Professor Elam

Buying Only, That’s the Ticket! "The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets." The move, he said, would not be necessary in a well-functioning market and is only a temporary step that is part of the actions being taken by the Federal Reserve, the Treasury and Congress. Christopher Cox, Chairman Securities and Exchange Commission

We can apparently conclude that a ‘well functioning market’, by government standards, is one that always goes up. From the standpoint of politicians that think ‘the well to do can afford to pay more taxes,’ this is a logical stance. After all, if the Wall Street Money Machine freezes up, the well to do might stop being just that. If the rich were to become middle class, who indeed would pull the wagon that Barack and John want to ride in? One can put higher taxes on those that can pay as long as in fact their wealth increases, Should the overall increase fall after taxes and capital losses, someone might start noticing just how greedy the government really is. Wall Street might deliver less but the government never cuts back its demands on taxpayers.

Perhaps the next time oil is ‘too high,’ Congress will ban buying oil and only allow selling on the New York Mercantile Exchange, sure that will fix the problem! Short selling is the polar opposite of buy low, sell high. A short seller sells high, and then buys back at a lower price. Some retirement funds have now refused to lend shares of Morgan or Goldman to short sellers. This would be a perfect stop gap measure, in 1930. However I did not read this morning 9Friday Sept 19) that the SEC had also banned trading in indices, options, and futures. Those are far more leveraged than mere stocks and certainly contribute to the overall decline in the markets. I doubt the SEC can rein in those trades given the size of those markets. But Goldman actually made money last quarter, which is more than Lehman and Merrill could say for themselves. The irony is that the same brain trust, Barney Frank, Chris Dodd, Alan Greenspan, Hank Paulson, Phil Gramm, et al, that failed us all are now claiming to ride to the rescue. And for the moment that is probably all that can happen.

But the US Dollar has been falling since 2002. Yes it rallied the last few weeks. But as the FED cranks up the dollar printing presses to bail out Fannie but not Lehman, AIG but not Merrill, it is no wonder gold rose $90 one day this week. Gold is the ultimate money that cannot be printed from trees, and this election year, Washington is promising to print quite a bit of it. Fannie Mae was the perfect storm trying to happen. Bureaucrats were moved to inflate earnings which inflated the FNM stock price which lined their pockets with bonuses. After all, the government guarantees the mortgages will pay, everyone will win as the FNM stock price rises! Now the FED and SEC are trying to guarantee against loss, period. Neither borrower nor lender will lose on a mortgage, no 401K will lose in the markets, selling is outlawed, only buying please. Such outright bans on rational activity can only be a stop gap measure.

The better idea would be to demand prudent behavior which only markets can enforce. For example, John Thain, Merrill CEO, is the former NY Stock Exchange CEO. Aware of regulations, once he saw the government would not bail out Lehman last Sunday, he penned a deal with Bank of America that day to save Merrill. See, Barney and Nancy, markets work better than any regulation.! We warned of an extended oil price all summer. Now lower prices are here. Oil has fallen $50. It is showing signs of life again. The reason is not just the cost of exploration. The world economies were weakening to the point that $145 oil was unaffordable. If the price is bottoming now, it is more a sign of strengthening economies that might once again afford this luxury. Our best guess is that the dollar rallies for a few more weeks or perhaps into next year. Oil should rise one last time over the next couple of years. But as we have warned, operating debt free in the oil field (read volatile markets) with low fixed costs is the only successful strategy. Don’t take my word for it, just ask AIG or Lehman.