Selling Stock Short: It's a Gamble -Smart versus Dumb Money

when you sell my stock short
i get paid in full plus commissions

now, had the stock risen
i would have made more profit
but, that's okay because in your wisdom
you did me a favor
by selling that lousy stock short
because the SOB was going down anyway
and i got my money and made a profit

i did this because you requested me to do it
with the intention of buying it back later
after the stock went down
as you predicted it would
-you saved my ass!
i got my money
before it was too late to sell
good thing!

what's even better
is that you have promised to buy it back
at a later date when the price goes down
and then return it to me
so i once had an overpriced stock
now it's gone
and it comes back to me later
with even greater value (p/e)
plus
you will purchase it at that time
and put it back into my account
like a little gift
whe-hell, let's see how much money i have made
i made a profit selling the stock initially
because the stock was going up when you asked me to sell it
i got full price for my shares
and now two months later
you are going to buy these very same shares
much cheaper you hope
and return them to me
sounds like a great deal
actually i feel a little guilty
to be making all this money off of you
so tell you what i can do for you
for saving my ass on that miserable stock
i will pay you the difference between what you paid for it
and what it was initially sold for
why should i make all that money
because i now have the same number of shares
that you bought for me
albeit, much cheaper
poised and ready to increase and make me a juicy profit
according to your wisdom


so, let's recap
somebody else buys my stock
i make my money
you promise to buy it back for me later when it goes down
and return it to me
and i'll pay you the difference
i mean
i would have lost that money
had i sold it myself later
had i waited to sell
but now i got my money
and i got all those shares back
because of you

sounds like a plan

but if the stock should happen to go up
after i sell it initially
i am up the creek
because i might have sold it for a higher price
and made a greater profit
you made me sell my stock
now i make you buy it back
same number of shares
at that high price
and deliver them to me as promised
sure, i got my money when the stock was first sold
and now when you buy it back for me again
i get high priced shares back again
all of them!
on you
you covered me ... us
love ya!
i really make a killing off of you
and never have to return a penny to you
although i should
i feel terrible about this
i just doubled my money
plus!
after all
business is business
sucker

it's a gamble
and as they say
the house always wins
in the end

The Rest of the Story by Jeseppi Trade Wildfeather

The last meltdown in 2001 as all meltdowns are designed to meltdown the dumb money and purify and refine the smart money. Out of fear the dumb money sold too late and out of wisdom the smart money had bought earlier and taken massive profits as usual and then sat bored on their US Treasuries until the dumb money out of fear and terror drove the market down until the strongest companies were selling for bargain basement prices. The smart then bought up everything of value creating massive demand and turning the market around initiating a bullish charge to until the Tau broke the fourteen K sound barrier. It is my understanding that as the smart get richer and the dumb get poorer, the smart had to do something creative with the enormous wealth they had amassed. Reeling with options and tremendous capital they decided to create hedge funds, derivatives and anything else they could imagine that could be invested in again by the dumber money. So they invented companies that insured the insurer of the insurer of the maintenance contracts that the dumb money painfully pay for (stomach) instead of paying a little more for quality. They invented companies that insure the insurer who insures how many toilets will flush on any given day in New York City and sell futures on consumer non durables like toilet paper and room deodorizers. The dumber money, who made a killing on that last bubble bust, took the bait as always, and began to leverage out purchases because dumber money is motivated by greed, lust and fear and have no compunction about using OPM indiscriminately and unwisely reeling as they are apt to be with avaricious fool hardiness and an inordinate spirit of outlaw folly that says, "The other guy will loose his shirt ... but, I'll get out in time." The fatal call comes from the god of the ticker demanding full payment with interest, and OPM just became OPM with a vengeance. And, after both the dumber money and OPM have exchanged the most sordid case of financial STD's (Smart Trumps Dumb) they are both forced to sacrifice what is in the grip of their clingy miserable hands and deliver them to the wise like Soros and Buffet who will rightly divide the spoils with the demigods of the fiat kingdom who understand p/e and control the seasons and cycles financial affairs to suit their own sophisticated pleasures.

Those With Sense of History May Find It’s Time to Invest By Alex Berenson

Published: October 11, 2008, The New York Times:

The four most dangerous words for investors are: This time is different.

Martin Whitman, manager of the Third Avenue Value fund.

Multimedia

Are Stocks a Bargain?

In 1999, technology companies with no earnings or sales were valued at billions of dollars. But this time was different, investors told themselves. The Internet could not be missed at any price.

They were wrong. In 2000 and 2001 technology stocks plunged, erasing trillions of dollars in wealth.

Now investors have again convinced themselves that this time is different, that the credit crisis will push economies worldwide into the deepest recession since the Depression. Fear runs even deeper today than greed did a decade ago.

But in their panic, investors are ignoring 60 years of history. Since the Depression, governments have become far more aggressive about intervening when credit markets seize up or economies struggle. And those interventions have generally succeeded. The recessions since World War II, while hardly easy, have been far less painful than the Depression.

Now some veteran investors, including G. Kenneth Heebner, a mutual fund manager who has one of the best long-term track records on Wall Street, say that the sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors fear.

“The fact is, there are a lot of tremendous bargains out there,” said Mr. Heebner, who manages about $10 billion in several mutual funds. Indeed, by many measures stocks are as cheap as they have been in the last 25 years.

He pointed to Chesapeake Energy, a natural gas producer that he owns in his CGM Focus mutual fund. In July, Chesapeake traded for $63 a share. On Friday, it fell as low as $11.99.

He says that investors with a stomach for risk and a long time horizon should consider following Warren E. Buffett, who in the last three weeks has invested $8 billion in Goldman Sachs and General Electric.

Mr. Heebner expects world economies to contract over the next year. But he said the market plunge in the last week was no longer being driven by rational analysis. Stocks are probably falling because of a combination of panic and forced selling by hedge funds that must meet margin calls from their lenders, he said.

Mr. Heebner’s funds have not avoided the carnage this year. The CGM Focus fund is down about 42 percent so far in 2008. But his long-term track record is impressive. In the decade that ended Dec. 31, 2007, CGM Focus rose 26 percent a year, including reinvested dividends, making it among the best-performing mutual funds.

Mr. Heebner is not alone in his optimism.

“I think in years to come — I wouldn’t say months to come — we will perceive this as being a great value-buying opportunity,” said David P. Stowell, a finance professor at Northwestern and a former managing director at JPMorgan Chase. “Two and three years from now, it will seem very smart.”

Even before their jaw-dropping plunge of the last month, stocks were not expensive by historical standards, based on fundamentals like earnings and cash flow. Now, after falling 30 percent or more since early September, stocks in stalwart, profitable corporations like Nokia, Exxon Mobil and Boeing are trading at nine times their annual profits per share or less. Many smaller companies are even cheaper. Some of those stocks are trading at five times earnings or less.

Those ratios are historically low. Over all, the Standard & Poor’s 500-stock index is trading at about 13 times its expected profits for 2009, its lowest level in decades. In contrast, at the height of the technology bubble in early 2000, the stocks in the S.& P. traded at about 30 times earnings, the highest level ever. At the same time, the 10-year Treasury bond paid about 6 percent interest, compared with less than 4 percent today.

Investors have fled stocks in favor of government bonds, insured bank deposits and other low-risk investments because they are deeply afraid of the worldwide economic crisis, said Stephen Haber, an economic historian and senior fellow at the Hoover Institution. But he said he believed that fear might have gone too far.

“If there is good and wise policy, and government moves effectively, this need not play itself out in ways like the Great Depression, which is the image that is playing itself out in people’s mind,” Mr. Haber said. Government action typically does not work immediately, and banking crises around the world often require multiple interventions, he said.

Still, optimists remain in the minority on Wall Street. Most investors seem to believe that the credit crisis will do substantial damage to stocks and overall economic activity.

“We have never before seen for such sustained periods of time such a sustained turn away from risk taking,” said Steven Wieting, the chief United States economist for Citigroup. “This has broken out of the boundaries we’ve seen.” Economic activity appears to have slowed sharply in September, Mr. Wieting said.

The panic last week took the biggest toll on financial companies, as well as companies that are highly leveraged. But stocks fell 10 to 30 percent even for companies typically thought to be resistant to economic downturns, like the manufacturers of consumer staples.

For example, Newell Rubbermaid fell to $12.82 on Friday from $17.34 on Oct. 1, a 26 percent decline in 10 days. Newell Rubbermaid now trades at its lowest levels since 1990, and just eight times its expected earnings for next year.

Yet Newell Rubbermaid, whose brands include Calphalon, is profitable and insulated from the credit crisis, said William G. Schmitz Jr., who follows household products companies for Deutsche Bank. “There’s really no balance sheet risk,” Mr. Schmitz said. The company also pays a 6 percent dividend.

Newell Rubbermaid said in July that it would earn $1.40 to $1.60 a share for 2008, excluding restructuring charges. For 2009, stock analysts predict it will make $1.53 a share. And while a slowing economy may mean that people will be buying fewer products from Newell Rubbermaid, the recent plunge in oil prices will reduce its costs, Mr. Schmitz said.

“The way the stock’s reacted, you’d think they were going out of business,” he said.

Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap. Mr. Whitman manages the $6 billion Third Avenue Value fund, which returned 10.2 percent annually for the 15 years that ended Sept. 30, almost two percentage points a year better than the S.& P. 500 index. The fund is down 46 percent this year.

“This is the opportunity of a lifetime,” Mr. Whitman said. “The most important securities are being given away.”

The Bailout's Essential Brazenness by Jay Cochran

Dr. Cochran is an Adjunct Professor of Economics at George Mason University.

Added to cato.org on October 1, 2008

This article appeared on Cato.org on October 1, 2008

One of the more galling arguments put forth in support of the Treasury’s $700 billion bailout, is the suggestion that the government might actually profit from being a hold-tomaturity investor in the illiquid mortgage instruments currently clogging the arteries of high finance. Laying aside the thorny issue of whether the Treasury Secretary and his overseers have the means to discover the correct price for securities that the market itself cannot price (hence the illiquidity), it is breathtakingly brazen that the supporters of this scheme think it somehow proper for the government to earn even one basis point of net return from a problem that is of its own making.

Congress and the executive branch, established the rules and institutions that all but guaranteed the outcome we taxpayers see unfolding and are being asked to pay for today. Government leaders had multiple opportunities to correct problems identified years before, but instead dithered and calculated. To suggest now-in malice, greed, or fear-that it is somehow proper for government to make a net return on the assets it purchases, is as unjust as allowing a referee to make money gambling on the outcome of a game he oversees. (Read on)