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Cinema Signal: Not quite a green light but has elements of strong appeal for a limited audience.

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. "Stock Shock"

There are so many vultures flying through the skies of the financial markets it's a wonder when a very fat one named Bernie Madoff is nabbed and has become prisoner No. 61727-054 for 150 years. It's equally safe to say, however, that his con artist peers are envious of his criminal success, greedier than ever, and still scouting their next meal. Which magnifies the risk of investing in overhyped, fast-moving stocks and informs the investor that he or she had better be cautious about where they put their money.

What gives these predators such an edge up on most of us is that they know the market well enough to take advantage of those who don't and, even, some who should know better. The Madoff case demonstrates that greed is the stimulus that makes people vulnerable, and this potentially ruinous motivator is what stock bandits trade in. What this documentary vividly emphasizes is that the market is a dangerous place for the uninitiate and those who use it as little more than a crap shoot.

To explain and back that up, we have to get into some technical matters. Don't let your eyes gloss over with instant fatigue because, to understand the phenomenon that took place here, it's important to grasp a few esoteric details about a stock manipulation fraud and market practices.

First, the stock in question is Sirius XM Radio (symbol, SIRI), a company that formed as a merger of two satellite radio stations, Sirius, the one that built up a clientele from the avid followers of Howard Stern, and XM Satellite which, when it was formed, seemed the better funded of the two. Once it was clear that the market for their services was limited, they merged, arousing vast amounts of media and market attention. It was an industry of the future as some saw it, and many wanted to get in on the ground floor.

Next: Short selling. This is the practice of selling borrowed stock in the hope that the stock price will soon fall, allowing the short seller to buy it back for a profit. This means that if you think Bank of America (symbol BAC), for example, has reached a temporary high (especially in a down- trending market) and/or has established a pattern downtrend, you can profit by its decline. The practical effect of this mechanism is to allow you to play the market in whichever direction you think it's going.

It's important to note that from 1938 to 2007, a short sale could only be executed on an uptick, seen as a braking device to keep the exploiters at bay. This ended when it was seen as more symbolic than an actual prevention measure. You can now dive right into a short sale with no governing mechanism, just as you can do with a straight buy order (referred to as a long position.

Whether this had any real effect on avoiding market manipulation isn't worth arguing, since stock market thieves don't rely on it, preferring the much more controllable effect of "pump and dump." With this ploy, especially in a bear market (down-trending), they select a stock with a highly speculative "promise" factor and, through the issuance of false information, rumor and questionable glowing testimonials, "pump" it up.

The operators of the scam will buy into it along the way to further advance its value, but when their determined maximum stretch point is reached, their big dump of the stock at a handsome profit will immediately begin the momentum for a downslide. But, they're not done. More misinformation will follow, now with an entirely negative aspect, which will be absorbed by the financial press and then the major media which are quick to make stories out of such moves.

Imagine what those behind the XM Sirius bubble made when the stock went from $9 per share to five cents (yes, $.05) per share recently--in 2009!

So, now, everyone's shouting about short selling. There's nothing like a successful and widely damaging scam, plus interviews with a few primary victims of it, to produce a mass call for changes in legal practices they never knew existed or just didn't consider.

I hate to advise them of it now, but that's what the stop-loss order is all about. That's when you tell your broker to sell your stock if and when it goes down to a certain price, the idea being to limit your loss (or lock in some gain) before your investment descends even further, limiting the loss to something more bearable [no pun intended]. While many of us think we'll know when to get out, the reality is that most amateur traders don't pay all that much attention until it's too late--or appears to be too late.

Whether you've ever had occasion to cry over the milk the stock market spilled all over your laptop or not, the lesson learned from the Sirius case should remind all who ventured there (and who read here) to place stops under stock positions. Due dilligence would also dictate moving your stop level as the stock appreciates, if it does. In other words, fellow amateurs, pay attention to your money!

I define an "investment amateur" as a person to whom investing is a secondary activity (perhaps, even, tertiary)--people who cannot maintain regular vigil over their portfolio. People to whom investing is not their day job.

Having said all that by way of preparation, let me now get to the two things that limit the message of this documentary. So much of its content consists of the reactions of victims who have, indeed, been Stock Shocked. They cause the viewer to feel for their bad fortune. As market amateurs, they over-and-over again heap blame on short selling, venting over a perfectly legal and acceptable market mechanism. But, they are as wrong in identifying the cause of their perfectly understandable woes as they are shocked to learn they've been the victims of "pump and dump."

Rage is well placed here, but the outcry of the interviewed subjects, along with journalists, corporate heads, and market pros should be directed toward apprehending and imprisoning the humanoid scum who set a trap for them. Where is the footage on the pursuit? Where are the court sessions or the prison interviews? Where are the wanted posters? It's hard to face the fact that there aren't any of these because it was all done legally. Just unscrupulously is all.

The second problem here is the filmmakers' assertion that short selling implies Wall Street corruption and inept regulation. There may be an ounce of truth to that, but in view of the Sirius case, it's a little like blaming the horse for strolling out of the barn, which someone decided not to close up and lock. Could it be that Wall St. and the Feds hate locks?

But, don't get me wrong. Though the depth of Mohr's attempt to bring attention to market risks and traps may be, of necessity, limited, she does a service by focusing on it with all good intentions to forewarn the public. The effects it has on naive and ill-prepared investors should not be to depend on government regulation and oversight but rather to develop a sound method of judging a potential investment other than "the seat of your pants." That approach is what Las Vegas is all about.

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Ponzi schemes, such as the fraud Bernie Madoff pulled off on elite and sophisticated clients, are crimes--illegal, corrupt and fraudulent. Short selling, "naked" or otherwise, isn't. We have to face the fact that the critical need for due diligence when considering our investments would be a harder and far less popular sell, wise though it would be. Try telling victims of a scheme that they should have been better prepared to protect their own money and/or to avoid stocks altogether.

In fact, if you're reading this with any concern over a recent stock venture, I offer a word of advice. If you want to be in the market, put your savings in funds, and let the fund manager worry about which companies to buy and sell on your behalf.

On the other hand, if neither the film nor this tract will affect your approach to the market, can I interest you in a really promising gold mining stock? Hit me.

[See also: "The Boiler Room" (2000) and Oliver Stone's take, "Wall Street" (1987) for more on the subject. Also, a listing of excellent books on technical analysis for an even greater education in market understanding.]

P.S. When we last checked, SIRI, now a penny stock, made a strong move to the upside, from a low of 30 cents to a high of .75 before sliding back to .62 -- in a three month period.


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                                      ~~  Jules Brenner  


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Site rating: 4

A combination of Naked Short Selling ( abolishment of he uptick rule ) and decimal place trading resulting in a scandal on Wall Street with severe naked shorting

                                                           ~~ Richard Keane 
[Ed. note: Mr. Keane is the narrator of this film (or video, if you prefer). This being an arcane subject even for a documentary, I didn't think it would receive much attention from Cinema Signals readers and very little to no opinion feedback -- unless it came from someone who was involved in the production. Sure enough, in this instance, and we're happy to hear from him.]



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