Life is getting better as I get older

Has anyone else noticed the relationship between the decline in the stock market, and the ceasing of short selling stocks? Granted, it was lifted in October, but the damage only started.

When you short sell a stock, you borrow someone else’s shares to sell, only to buy it back at a lower price to return those shares (called ‘covering’).  If a stock is experiencing a lot of short selling, it’s an indication to the market that the stock is overvalued, that something is not right, or anticipation of bad news going to be released.  But what isn’t realized is the timing of the covering of the short sell is significant.  Covering your position is still a purchase.  It comes at a time when the stock is viewed as underpriced, too cheap, and about to increase in value.

Shorting is the other half of the market.  Think about it – when stocks are in demand, the price goes up.  People stop buying, or sell their shares, and the stock goes down.  Shorting balances it out.  In theory, there’s always a buyer for a seller (*cough* when the price is right).  There’s always a short for a long position. 

Now going a step further – if there’s only long positions, people will sell high and walk away, only to drive the stock down.  And down, and down!  If shorting is banned, there can’t be that other half of trading, and the spiral continues.

Hmm…now where’s that up tick rule…

I figured I would help out the freako blog   I believe I’m comment #24

http://freakonomics.blogs.nytimes.com/2008/11/26/a-question-for-the-finance-types/

wow! I’m already up $10 grand!

If you don’t know – please sign up for the million dollar portfolio challenge on CNBC.  It starts Nov 17th, with the publishing of qualifying trade-able equities on the 14th.  US equities on NYSE, Nasdaq, and AMEX can be traded (no IPOs after Nov 14th I believe), and currency can be traded.  No shorting, no options, no fun stuff.  You are able to practice currency trading before the game begins.  I’m already up $10,000! Trading GBP/USD, AUD/USD, EUR/JPY, GBP/JPY, GBP/CHF, and AUD/JPY, more to come…

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So these thoughts spawned from hearing the start of a bank run in Russia. (PS: can I mention again, why the effff did Iceland ask for help from Russia?!)

Why haven’t patrons flocked to banks that guarantee 100% of deposits? Are people not awake? I mean, here, there isn’t that safety net. We haven’t seen much of a dip in deposits. Actually, we’ve seen some upward fluctuation of deposits. wtf, people? Does nervousness erase rational thought? If anything, due diligence in money placement should be heightened.

This stems another thought – do people really understand what’s going on behind the scenes? Did people notice the slight difference, but hugely affecting, monetary policy change when the bailout was past a few weeks ago (still seems like yesterday)? Here’s what happened: the Federal Reserve is now paying interest on the funds that banks are required to maintain there. The interest for required reserves is the Fed Funds target minus 10 bips. On excess reserves, it’s 75 bips below the target. This notice impacts greatly! Banks are now more apt to keep their money since they can earn money, rather than lend it out (note: banks hoarding their money…not so good). This also leads to arbitrage opportunities. For example, just this past week we were able to borrow from the FHLB at .625% to make up required reserves. In turn, we got paid 1.4% for that day. (Granted, the interest is for the average of our two week reporting period, and other borrowings were between 1-2% for the past few weeks). But, still…opportunity nonetheless.

By our consulting company, there have been suggestions to stick our excess reserves in a money market fund. Why would we? when we would earn 12 bips there. Seriously. Clearly, the specialized consulting company of ours has yet to fully realize the extent of initiatives being taken place.

Can we talk about how this is now a fourth tool for the fed in monetary policy? The other three being open market transaction affecting the fed funds target rate (conducted by the FOMC), the discount rate in which banks can borrow from the fed itself, and then the level of reserve requirements. This interest on reserve requirements is almost a soft, slightly affective tool at the hands of the fed. They have been pushing this for a few years, to be passed by congress. It seems like it was a “throw this into the bailout plan” and they snuck it in there. But really, let’s break it down. The fed now has to pay the banks money for keeping their money there. This could affect out banks will lend between other banks. And perhaps will lower the fed funds effective rate in return. If banks have less incentive to lend to other [risky] banks, then money would be cheaper to borrow. Less demand, less expensive. Perhaps this would also affect borrowing from the fed themselves, and the discount window. The fact that you can earn money at the fed, while borrowing from the fed, in effect will make it cheaper. Not as cheap as you can get elsewhere, but cheaper nonetheless.

Last thing I want to mention – is no one paying attention to the threat of inflation? All this money is being/has been pumped into the economy. Duh, what happens after money floods the economy? *cough* inflation…. After this whole scare of the world is going to end, things settle, inflation is definitely going to be a worry, and the fed will hike their target rate consistently for a while. This isn’t so much of a worry with the euro, or pound. But perhaps the aussie dollar, the yen, the yuan… And look at oil. OPEC may restrict supply in response to the crazy drop in demand. Therefore, oil will go up, and the latest trend with oil increasing is the value of the dollar decreases (perhaps not so much now with euro and pound falling?).

My suggestions: if you’re going abroad, buy currency now. If you need oil to heat your home, by it on a futures contract.

And what’s with gold being so cheap? In all this flight to security, I’d expect it to increase.

Pres Bush is speaking as I write this… and the first thing I noticed when watching this on cnbc was “Bush to deliver speech on fixing the financial crisis.” Does anyone notice anything wrong with that sentence? I’m hanging on the word “fixing.” Makes for a good laugh.

Notice how the futures markets are dipping right now….and oil increasing.

At least he is speaking early in the morning. US markets have a trend of picking up around 3 in the afternoon this past week or two.

Would anyone still like to have a beer with Mr W Bush?

“Our nation is dealing with a serious financial crisis” now the tag line. Really? really… come on.

“If we had not acted, crisis would have impacted American people directly” – I get hung up on “we”. Bush, you didn’t do a damned thing. Right now it seems like you are trying to be the face of America’s decision-making during this hemorrage.

I’m done with this. On to my FHLB analyses.

It’s a no brainer that the French do not like us. Well, no big loss to us… But criticizing our economy? Come on.

Lovely Sarcozy said “the all-powerful market that is always right is finished,” that “laissez-faire is finished.” If you remember, he stood on the platform during his campaign that capitalism should be moralized. That “free trade cannot be a dogma.”

Well, alright then. While he may not agree with our capitalistic techniques here in America, one can not help but be involved. Europe may have an immediate sense of Schadenfreude, but wait until they catch the cold (oh wait, they already did!). A rising tide floats all boats….as well as overtakes them.

Germany once pointed and laughed as us as well. But that’s far forgotten once the needed rescue of Hypo Real Estate took place. Deutchebank has a lot of exposure too, despite the notion of a safe bank. Iceland is apparently broke, with roughly a quarter of its GDP taken up by its budget deficit, and asking Russia, of all places, for assistance (do they not realize that the Russian market is tanking too?). Ireland insured banking system is now seeing a flood from the shaky UK. And the latest – the Italian’s government is guarantying all banks with preferred stock holdings.

At what point to these Europeans start realizing that it’s not capitalism that should be the aim of their discontent, but globalization? The US financial markets are far more regulated than Europe’s, so judgement on free market ideas is a little bit misplaced. We’re not exactly “free.” Europeans aren’t exactly “socialized.”

Who can criticize us for being let by capitalism, led by profit? Greed is a motivator, and fortunately it works in the benefit of the most efficient markets. But, really, can we be criticised by something that runs through all our veins? It wouldn’t be a sin if it wasn’t innate… ah I’ll bypass that subject.

My point being, the rest of the world wants to join us when we prosper. Eyes us as the place to make it big. Idolizes us as the place for dreams. I mean come on, where else could you work 70 hours a week just to pay your dues, move up the corporate ladder? Be another suit? (Armani, mind you…) But as soon as we catch a cold, or suffer a heart attack really, the world disowns our capitalistic views. Seriously, you can’t win without losing. You can’t gain without facing loses. You basically have to be more knowledgeable to survive in a capitalistic market. Sell high, buy low, it’s instinct, it’s research, it’s hard work. You can’t blame the US for your stupidity in buying into our free market. If you would like to remain “without”, relax with no care, socialism is a nice parachute for all. Got laid off at work? It’s ok – your health care is still available. Unemployment claims are there to keep you afloat. And even if you do work, 35 hours is a breeze. 2 months vacation. So, hard work and prosper? Or relaxed life and make it by?

We’ve chosen our destiny. And we’re fairing quite well compared to history (moderate unemployment, low oil prices, less risk of inflation, who can compare that to the Depression?).

Finger pointing aside, we’re all in the same tide. It’s up to the rest to get their act together.