Archive for July, 2008

About short selling

Wednesday, July 16th, 2008

You may have read yesterday’s headlines that SEC officials are banning short selling of Fannie Mae and Freddy Mac and some other financial stocks.

First of all, most of the headlines are slightly inaccurate: the ban is on naked short-selling.

A normal short sale involves actually borrowing shares from your broker and selling those, hoping to buy them back cheaper to return them to the broker later. Naked short selling means that you don’t actually borrow shares, you just sell a fiction, to be bought back and erased later.

You and I, and Longsplice and almost all the other financial companies in the world, were never able to do naked short-selling. It’s been the exclusive province of BIG companies such as the brokerage and investment banking companies. It makes sense to allow it for market-makers, who sometimes need to fill a customer ‘buy’ order, even though they don’t have the shares in hand.

In my opinion, that’s the only legitimate use of naked shorting, and all other uses should always have been banned. By side-stepping the requirement to borrow stock, these big players were able to short massively more shares than anyone else could have, more shares even than existed. That extra selling could very well have been sufficient to manipulate prices.

This new ban, even if it were made permanent and applied to all stocks, would not affect Longsplice’s long-short investing style. Our shorts have always been, and will always be, covered.

One final note: in previous crises involving non-financial companies, the Financial establishment has always said “Oh, we don’t need to ban anything, (naked) shorting doesn’t cause any harm.” Now it is some of their own shares being trampled, they care. It always depends on whose ox is being gored.


June inflation– ouch.

Wednesday, July 16th, 2008

The latest inflation release, the Urban Consumer Price Index (CPI-U), is terrible. Headline inflation, which includes food and energy, is at the highest level in more than five years. Core inflation is not quite a recent record, but it’s high and rising again.

You can look at the inflation graph for the past five years on the Macroeconomics page.

While you’re there– I’m hopping up on my soapbox again– take a look at the graphs for alternative ways to interpret the difference between core and headline inflation. I contend that simply ignoring food and energy is completely misleading for consumers and businesses. Headline inflation is the level that you are actually paying. All your money– your savings and your salary– buys 4% less than it did 12 months ago.

The administration says “don’t worry.” I say you’re being robbed.


Another good book on mutual funds

Monday, July 7th, 2008

I just found another very helpful book, “The Mutual Fund Business, 2nd Edition,” by Robert C. Pozen. It is structured as a textbook, with the author’s text, readings from academic papers, review questions, and case studies. It’s long, but well-organized, well-written, and comprehensive.

While I’m on the subject, a book I read recently which I do not recommend was “Getting Started in Hedge Funds,” by Daniel A. Strachman. It had some interesting insider anecdotes, but in general it was too simple-minded and, even though it was easily skimmed, not worth the trouble.