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General Motors Reverse Split Creates Problems for Dow Jones

If the General Motors (GM) 1 for 100 stock split becomes effective then the stock price would theoretically becomes 100 times its current value. This would not create an issue with the S&P 500 Index (SPX) which is market capitalization weighted. However the people over at Dow Jones, now owned by News Corp. (NWS) have a predicament on their hands. The Dow Jones Industrial Average (DJIA or INDU) is a price weighted index. Each constituent stock is represented by one share, regardless of the stock price or market capitalization. Thus a higher priced stock like International Business Machines is nearly 10% of the index while a lower priced stock like Alcoa (AA) is just 1%. If the “new” GM post-reverse split shares are 100 times the current price then the “new” GM shares would jump from the lowest weighted stock in the index to the highest weighted stock.

So what is Dow Jones to do for its grand old Industrials Index? First they could leave the status quo alone and just let GM and its newly inflated price dominate the index. That would be a disaster and the index would become even more irrelevant that it currently is. Second they could seize the opportunity to transform the index to a capitalization weighted index. I doubt that would happen. It would require teaching old dogs new tricks. Lastly they could kick GM out of the index and add a more meaningful stock like Apple (AAPL) which at a price of $130 and market cap of $117 billion is as worthy to dominate the index like IBM with its $137 billion market cap rather than GM with a dubious market cap of $1 billion. I think that the replacement strategy is most likely for the Dow Jones Industrials. Stay tuned index fans.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of AAPL --- although positions can change at any time.

For more information on investing with LakeView Asset Management, LLC please visit the company's website

You can subscribe to The LakeView Restaurant and Food Chain Report newsletter at

Posted By Scott Rothbort at May 7, 2009

Letter to SEC: Reinstate 'Uptick Rule'

The SEC is currently inviting comments on proposals for the reinstatement of the Uptick Rule or similar short-selling measures. We encourage everyone to participate in the dialog -- when the SEC sought input on removal of the Uptick Rule in 2007, only 27 comments came forth. Now is your chance to let the SEC know your thoughts, the window for comments closes on June 19. Here is a link to the  official SEC comment form.  We also invite you to click here and co-sign the following letter prepared by Jim Cramer, Eric Oberg, Scott Rothbort and Bill Furber, who are in favor of reinstating the Uptick Rule.

We the undersigned believe in not just free markets, but fair markets. While the practice of short-selling equities can contribute to the market in terms of liquidity and price discovery, if left unchecked the practice can impede capital formation. We believe that a relatively simple check that was in place for nearly seventy years, the "Uptick Rule", helped serve the markets well in balancing various participants' interests. We therefore urge the SEC to reinstate such a price test rule, and specifically would urge a plus tick rule over other alternatives such as a "best bid" or "circuit breaker" test.

When the Uptick Rule was initially implemented in the late 1930's, there was an implicit acknowledgement that companies were not commodities. There was recognition that the capital markets served the broader purpose of capital formation; that companies create products, provide services, employ citizens and pay taxes and thus there was an interest to promote market integrity and protect interstate commerce.

In 1963, the SEC's Special Study reiterated the Uptick Rule as being a simple, but effective, mechanism for balancing the various competing interests: allowing for relatively unrestricted short sales in advancing markets, eliminating short selling as a tool for driving the market down by preventing short sales at successively lower prices, and preventing short sellers from accelerating a declining market by exhausting all available liquidity thus leaving long sellers to sell at successively lower prices.

Indeed in 2007, with their report on the Regulation SHO Pilot Study, the SEC's Office of Economic Analysis made the express point that in the context of a "Tick Test", short sellers were liquidity providers, but without such a price test they could readily become liquidity takers. An Uptick Rule validates short sellers as liquidity providers, thus should help remove stigma with the practice.

When considering the objectives of protecting investors and capital formation, it seems that the Tick Test seems to balance the interest of both the short seller and market integrity, and therefore ought to be reinstated.

Furthermore, the undersigned not only support the letter of the rule, but also the spirit and intent of the rule. A rule with myriad exemptions and carve-outs will not fulfill its purpose. Therefore, we urge the SEC to enforce not just the letter of the law, but also be mindful of the principle of the rule.

There has been considerable attention around the topic of the Uptick Rule because of a confluence of issues that, while independent, are inter-related around the practice of short selling.

One of the most obvious related areas of unease is the practice of naked short selling. This is a fraudulent practice that appears to have been laxly enforced in the past. Naked short selling is essentially the creation of shares out of "whole cloth", shares that never had to undergo SEC review, diluting the rights of existing shareholders, placing a price control on a stock and thereby inhibiting capital formation. No doubt, there is genuine concern from all market participants to put an end to this egregious practice; this is not an issue of "balancing interests", but instead an issue of enforcement, and we urge the SEC to continue to step up their efforts in this regard. Naked short selling simply can not be tolerated.

Another question that has arisen is the proliferation of levered "short side" sector based ETFs. These funds have mushroomed with the elimination of price tests, and have raised innumerable issues in the markets.

These ETFs were somehow approved by the Commission, despite seemingly obviating the margin rules set forth by the Federal Reserve. There is an entire body of evidence that shows a relaxation in margin constraints brings more noise to a market by drawing in uninformed traders. These funds have exacerbated volatility and created significant selling pressure during the downturn.

The great irony is that these products, due to their construct, do not even work for longer term holders, so in reality these are speculative instruments meant for intra-day trades, not for hedging or for investment. As intra-day speculative short selling vehicles unchecked by a plus tick test, they are sopping up available liquidity, rather than providing liquidity.

In the past, there was a "diversification exemption" for Rule 10a-1. While such an exemption may be understandable for a broad based ETF, it does not seem to make much sense with regards to these "short side" ETFs. If such an exemption was applied here with regards to the underlying hedging activity, then people would simply use these funds as a dodge for the Uptick Rule much as they are used as a dodge for the margin rules.

The proliferation of complex, algorithmic trading has also contributed to rapid-fire, unchecked short selling. There have been many comments about how embedded the code is in these program trades that would be impossible to reverse. This is a very specious argument. If the programmers can create code to trade thousands of stocks a second, they can surely accommodate a plus tick test.

To be appropriately comprehensive, the Commission will need to address these concerns, as well as many others including married put abuse and "dark pool" trading, in order to level the playing field for all participants. It is when too many exceptions are created, or rules are not enforced, that integrity and confidence suffer.

In conclusion, we the undersigned urge the Commission to promote market integrity and capital formation, and to help uphold free and fair markets. We support the re-implementation of the Uptick Rule in not only form, but in substance, as it best balances the interests of all market participants.

Jim Cramer

William Furber

Eric Oberg

Scott Rothbort

Posted By Scott Rothbort at May 8, 2009

Shareholders’ Bill of Rights

Below is contained the Shareholders' Bill of Rights. These rights are designed to protect the interests of shareholders and all those people who hold capitalism to be precious. Please link this bill of rights to your friends and colleagues. Help save capitalism from those who seek to destroy it.

Shareholders’ Bill of Rights

1.    Shareholders have the right to vote their shares in accordance with corporate by-laws.
2.    Shareholders have a claim to the net assets of the company.
3.    Shareholders have a right to receive dividends distributed by the company.
4.    Shareholders have the right to sue the company or its management as an individual or as part of a class.
5.    Shareholders are entitled to receive an annual set of financial statements audited by an independent public accountant.
6.    Shareholders have the right to create and destroy capital.
7.    Shareholders can pledge or assign their stock.
8.    Shareholders can elect to lend or withhold the lending of their stock.
9.    Shareholders right to sell stock shall not be subordinated to any individual or entity.
10.  Shareholders ownership shall not be nationalized by any government.

Scott R. Rothbort
May 13, 2009

Posted By Scott Rothbort at May 13, 2009

Scott Rothbort

About Me :




Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational website and a frequent contributor the where he also writes a weekly article as The Finance Professor

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at


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