Wednesday, July 16, 2008

Good News, Bad News, Sad News, Mad News

Bad News: Consumer prices surged 1.1% in June, driven by the (manipulated) cost of fuel. Inflation in June rose at the fastest rate in 17 years, the government said on Wednesday, the day after Bernanke warned inflation posed a significant risk to the nation’s economic outlook. You can read about this here.

Good News: That being said, however, have you been to Barracks Road or Fashion Square lately? At many stores the clothes are selling for what one of our galpals likes to call "free"--so deeply discounted, you can't afford not to buy. Especially if it's basics: for instance, men's button downs, polos, chinos, etc, are on sale for $29.99 MINUS 40% at JCrew. Check out GAP, Belk, Ann Taylor, wherever you shop, and you'll find deep discounts. Retailers need to get rid of their "summer merchandise," as we've moved into what's known in the rag trade as "Fake Fall." Though it's going to be hot here (and in much of the US) until late October, there's already wool, corduroy, velvet in the stores (just thinking about these fabrics, as we try to limit our use of the CAC, makes us sweat).

Sad News: Here's an element of the Fannie/Freddie debacle not getting much press: that there are many shareholders, just like you and me, Average Joes concerned about keeping the retirement account gaining, who believed in the implicit government guarantee of the mortgage giants. These are the folk who are now losing money. Read about it here: Shareholders Left Behind in Fannie/Freddie Rescue.

Mad News: (Mad as in This is a crazy financial practice). Do you know what "shortselling" is? It's a financial maneuver that lately is impacting everybody, though many people off Wall Street have never heard of it. Many believe that when shortselling begins, and rumors of shortselling begin, a company's value can decline precipitously.

Basically, a shortseller is someone who borrows money to make "bets" that a stock will drop, and when it does, they profit. Here's a longer definition: "Borrowing a security (or commodity futures contract) from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker is called a Short Sell. Short selling (or "selling short") is a technique used by investors who try to profit from the falling price of a stock. For example, consider an investor who wants to sell short 100 shares of a company, believing it is overpriced and will fall. The investor's broker will borrow the shares from someone who owns them with the promise that the investor will return them later. The investor immediately sells the borrowed shares at the current market price. If the price of the shares drops, he/she "covers the short position" by buying back the shares, and his/her broker returns them to the lender. The profit is the difference between the price at which the stock was sold and the cost to buy it back, minus commissions and expenses for borrowing the stock."[End of definition, which you can find at above link; you can also find definitions of any Market-related word or term there.]


Today WSJ reports, "Shortsellers appear to be the agreed-upon villains of the current markets. The Fed has now limited shortselling on Fannie/Freddie and Lehman Brothers (which many analysts fear will be the next to go down in flames, like Bear Stearns). When shortsellers are successful--when the stocks they're "betting" on actuall DO tumble, investor confidence can be shaken, selloffs begin, and the stock loses even more value. Today Treasury Secretary Paulson and Securities and Exchange Commission Chairman Christopher Cox took radical steps very close to that: they created an emergency order limiting short-selling in shares of Fannie Mae, Freddie Mac, Lehman Brothers, Goldman Sachs, Merrill Lynch and Morgan Stanley."

The new rules in effect for 30 days as compared to the old ones, according to Kara Scannell at the WSJ, go something like this:

"Under current rules, a short-seller must locate shares to borrow, which are later replaced with stock bought at a lower price. Some market watchers have been concerned that traders were borrowing the same shares from the same lender over and over, and driving down stock prices….Under the emergency order, traders will be required to borrow the stock and the lender would then take it out of the market and not allow other traders to use it to satisfy requirements that they’ve located stock."

Do you understand what was happening before these rules? Investors would "borrow" stock, but the stock wouldn't be taken out of play: it could still be bought or traded--or, worse, borrowed by another short seller. Hmmmm.

To read more about shortselling (which is fascinating in general, and is all the moreso now because it's contributing significantly to the decline of major financial entities and eroding our economy), click here, which will take you to the above-quoted material plus some additional links to other stories.

Meanwhile, Delta and American Airlines are reporting losses in the Billions. That's B like Boy. (or ohBOYohBOYohBOY). Don't you wonder how they can still be in business with losses this large?

4 comments:

Anonymous said...

Your comments on short selling are uninformed. Far from "eroding the economy", short sellers play an important role in helping to discipline badly-managed firms. Short sellers scrutinize companies' balance sheets to discover unfavorable information that the market sometimes misses. When shorts take large positions, people begin to look closer at the subject companies. This is an essential element of the stock market's ability to discipline the management of public companies -- the shorts help smell out hidden underperformance and fraud, which the markets then punish. For this we should be thankful.

You also miss the fact that a large percentage of short positions aren't "naked" shorts, but are instead taken to hedge the risk from long positions taken by the same investors or related parties. In this role, short selling is an efficient and valuable risk-reducing device.

I'm glad you guys are doing this blog -- I think you provide a service to C'ville by uncovering how ridiculous the prices for some of our local real estate have become. But I suggest that you do some more research on the role of short selling before commenting again on this subject. There is a distressing tendency these days -- which you guys have fallen into -- to ascribe perfectly explainable economic phenomena to some form of insidious "manipulation". Case in point -- I very seriously doubt that market manipulation has anything significant to do with the booming price of oil. Oil is expensive because we're using way too much of it in our piggish trucks and SUVs, and to heat (along with natural gas) our piggishly large homes. Given the very rapid economic growth in India and China, and our own huge and completely irresponsible growth in energy consumption, one could see $100+ oil coming from a mile away. And many did. The tendency to blame speculation is a form of scapegoating, plain and simple.

Yours, Anonymous Coward.

Real C'ville - The Bubble Blog said...

Anonymous Coward,

(Are you the same AC we've seen on other local RE blogs? Hoping you're consistent w/name)...Follow our links, and you'll see that our Short Selling Info is quoted largely from WSJ (we've updated the post and made this fully evident, btw).

We don't claim to be experts on Shorting (or anything, for that matter)--AND we rely on commenters like you for differing views of this and other practices.

Also, just to see another side re: oil and $ manipulation, simply google some string of words like oil market manipulation and with the thousands of hits you get, there may be something you find credible.

Real C'ville - The Bubble Blog said...

BTW, Anon Coward?

In case this wasn't evident in previous post, we're glad you're here and hope you'll continue commenting.

We do rely on folks not just for "other" points of view, but also for "educated" points of view (for instance, have you read around and seen the comments of our friend, Montpellier? Deeply insightful).

Matt S. said...

RealCville, I think you will understand if you imagine a crowd of angry blogging homeowners chasing after you, intent on crucifying you for crashing the c-ville housing market. "Them evel realvilliains killed mah homes! Argh Die!!!"

People don't want to look in the mirror, they want scapegoats.

Here are a few sane articles on the "oil bubble":


http://krugman.blogs.nytimes.com/2008/05/13/more-on-oil-and-speculation/

http://seekingalpha.com/article/82775-how-big-a-contribution-comes-from-oil-speculation

http://seekingalpha.com/article/82990-kling-s-oil-speculation-question

http://www.econbrowser.com/archives/2008/05/oil_price_funda.html


Although prices quickly doubled, this run-up started long ago. Look at this chart:

http://www.wtrg.com/oil_graphs/oilprice1947.gif

In particular, look at 2003.. what happened in 2003? What is the #1 factor in price hikes? War and geopolitical turmoil... add in inflation and the weak dollar and this should be absolutely no surprise.

This topic combines nicely with short-selling because the #1 reason why speculators cannot push oil up beyond all reason is that if they do, someone who actually supplies oil will SHORT them and take the speculators' money.

Short-selling has always been a natural and necessary part of trading. Illegal naked shorting is a different subject, one the the SEC has neglected for a long time, but as you know it is not the reason these banks became deathly ill. At worst it brings a slightly quicker end to these suffering creatures.