THE DAILY TRADING RISK: TOP STORIES

Monday, February 23, 2009

TOP STORIES

Citigroup wants more capital but not nationalization
After a slump in Citigroup's shares last week, bank officials are urging the U.S. government to inject additional capital but stop short of nationalizing the company. The plan would increase the government's stake to about 40%. Insiders expect a decision in the next few weeks but said if Citi's shares decline further, the decision will have to come earlier. Financial Times (23 Feb.)

Obama's budget to describe path toward dividing deficitWhen U.S. President Barack Obama presents his first budget proposal this week, it will show the $1.3 trillion deficit, inherited from the Bush administration, plummeting to $533 billion by 2013. Efforts include raising income by selling carbon-emission permits, reducing military spending in Iraq, and hiking taxes for businesses and wealthy individuals. Financial Times (22 Feb.)

WTO: "Buy America" clause doesn't violate trade rules
World Trade Organization Director-General Pascal Lamy said the "Buy American" provision in U.S. stimulus is a sign of "protectionist pressures," but it does not break international trade rules. The final "Buy American" compromise in the stimulus "will be implemented in a way that is consistent with U.S. WTO obligations," he said. The New York Times/Reuters (22 Feb.)

GOP governors divided on whether to take stimulus money
The Republican governors of Louisiana, Mississippi and South Carolina said they might reject some of the U.S. government's economic-stimulus money, while the Republican governors of California and Minnesota said they welcome the financial help. The governors leaning toward rejection said funds designated for extended unemployment benefits come with strings attached that could do their states more harm than good in the long term. Forbes/Reuters (22 Feb.)

Obama to appoint experienced inspector to oversee funds: Earl Devaney, inspector general of the U.S. Department of the Interior, is President Barack Obama's choice to manage a team that will ensure proper use of the $787 billion economic stimulus. Devaney headed up several investigations into scandals within the Interior Department. Reuters (22 Feb.)

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Books

Debt of Honor by Tom Clancy
Den of Thieves by James B. Stewart
Fundamentals of Investing in Oil by Chris Termeer
How We Got Here by Andy Kessler
How the Stock Market Works by Dalton NYIF
How to Day Trade Stocks by Harvey Walsh
Liars Poker by Michael Lewis
Manias, Panics and Crashes by Kindleberger and Aliber
Market Wizards by Jack Schwager
One Good Trade by Mike Bellafiore
Options as a Strategic Investment by Lawrence G. MacMillan
Reminiscinces of a Stock Operator
Secrets of a Pivot Boss by Frank Ochoa
Steidlmayer on Markets
Street Smarts by Linda Raschke
Team of Rivals by Doris Kearns Goodwin
Technical Analysis of the Financial Markets by John Murphy
Thank You for Arguing by Jay Heinrichs
The Ascent of Money by Niall Ferguson
The Big Short by Michael Lewis
The Forgotten Man by Amity Shlaes
The Intelligent Investor by Benjamin Graham
The Logical Trader by Mark Fisher
The Playbook by Mike Bellafiore
The Power Game by Hedrick Smith
The Shack by Wm. Paul Young
The Smartest Guys in the Room by Bethany McLean and Peter Elkind
The Taylor Trading Technique by George Taylor
The Traders Bible by Richard Wyckoff
Unconventional Success by David Swensen
When Genius Failed by Roger Lowenstein
Women & Money by Suze Orman

SHORTING STOCK

Lets say you think GE is headed down in price. You would borrow 100 GE shares from A at say, $10, then sell them to B for $10, and when the price goes down to say $5, you would go into the market and buy them at $5 and give back the shares to A, pocketing the difference.

The Mechanics of a Short-Sale
by Andrew Tobin
When you sell stock short, you are selling shares you don’t own, hoping they will go down. Your broker just borrows someone else’s shares for you to sell. Eventually, you have to buy them back and return them (unless you’re really lucky and the stock goes all the way to zero and disappears, in which case there’s nothing to return). If you can buy the shares back for less then you got for them, you make a profit; if you have to pay more, you suffer a loss.

But where do brokers get shares to lend short-sellers? The first thing they do is look to see whether one of their other customers holds the same stock in a margin account. Anyone with a margin account has signed an agreement authorizing the broker to lend his shares. He will not know they’ve been loaned, and he needn’t worry about it either way. He’ll still get his dividend (it will come out of the short-seller’s account); he will still be able to sell at a moment’s notice. (The broker will just replace the shares by borrowing someone else’s shares. Or, if that proves impossible, he’ll "buy in" the short-seller, forcing him to cover his short — typically at a loss — and return the shares. This doesn’t often happen, but it definitely can. It’s one more risk of the hazardous short-selling game.)

Brokers love short sales, because although you take all the risk, they typically get the interest on the proceeds of the stock you’ve sold. That’s right: you shorted 1,000 shares of some stock at $50; well, that means the broker got $50,000 in cash money in return . . . but you won’t find that money in your account. It’s earning interest in his account, whether he be a deep discounter or the most expensive full-service firm on the block.
(Active, pushy customers can sometimes twist arms and, if they do enough short-selling, persuade their brokers to share some of that interest. But few even know to ask and fewer still will be told yes. If you do $20,000 a year in commissions, say, well, that might be a different story.)

If your own broker doesn’t have shares of stock in one of his other client’s margin accounts to lend you, he will call around to find a broker or institution that does have shares to lend. Harvard, with its $10 billion endowment, makes some good money this way.

When a broker or institution lends stock, the "rent" it charges is interest on the value of the shares. In other words, your own broker has to split some of the largess with the lender (making him all the less eager to share any of his share with you).

*to give you an indication of how crooked the market is lately, Fidelity has put out word that they will not lend out shares of IWM.

If you have more questions feel free to email me at tradebum@gmail.com.

THE DAILY TRADING RISK

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Monday, February 23, 2009

TOP STORIES

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