Restrictions on Short Selling

                      

In a previous report I mentioned the usefulness of short selling; selling borrowed securities, in the hope of buying back the borrowed security at a lower price in the future.

                       

Without short selling, markets would become overvalued and would not be priced as rationally as they generally are.

                       

However, during financial meltdowns or other emergencies which may affect markets from properly functioning, it may be necessary to temporarily stop such trading.

                       

The SEC has placed restrictions on the use of short selling after a security is off, for example, 10% on the day. Policing is difficult with the rise of lightning-fast trading computers. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Testing a "Financial Expert”

                     

Here’s a quick test of someone who considers himself a financial expert: Ask him about buying bonds with the threat of inflation.

                       

When he starts talking TIPS, (for inflation-protected Treasury bonds), or without first asking how long you intend to hold the bonds, he has flunked first steps.

                       

Then ask him to explain the duration principle behind the purchase of bonds. And how the usage of duration can overcome the effects of inflation. Chances are he will flub that too.

                                           

Want my answers to such questions? (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Why Financial Advisers Often Aren’t Needed

                      

Most investors don’t need financial advisers for three basic reasons.

                       

First: Basic investing principles are easy to master. I mention them often.

Secondly: What to buy is simple in the age of index funds. There is no reason to attempt to buy individual securities. I have explained why in much of my past comments and books.

                       

And three: Adviser fees eat too much out of investment earnings. I repeat this constantly. Adviser fees can account for as much as 20% and more of annual investor earnings.

                       

The garden variety of advisers, that is the bulk of them, are not worth the money because their expertise is run-of-the- mill.

                       

On the other hand, investors who have estate and tax questions need legal advisers. That has little to do with portfolio selection. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Why Short Selling of Securities is Sometimes Wise

                       

Populist politicians and the bulk of the media give the impression that short sellers are bad. And that short selling causes much of our financial problems.

                       

There are times when it does. But short selling usually has a proper function in the securities business and our economy.

                       

This is the practice of selling borrowed securities, in the hope of buying them back at lower prices in the future.

                       

Without short selling, overheated, overvalued securities would continue rising and add to dangerous bubbles, and thus prevent markets from being priced more rationally.

                       

Short selling generally keeps markets honest. Dictating when to stop or retard its use will only exaggerate market extremes. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Over-Trading and Financial Meltdowns

                      

Short-term, in-and-out, frenzied trading by the pros is what aggravates financial meltdowns. It is the segment of Wall Street that I always avoid in good times. Imagine what can happen in dangerous markets.

                       

This is precisely what aggravated the 2008/2009 market selloff, aided and abetted with mark-to-market and short- selling. True, erratic markets create opportunities for professional traders, particularly those I call inside players. But not the vast majority of investors. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Understanding the Yield Curve

                       

One of the strategies often suggested in financial circles is the “yield curve..” This has to do with the difference in yields of the different maturities of U.S. Treasury bills, notes and bonds.

                       

There is usually a normal difference in return, depending on years to maturity of the security. But this can change, depending on economic conditions and influences, including fiscal activity of the Treasury and monetary action by the Federal Reserve,

                       

But playing yield differences is a timing, short-term exercise which is tough enough for pros to succeed at. It’s best that average investors forget about this strategy.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Government Bailout Misdeeds

                                         

In the case of AIG, the value of its derivative insurance coverage, in 2008-2009, was  being determined on the basis of fictitious existing market value. Not on possible claims in the future, at the maturing of AIG company obligations, but at supposed current valuations.

                       

That produced a condition that induced premature bankruptcy, in a panic venue; a rush to judgment when cool heads and hands ought to have been the hallmarks of expertise.

                       

The AIG panic was evidenced by the rescuer’s paying of debts on the basis of 100 cents on the dollar to some bankers in this country and abroad.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Human Error and Political Mistakes

                      

Human error was instrumental in the financial meltdown of 2008/2009,and various bubbles that we have had in the past.

                       

In each case, there has been finger-pointing, usually by anti-business politicians and by bureaucrats whose immediate impulse is to blame big business and bankers; the usual scapegoats. That is the litany of criminalization.

                       

I have always blamed human error. Whether it be loose monetary policy of the Federal Reserve, in inflating currency, or inappropriate accounting rules for normal securities market situations, actions that hasten the ruin of investment liquidity. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Credit Default Swaps

                     

Just a few years ago CDS, or credit default swaps, were considered by liberal politicians to be the cause of the financial meltdown.

                       

They thus conveniently forgot the real cause of the financial meltdown, which would have pointed to much o their past political activity. That financial debacle owed much more to Washington antics and influence than it did to Wall Street.

                       

But Credit Default Swaps are back because they are needed in a burgeoning market by a number of industries, particularly big banks. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

   

Big Banks Can Now More Easily Fail

                       

The Glass-Steagall Act, created under the Banking Act of 1934, was terminated during the Clinton administration. It had separated regular banking from investment banking activity.

                       

However, it’s easy to talk about the problems requiring the separation of investment banking and ordinary banking. There are, however, difficulties once the two have been so connected for years. The question of proprietary trading arises.

Both regular and investment banks had executed such trades, ordinary banks to a lesser extent. Moreover, such trading generally represented a very small, insignificant amount of activity and income.

                       

Furthermore, the definition of what is a proprietary or “prop” trade is hard to delineate.

                       

The result, with all our populist politicians, we have bombast, finger-pointing, and economic panic and damage.

                       

We wound up with Dodd-Frank, a complex maze of regulations that has, as one of its missions, an attempt to separate commercial and investment banking. And preventing banks from getting too big to unwind as failures.

                       

The result so far: Banks are getting bigger and the risk of failing is ever-larger. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

           

                   

Are “Smart” Investors Really Smart?

                        

Most investors are not too sharp when they constantly try to outsmart the mass of other investors such as they are.

                       

There is a better, disciplined way of investing, whether you come from Wall Street or Main Street. It’s not by acting on the same mass information, at the same time, usually incorrectly.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Do Bankers Make Too Much Money?

                   

They may if they earn commissions and options of hundreds of millions a year. But who is to say what is too much? Some politician or bureaucrat with favors to hand out for votes?

                   

Do baseball players earn too much money?

                   

They certainly do, if they earn up to $30 million a year for playing a kid’s game. And which many sandlot amateurs do for nothing, but just a little less efficiently. The real difference in their ball- hitting capability is not learned the hard way but in their luck in having eyes to see the ball.

                   

Do gymnasts deserve more than they earn?

                   

They get practically no income despite all the incurred pain, and years of training and practice, and the need to overcome initial physical fear.

                   

From my personal experience with all three practices, it is difficult to see how bureaucrats and politicians in Washington are so ready to damn bankers for making “too much” money while other genuinely overpaid groups are left to make their fortunes politically undisturbed.

                   

And ballplayers are indirectly being financed by bailout funds of their bosses’ subsidized ballparks.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole atTwitter.)

Financial Stimulus Facts

                       

Interest rates normally adjust to supply and demand forces and thereby adjust economic events. However, whenever the government imposes stimulus proposals to raise credit and lift the economy, the system is disturbed and thus distorted.

                       

This unbalances the economy and does the exact opposite of what has been intended. It’s a lesson politicians wantonly overlook to suit their election goals.

                       

Ludwig von Mises wrote fully about the phenomenon in the 1920s but the economist in fashion during the 1930s recession was, unfortunately, John Maynard Keynes. He became the political icon of that recovery movement.

                       

The Keynes government pump-priming thesis prolonged stimuli that actually deepened and helped induce the Great Depression. Nevertheless, it is the premise of failed current policy. (See the Earl J. Weinreb NewsHole® commentaries.)