Government restriction on short sales may have unintended consequences

A lot of my investments are in S&P 500 index funds, which, until the recent dive by financial institutions, included financial stocks as its largest sector of investment (finance is now third after energy and IT). Over the past couple years, I've held shares in the Prudent Bear Fund (BEARX), a mutual fund that uses a strategy of shorting various stocks, purchasing put options, and investing in gold, as well as making some short-term trades of the exchange-traded funds ProShares UltraShort S&P 500 (SDS), which goes up when the S&P 500 goes down, and ProShares UltraShort Financial (SKF), which goes up when the Dow Jones U.S. Financials Index (DJUSFI) goes down.

I had been holding some shares of SKF for a couple weeks with a 30-day limit order to sell at $142, which would give me a nice profit. When it shot up Thursday, I upped my limit, and ended up selling some of my shares at over $150, and closing out my position. The market then reversed, and SKF dropped as low as $110, so I picked up a few more shares at around $117. Friday morning, SKF dropped to $87 and started to climb back up, when all of a sudden it stuck at $93 and no more trades went through. Trading was halted.

The SEC announced a "temporary emergency action" to ban short selling in 799 stocks of financial companies for the next ten business days (until the end of the day on October 2), which may be extended for up to another twenty business days (until the end of the day on October 31, bringing us right up to the election). The UK instituted a similar ban. Because of this ban, trading in SKF was temporarily halted. The SEC seems to be under the illusion that short sellers are responsible for the stocks of financial companies falling, rather than the fact that these companies have been engaging in risky behavior and are now loaded down with bad debt.

But a short time later today, trading in SKF resumed, after ProShares announced that they cannot accept orders to create new shares in the fund, since that would require taking new short positions in financial stocks, but those who hold existing positions are still permitted to trade them.

This effectively turns SKF into a closed-end fund, making SKF shares more scarce than they otherwise would be. When I saw that SKF was again trading, I bought more shares at $90, reasoning that the financial problems are far from fixed, the proposed government action is likely to be full of holes, and with normal routes to short selling closed, more of those who wish to hedge their bets against further drops in the financial sector will turn to other alternatives such as put options (though options markets are likely to be hurt by this ban as well, since the U.S., unlike the UK, didn't make an exception for options market makers) or shares in funds like SKF, the latter of which they will only be able to purchase from existing holders of the fund.

It's a serious mistake to think that short selling is something solely done by vultures trying to destroy companies at risk--it's a defensive measure against catastrophe for those who are mostly holding long-term investment positions.

An Associated Press story on the ban shows that the SEC is starting to recognize that it may cause some unintended problems:

But on Wall Street, professional short-sellers said they were being unfairly targeted by the SEC's prohibition. And some analysts warned of possible negative consequences, maintaining that banning short-selling could actually distort -- not stabilize -- edgy markets.

Indeed, hours after the new ban was announced, some of its details appeared to be a work in progress. The SEC said its staff was recommending exemptions from the ban for trades market professionals make to hedge their investments in stock options or futures.

"I don't think it's going to accomplish what they're after," said Jeff Tjornehoj, senior analyst at fund research firm Lipper Inc. Without short sellers, he said, investors will have a harder time gauging the true value of a stock.

"Most people want to be in a stock for the long run and want to see prices go up. Short sellers are useful for throwing water in their face and saying, `Oh yeah? Think about this,'" Tjornehoj said. As a result, restricting the practice could inflate the value of some stocks, opening the door for a big downward correction later.

"Without offering a flip-side to the price-discovery mechanism, I think there's a pressure built up in stock prices that only gets relieved in a great cataclysm," he said.

Disclosure: I presently hold no shares of BEARX or SDS, but do have a position in SKF. This post does not constitute investment advice.

UPDATE (September 20, 2008): Paul Krugman critiques leaked details of the bailout deal. If accurate, I agree with him that it's a bad deal and I expect to see SKF climb on Monday.

Iraq peace: surge working, or results of ethnic cleansing?

Reuters reports that nighttime satellite photos from Sunni Arab areas of Baghdad show that the lights in those areas began to go out before the U.S. troop surge began in 2007, suggesting that population shift, rather than the surge, may have had greater responsibility for the drop in violence.

Sarah Palin's Yahoo account hacked

Sarah Palin has apparently been using a personal email account for State of Alaska business (perhaps following Republican precedent on how to avoid subpoenas?), and it's been compromised.

Wikileaks has the documents.

UPDATE (September 19, 2008): The screenshots used by the attacker showed that he used ctunnel as his web proxy, and contained enough information to identify his source IP in ctunnel's logs.

As pointed out by commenter Schtacky, it looks like they've identified the culprit, who used some Google research and Yahoo's password recovery feature to change the password on the account to break in.

This shows the problem with choosing "security questions" for password recovery that have answers which are easily publicly available.

I hope that this kid's actions don't sabotage the corruption case against Palin that may have been supported by evidence in her Yahoo email, evidence that is now tainted by the fact that it was compromised (and subsequently deleted).

The Religious Right's Religious Right

Ed Brayton at Dispatches from the Culture Wars discusses those right-wing Christians who oppose Sarah Palin because God doesn't want women to hold leadership positions or even vote.

He lays out some choice quotes from Covenant News, the website promoting these extreme views, and observes that this website is the home to contributors such as Gary North and Ron Paul.

Cindy McCain's drug-related crimes

Radley Balko at The Agitator replies to Jennifer Rubin at Commentary about why the Washington Post's coverage of Cindy McCain's addiction to painkillers and commission of crimes to support it is newsworthy.

Balko gives two reasons:

• John and Cindy McCain have touted her addiction an example in overcoming adversity. That presents quite the contrast to McCain’s legislative history as an ardent drug warrior. People accused of crimes similar to those Cindy McCain was accused of committing usually go to prison (even when they’re innocent). Her crimes haven’t been well-reported in the media. And they show how John McCain (who, by the way, is running for president) believes in one set of rules for the friends and family of powerful politicians, and a different set of rules for everyone else.
• While Cindy McCain’s addiction and theft from her children’s charity to support that addiction were lightly covered at the time, there has yet to be much coverage of it at all during this campaign. And one aspect of the case that’s been covered even less is John and Cindy McCain’s attempt to railroad Tom Gosinski, the guy who blew the whistle on Cindy McCain’s theft from her children’s charity. The Post story is one of the first to get his version of what happened.

And Balko concludes:

So here we have a U.S. senator who tried to destroy the guy who blew the whistle on his wife’s crimes, who then used his political power to work out a sweetheart deal with prosecutors to get his wife a slap on the wrist for those crimes (which often send others to prison), and who has then spent his entire career fighting for longer sentences and less leniency for people who commit similar crimes. And he’s now running for president.

The Washington Post story is here. Phoenix's New Times covered the story of Cindy McCain's drug addiction and Tom Gosinski whistle-blowing back in 1994. The New Times story contains much more detail than the Post story, including lies told by Cindy McCain as part of the McCains handling of the unwanted media coverage of the story.

Amy Silverman of New Times, who has covered McCain in detail for many years, has a lengthy recent article about McCain here, which includes stories about McCain such as his sabotaging a hearing of Arizona Gov. Rose Mofford, Barry Goldwater's irritation with McCain, McCain's exploitation of the illness of Mo Udall for publicity, and more.

McCain and Palin lie about factcheck.org

A McCain-Palin ad cites factcheck.org to claim that Obama has made false attacks on Palin--but the attacks haven't come from Obama. McCain and Palin are appealing to factcheck.org's accurate content in order to lie about Obama, and factcheck.org calls them on their dishonesty.

Palin falsely claims Alaska produces 20% of U.S. energy

Sarah Palin said in an interview with Charlie Gibson that Alaska "produces nearly 20 percent of the U.S. domestic supply of energy."

Not true.

Alaska produces 14% of the oil from U.S. wells (not 14% of oil consumed), produces 3.5% of domestically produced U.S. energy, about 2.4% of U.S. energy consumed.

McCain repeated the same falsehood to Gibson, saying "[Palin's] been governor of our largest state, in charge of 20 percent of America's energy supply."

(Via factcheck.org.)

If they keep repeating this claim, they are liars. There's already good evidence that they are bullshitters.

Walking with the Dinosaurs

Kat and I went last night to see "Walking with Dinosaurs" at the U.S. Airways Center in Phoenix. It was a visually impressive show--they did a great job on the dinosaurs, which were quite realistic in appearance and movement, with only minor distractions. The smaller dinosaurs were operated by a person inside, whose legs were partially visible since a human's legs don't fit into the shape of the dinosaur's legs. The larger dinosaurs were each mounted on some kind of flat long vehicle that was colored to match the floor, but was still visible.

The music was loud and somewhat bombastic, the kind of stirring movie soundtrack music that can be sometimes irritating--but not as much so as the typical Phoenix Suns intro that regularly happens at the same location. The dinosaurs movements involved very limited interactions with each other--only occasionally so much as touching each other--which made the "battles" more of a suggestion than a depiction. No doubt this was to avoid damaging some expensive dinosaurs.

The production was narrated by an actor playing "Huxley" the paleontologist, who walked around on the floor with the dinosaurs, describing the historical context with the help of video projected onto several screens. The arena itself was encircled by inflatable plant life that "grew" and "died" at the appropriate times. Some lighting and smoke effects also contributed to the atmosphere, for fires, volcanos, and the comet theory of the K-T mass extinction. Some other props included some giant rocks which were also used to represent the continents, and a big ball of dinosaur poop (one of several kid-pleasing elements that I also appreciated).

It was definitely a bit more on the entertainment side of "edutainment" than the education side. Although the script tried to convey the timescales involved, it didn't try very hard--some visual analogies on the video screen might have helped. It explained the difference between fossils of dead animals and trace fossils that show evidence of how they lived, but made no attempt to talk about the geological strata or how we know the enormous ages involved. It didn't, to my mind, do much of anything to try to proactively counter young-earth creationist nonsense about the dinosaurs.

And that was a pity, because as we left the arena, we were confronted by young-earth creationists from the Arizona Origin Science Association handing out copies of Ken Ham's booklet, "What REALLY Happened to the Dinosaurs?" I heard one gentleman come back and ask for another copy, saying "my brother[-in-law?] is an evolutionary biologist, and I want to give him one." I hope that man's relative takes the time to rebut it.

There are some photos and video of "Walking with Dinosaurs" at Brian Switek's Laelaps blog, along with his description of the show.

August's Notices of Trustee's Sales

As Jim pointed out here, Maricopa County saw another record month for pre-foreclosures - though AZ Central's count is different than mine. I can only tell you what I get from the recorder's office (which was 7286).

Candidate charitable contributions

USA Today reports that the Biden family has given $3,690 to charity over the last decade, an average of $369 per year, on "modest" income that has ranged from a low of $210,797 in 1999 to a high of over $320,000 in 2005. Last year, they gave $995 on income of $319,853 (0.3%), their highest giving rate of the decade.

A 2005 study of households with incomes from $200,000 to $500,000 per year shows average charitable giving of $40,746 per year.

John McCain has given $202,000 to charity in the last two years, about 25% of his income--but of course he is married to a very wealthy woman who earned more than $6 million in 2006. Last year he gave $105,467 (half of what he and his wife donated as a couple) on income of $405,409, which would be more impressive if it weren't just an even division of their reported expenses reported without the comparison figure of her income.

The Obamas gave $240,000 to charity last year on income of more than $4.2 million (5.7%). In 2000, they gave $2,350 to charity on income of $240,726 (1%).

Palin's tax data hasn't yet been released. There may be some tax problems lurking in her records.

John McCain's personal charitable giving appears quite generous, but it's somewhat less so considering his wife's much higher separate income and my suspicion that she effectively subsidized his charitable giving as the chief breadwinner and provider. The Obamas were very generous last year, but not so much in 2000. The Bidens, not at all generous. This seems to lend further support to the thesis that conservatives are more generous with their own money than liberals.

My feeling is that most professionals earning six-figure incomes should be able to give 5-10% of their gross income to charitable causes without much trouble. The average figures for those earning $200,000 to $500,000 strike me as just about right.

(UPDATE, 17 May 2021):  The Bidens' 2020 tax returns show much more generous charitable contributions:

The Bidens donated $30,704 to 10 charities last year. The largest gift was $10,000 to the Beau Biden Foundation, a nonprofit focused on child abuse that is named after the president's deceased son.

But that's on $607,336 in income, so it's just over 5%.  Kamala Harris and Doug Emhoff gave just under 1.6%:

Vice President Kamala Harris and her husband, Douglas Emhoff, also released their 2020 tax filings. They paid a rate of 36.7% on income of $1,695,225 and contributed $27,006 to charity.