'America is practically owned by China,' he said.He's wrong. China's stake in US Treasuries has fallen over the past year. Over the past two years, China's holdings of US debt have remained flat. They may be putting some of their US dollars to work on Wall Street—I haven't seen numbers on that—but the economic downturn combined with their steady position in treasuries leads me to believe that their just treading water.
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Friday, October 1, 2010
US Is 'Practically Owned' by China
CNBC quotes an analyst who says:
Saturday, August 1, 2009
Interview with Ed Martin Part 2
This is part two of my interview with Ed Martin. In this segment Ed talks about his experience and focuses on his efforts to stop InBev's take over of Anheuser Busch. He was instrumental in the saveAB.com effort and points out that some of their fears have been realized now that AB has been taken over.
Full disclosure: I profited from the sale of AB to InBev. I can't remember if I owned shares prior to the vote on the sale to InBev—my initial investment was acquired in August or September '08—but I would have voted for the merger if presented with that option.
Related:
- Part 1: Exploring a Congressional Run
- Part 2: Experience and saveAB.com
- Part 3: St Louis Tea Party Movement
- Part 4: Earmarks and Reducing the Size of Government
- Part 5: "Ask Ed" sessions and Term Limits
Friday, June 12, 2009
Securities Reform
A few days ago I saw a Wall Street Journal article about reforming corporate elections. I have some thoughts about that below...
Yesterday, I saw a short video of Rep. Barney Frank (D-MA) making a fool of himself. When he walked off the set I thought for a minute that he might have a point, but then I watched the full interview. He clearly did not understand the question. Yeah, he's one of our betters in Washington providing Congressional oversight of the financial sector.
The question was vitally important and my suggestion below for reform plays right to it. CNBC's Mark Haines asked Barney Frank (I'm massively paraphrasing): "The current investment model doesn't work very well because most shares are not owned by individuals but rather by mutual funds and ETFs, so the funds (mutual funds or ETFs) that an investor owns have voting rights, but the individual with the equity stake does not. How do you pass voting rights through mutual funds and ETFs to the actual investors?"
If you've only ever bought mutual funds through your company's 401k, you might not be aware of how the underlying asset works. You probably know that your S&P500 tracking fund buys shares in all the companies on the S&P500. You may not realize that the people that manage that fund at Fidelity, Vanguard, or a host of other investment houses vote your shares their way at the annual board meetings. You should get to vote your own shares: that is the inequity that CNBC's Mark Haines was getting at and the knuckle dragging Barney Frank was too dimwitted to grasp.
When you buy a fund, you are buying a small fractions of shares in many different companies. I would like to see funds reformed to account for the voting preferences of the shareholders. If someone buys shares in a mutual fund, their representation at board meetings should be proportional to their equity stake in the fund. In other words, if the fund effectively owns 13 shares of AAPL on behalf of John Doe, then John Doe's desire to kick Al Gore off the board of Apple Computer (AAPL) should be represented at the board meeting by the fund voting those 13 shares to oust Gore. Obviously, there's a substantial amount of calculation that has to happen to figure out who gets to vote on what. Furthermore, presenting all of that to someone that just wants to setup their 401k and be done with it is potentially problematic—no one wants to read the proxy statements of all the companies on the Wilshire 5000.
The way to bring representation to fund investors is two fold. First, fund investors should be granted the right to attend and participate in the annual meetings of companies whose shares are owned through the investor's fund. This does not compel companies to distribute their proxies to every fund investor that owns a fraction of a share through a fund. Rather, investors will have to determine when the annual meeting is for themselves (or perhaps be notified by their brokerage).
The second step is to require funds to track investor preferences. This can be accomplished by allowing investors to select rules that represent their preferences. Here are some rules of thumb for boards of directors:
I do not think the above list is complete or that you should only pick one of those rules. I would want all of those rules, but I might switch the last two. Steve Jobs and Anne Mulcahy are amazing corporate leaders. I suspect Steve donates to liberal politicians, but I'd like to keep him around anyway. In other words, each rule is considered in order so they narrow the field. If the "for" was last it would save Steve even though he may have made some iffy (in my opinion) donations.
The other question that is voted on annually is the choice of accounting firm. I have a simple rule for that one:
Corporate proxies often have a lot of other questions. Many of those will be hard to capture in the system of rules that I'm talking about, but some are not. Here are some obvious one:
Cross Coverage:
Yesterday, I saw a short video of Rep. Barney Frank (D-MA) making a fool of himself. When he walked off the set I thought for a minute that he might have a point, but then I watched the full interview. He clearly did not understand the question. Yeah, he's one of our betters in Washington providing Congressional oversight of the financial sector.
The question was vitally important and my suggestion below for reform plays right to it. CNBC's Mark Haines asked Barney Frank (I'm massively paraphrasing): "The current investment model doesn't work very well because most shares are not owned by individuals but rather by mutual funds and ETFs, so the funds (mutual funds or ETFs) that an investor owns have voting rights, but the individual with the equity stake does not. How do you pass voting rights through mutual funds and ETFs to the actual investors?"
If you've only ever bought mutual funds through your company's 401k, you might not be aware of how the underlying asset works. You probably know that your S&P500 tracking fund buys shares in all the companies on the S&P500. You may not realize that the people that manage that fund at Fidelity, Vanguard, or a host of other investment houses vote your shares their way at the annual board meetings. You should get to vote your own shares: that is the inequity that CNBC's Mark Haines was getting at and the knuckle dragging Barney Frank was too dimwitted to grasp.
When you buy a fund, you are buying a small fractions of shares in many different companies. I would like to see funds reformed to account for the voting preferences of the shareholders. If someone buys shares in a mutual fund, their representation at board meetings should be proportional to their equity stake in the fund. In other words, if the fund effectively owns 13 shares of AAPL on behalf of John Doe, then John Doe's desire to kick Al Gore off the board of Apple Computer (AAPL) should be represented at the board meeting by the fund voting those 13 shares to oust Gore. Obviously, there's a substantial amount of calculation that has to happen to figure out who gets to vote on what. Furthermore, presenting all of that to someone that just wants to setup their 401k and be done with it is potentially problematic—no one wants to read the proxy statements of all the companies on the Wilshire 5000.
The way to bring representation to fund investors is two fold. First, fund investors should be granted the right to attend and participate in the annual meetings of companies whose shares are owned through the investor's fund. This does not compel companies to distribute their proxies to every fund investor that owns a fraction of a share through a fund. Rather, investors will have to determine when the annual meeting is for themselves (or perhaps be notified by their brokerage).
The second step is to require funds to track investor preferences. This can be accomplished by allowing investors to select rules that represent their preferences. Here are some rules of thumb for boards of directors:
- Against all board members if company lost more than $1/share last year
- Against chairman if company lost more than $0.50/share last year
- Against the following specified board members: Al Gore
- For the following specified board members: Steve Jobs, Anne Mulcahy
- Against board members that donated to ANY political campaigns
I do not think the above list is complete or that you should only pick one of those rules. I would want all of those rules, but I might switch the last two. Steve Jobs and Anne Mulcahy are amazing corporate leaders. I suspect Steve donates to liberal politicians, but I'd like to keep him around anyway. In other words, each rule is considered in order so they narrow the field. If the "for" was last it would save Steve even though he may have made some iffy (in my opinion) donations.
The other question that is voted on annually is the choice of accounting firm. I have a simple rule for that one:
- Against, if accounting firm has been selected in either of the previous two years
Corporate proxies often have a lot of other questions. Many of those will be hard to capture in the system of rules that I'm talking about, but some are not. Here are some obvious one:
- Against all poison pills
- For tender offers worth 10% over the share price
- Against issuing more shares
Cross Coverage:
Wednesday, March 11, 2009
Washington Should Continue to Favor Long-Buyers
Instapundit links to Rich Karlgaard's Washington Should Stop Favoring Short-Sellers. (Before we get started, do not take my investment advice. While misery may love company, you certainly do not want to be that miserable ;-) Rich omits several details about shorting equities, so I'm mostly faulting him for errors of omission. Perhaps he just didn't know—it's been known to happen (see below). Rich writes:
There are several policies tilting the market long. First, you cannot establish a short position in an IRA account. Second, you cannot short mutual funds. It's possible that part of the assets of a mutual fund could be used for short positions. However, the regulatory requirements make this unlikely. The regulations described here explain why:
Back to the long tilt of market policy... Third, short sales can only be "day" orders. This rule was imposed in the wake of last year's meltdown. When placing a buy or sell limit order, you have to specify the duration of the order. The duration may be just for today (a day order) or good-til-cancel (GTC) which can be several months out. (Ok, there are a few others, but that would expose minutea that even I do not care about.) If you want to establish a short position in QQQQ (full disclosure: I'm currently short QQQQ) you have to place the order after the previous day's market close. You cannot simply enter that order on Sunday and review it the next weekend. This means that there's slightly more work involved in shorting (you have to enter your shorts daily).
Fourth, short interest is reported monthly and, if it's too high, there could be a short sqeeze. The short interest for QQQQ (153,801,007) is near the daily trading volume (173,147,912). That means that the days to cover is about 1. Combined with the good liquidity (high trading volumes), I believe the risk of a short squeeze is pretty low. Nonetheless, a squeeze would acrue to the benefit of the longs.
Lastly, if an equity you shorted pays a dividend, then you pay that dividend. If more companies paid regular dividends, there would be less short interest.
Karlgaard has three recommendations:
Rich is spot on with #2. I don't know how the SEC can do this, but I agree.
I also agree with #3. In fact, I didn't know that rule had been remove—it's been known to happen ;-)
I will pick one last nit: Rich, if you want a "neutral policy" and the "short-uptick rule", would you also advocate a long-downtick rule? I would say no, because the market is not a zero-sum game. The policy should be appropriately biased towards longs.
For investors, the question is: Does it still work to bet against the popular mood? I think so, but the worm in this apple is bad public policy. Specifically, the cockeyed policy that has, since late 2007, tilted the investing playing field toward short selling. Good public policy should not side with either longs or shorts. Policy should be neutral.I do not feel that the playing field is tilted toward short selling. Nor do I see how anyone could honestly claim that it was. More importantly, the current regulatory scheme favoring long positions is better than a neutral policy.
There are several policies tilting the market long. First, you cannot establish a short position in an IRA account. Second, you cannot short mutual funds. It's possible that part of the assets of a mutual fund could be used for short positions. However, the regulatory requirements make this unlikely. The regulations described here explain why:
The Investment Company Act severely restricts a mutual fund's ability to leverage or borrow against the value of securities in its portfolio. The SEC requires that funds engaging in certain investment techniques, including the use of options, futures, forward contracts and short selling, "cover" their positions. The effect of these constraints has been to strictly limit leveraging by mutual fund portfolio managers.In other words, the people least leveraged in the recent economic implosion (elderly folks with IRAs bulging with mutual funds) were some of the hardest hit. Did I mention that mutual funds only trade at the end of the day? The price of a mutual fund is set when the market closes. This means that on days where the market loses 5% of its value, you cannot cash-out your mutual fund to avoid further loses. You certainly can't flip a mutual fund in your IRA to a short position in the hopes of recouping some of what you losed. For these reasons, I prefer ETFs to mutual funds.
Back to the long tilt of market policy... Third, short sales can only be "day" orders. This rule was imposed in the wake of last year's meltdown. When placing a buy or sell limit order, you have to specify the duration of the order. The duration may be just for today (a day order) or good-til-cancel (GTC) which can be several months out. (Ok, there are a few others, but that would expose minutea that even I do not care about.) If you want to establish a short position in QQQQ (full disclosure: I'm currently short QQQQ) you have to place the order after the previous day's market close. You cannot simply enter that order on Sunday and review it the next weekend. This means that there's slightly more work involved in shorting (you have to enter your shorts daily).
Fourth, short interest is reported monthly and, if it's too high, there could be a short sqeeze. The short interest for QQQQ (153,801,007) is near the daily trading volume (173,147,912). That means that the days to cover is about 1. Combined with the good liquidity (high trading volumes), I believe the risk of a short squeeze is pretty low. Nonetheless, a squeeze would acrue to the benefit of the longs.
Lastly, if an equity you shorted pays a dividend, then you pay that dividend. If more companies paid regular dividends, there would be less short interest.
Karlgaard has three recommendations:
1. Suspend mark-to-market accountingI don't think #1 is relevant to his argument. It would cause the firesale of a few banking concerns as companies would have to realize their paper loses. And, "suspending" it is a really bad idea. This market needs certainty and "suspend" is a word littered with temporal ambiguity. I'm not even convinced that mark-to-market is a bad thing.
2. Make the SEC enforce its own ban against naked shorting.
3. Reinstate the short-uptick rule.
Rich is spot on with #2. I don't know how the SEC can do this, but I agree.
I also agree with #3. In fact, I didn't know that rule had been remove—it's been known to happen ;-)
I will pick one last nit: Rich, if you want a "neutral policy" and the "short-uptick rule", would you also advocate a long-downtick rule? I would say no, because the market is not a zero-sum game. The policy should be appropriately biased towards longs.
Tuesday, February 24, 2009
Missed Opportunity
After reading Stephen Green's always excellent drunk blogging on Obama's big speech tonight, I think it was a mistake to cancel that short sale order for QQQQ at $28.84 this afternoon. We'll see what the market thinks tomorrow.
The president is much better at voting present. I only wish he'd do that more often and leave the rest of us alone...
The president is much better at voting present. I only wish he'd do that more often and leave the rest of us alone...
Wednesday, November 19, 2008
Ch-Ching!
Loading up on Anheuser Busch stock this past fall was a brilliant way to dodge the market mayhem. I knew it all along! (Except for some nail biting and sleepless nights when I worried that the sale wouldn't go through.) Ah, cash, sweet cash—almost as tasty as cheap beer during a recession!
Subscribe to:
Posts (Atom)
Posts
