threads suggest that involvement. If someone told me that Barrick was involved in the shorting effort, I wouldn't be surprised. Berrick is the reason that the price of gold can't get off it dead ass, but that's another story.
Sorry for the long winded yappy. |
