When Short Selling is Smart

            

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 practise 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 can Produce 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 sell-off, 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.)

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, these days.

                     

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.)

Past Bailout Problems

                                       

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, at the expense of others.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

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.

                     

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.)

CDS or Credit Default Swaps

            

Just a few years ago CDS, or credit default swaps, were considered by 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.)

Can the Big Banks 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.

                     

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, ordinar 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.)

How Smart are “Smart” Investors?

       

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.)

Bankers’ Earnings

        

Only top-level bankers sometimes 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  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 at Twitter.)

Facts about a Financial Stimulus

                       

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 un-balances 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.)

Market Timing Success?

       

Stock in-and-out traders always feel they can get out of stocks at highs and in at lows because of their gut feelings or expertise.

                 

There are many reasons why they’re wrong and statistics attest to them. One example is how companies who buy back their own stock in the open market generally do a poor job at the procedure, buying at highs. And they have the benefit of genuine, legal inside information. (See the Earl J. Weinreb NewsHole® comments.)

Common Stocks, Bonds and Inflation

               

This is a follow-up to my previous report on the bleak common stock future.

                     

There is a possible solution to the quandary of a poor long-term common stock market. It concerns the use of the corporate bond market and proper implementation of duration, to suit the investor’s personal horizon.

                     

But be sure you invest in a low-cost bond mutual fund where interest earned is automatically, fully reinvested in shares of the same fund.

Despite erroneous conceptions: Corporate bonds in funds can help overcome inflation and the dearth of income and potentially limited growth from stocks. Estimated earnings can well be at least 6% on a net, net, net basis, if strategy is wisely used. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Future Common Stock Investing Gains

              

There are major disconnects among investors about what they expect to earn from their securities portfolio over the next ten, twenty and more years, after taxes and inflation.

                     

Admittedly, that’s a tough prediction when investors must take income taxes and inflation into account, along with projected securities’ yield and market returns.

                     

In one survey, the net/net/net predicted return by a number of experts over the next fifty years, estimated returns ranging only between 2% and 3% annually.

                                        

That is shocking. Investors’ experience from the past would have had expectations to be close to about 6%.

                     

In fact, many securities markets observers believe that potential, along with taxation and inflation bites, will badly impair future market returns. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Investing in Stocks as Your Actual Business

                 

I have found and investigated over 1,600 investment strategies. There are many an investor can use, in which he can imagine they would be his own business.

                     

The investor can take the same attitude as any owner would. The strategy can revolve around what he wants the company to accomplish. Everyday prices and values never enter business consideration while the business is on a growth path.

                                        

Short-term, quick-buyers and sellers often are trading company names. They really have no clue about the business. Most of the financial reports they see are little more than hearsay and gossip from Wall Street pundits looking over each others’ shoulders.

                     

Always remember, the clunker stock the short-termer is selling is probably considered a diamond-in-the-rough by the buyer. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)