Kudlow’s Money Politics

What Was the SEC Thinking?

Savvy veteran investor Mike Holland keeps asking a question that no one seems to be asking, much less answering: Why in the world did the SEC revoke the ‘uptick’ rule in early July?

Famous short seller and patriarch of the Kennedy clan, Joe Kennedy, created the uptick rule over seventy years ago during his tenure as FDR’s first SEC chairman. While many likened Kennedy’s stint to a fox guarding the hen house, Kennedy certainly knew how to stop the bear raiders from trashing the stock market.

The uptick rule was put into place forbidding traders from shorting stocks on a price downtick. Until last month, if you wanted to short a stock, you needed to wait for an uptick in the share price. This move stymied potential bear raids on stocks. It worked for over seven decades. Many Wall Street veterans also believe it dramatically reduced stock market volatility.

In today’s context, is it purely a coincidence that Chris Cox’s new SEC ‘no uptick’ rule made its debut at the same time that stock market volatility has gone gangbusters? Are hedge fund traders shorting stocks on down ticks? This could be adding huge momentum to downsized price movement. It could also be putting ordinary mom and pops investors on Main Street at great risk to the machinations of Wall Street professionals.

Nobody knows for sure what’s going on here. I’d like to get some comments on this. Meanwhile, I’m still looking for more info on this whole point.

But it seems to me that abolishing the uptick rule was an unbelievably lousy idea by Cox’s SEC. It appears the rule’s revocation may have exaggerated downside pressure on the stock market.

More to be revealed later…

On a different point, today’s 0.6 percent increase in core retail sales — which comes to 7.7 percent at an annual rate for the three months ending in July, and 5.8 percent for the last 12 months — shows clearly that neither the consumer nor the economy is dead.

As I wrote in my most recent syndicated column (“Will Main Street Bail Out Wall Street?”), profitable U.S. businesses and hard working Americans are producing plenty of economy wide income to weather this subprime housing storm.

Larry Kudlow — Larry Kudlow is CNBC’s senior contributor. His new book is JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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