Quite suddenly, a web based operation called OptionSellers.com went dark last month.A casualty of the spike in natural gas prices. More accurately, it was a casualty of hubris, as manifest in a failure to hedge against natural gas prices. The suckers -- excuse me, its investors -- received an email November 15 with the subject line "Catastrophic Loss Event." The catastrophic loss was that OS.com had bet heavily that natural gas prices would NOT suddenly spike any time soon. As the chart I've pasted on to this blog post indicates ... nat gas prices spiked in a big way. This was part of the pitch that you might have encountered had you gone onto their website before the spike. "Stocks are great, until they aren't. Options are better, but most make the mistake of buying them." OOOOOh, I see, so the trick is to be on the SELLING side. Taking a small amount of money in return for a promise to pay off later if specified events happen in ...
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I love Shark Tank. I think I've mentioned that before, even on this blog. Indeed, now that I've checked ... I wrote a post here that discussed the structure of the show. Today, I'll say something about the personalities. Kevin O'Leary is the hostile stereotype of a capitalist, come to life and played at least somewhat for laughs. When Kevin decides that he has no use for a particular entrepreneur, he says "you';re dead to me." Not "I'm out" (the phrasing shared by all the other sharks in the same situation) but "you're dead to me." Yet there is sometimes a "tough love" aspect to Kevin's snarkiness. I remember an episode in which two young men, who could not or would not offer many business plan specifics, were trying to sell equity in their computer password-protection system. Kevin (and Mark Cuban as well, IIRC) were interrupting them with hostile or sarcastic seeming questions. The two ladies on the panel, ...
Finance studies the way in which liquid resources, cash and cash-like stuff, moves about in a broader economy, and – if all works well – gets to where it is needed. Finance is a branch of economics, and so as you might suspect is concerned with “supply” and “demand.” But it is concerned with a very particular branch of each. Consider the cash that some people have saved. We’ll call them the Jones’. They’ve put cash away somewhere – in a safe, let us imagine, or in a pillow case – where it is immediately available to them should they want it. Consider also that there are other people and institutions who very much want the use of that cash. These others may have a very restaurant and a distinctive brand, but may need a new infusion of cash in order to expand the restaurant, perhaps making it a chain. In this case, the idea naturally arises that the Jones’ money might be lent to the restauranteurs, as equity (in which case the Jones’ expect a share of profit) or as debt (in...
The move of US exchanges into penny pricing in the 1990s is sometimes given credit for lessening something called a "spread," and thus to a degree the price of purchased securities. Let's pause on this point. The spread is the difference between the bid and ask prices at any moment: that is, the highest price that a would-be buyer has offered (that no one yet has accepted) on the one hand, and the lowest process that a would-be seller has asked for (with the same qualification, which I will hereafter drop) on the other. Books and articles and even blog posts that purport to teach you how to trade -- and this is emphatically not one of them -- will talk a good deal about which one of you should be the one to "cross the spread." It can all sound a bit like the musings of the wallflowers at a junior high school dance. As prices came to be quoted in smaller and smaller increments, there were (as the SEC expected there would be) greater opportunities for trad...
As I noted in yesterday's entry, the U.S. Supreme Court this week declined to hear an appeal from State Street Bank & Trust after the 6th Circuit Court of Appeals gave the go-ahead to litigation against it brought by former (pre-bankruptcy) employees of General Motors. State Street had tried to get this case squashed on a motion to dismiss for failure to state a claim on which relief can be granted (the old-fashioned term for that was a demurrer). SCOTUS' non-decision decision means that it has failed in that effort. State Street's claim had been that ERISA shielded it from immunity. Other fiduciaries in similar situations may continue to make such claims (outside of the 6th Circuit), because SCOTUS' s refusal to take an appeal has no precedential significance. Still, the 6th Circuit, which consists of the federal districts within Tennessee, Kentucky, Ohio, and Michigan, ain't peanuts, and the 6th Circuits decision is sure to be cited elsewhere. This m...
A bit of fascinating news this week was mostly overlooked. The U.S. Supreme Court, on Monday, December 3, declined to hear an appeal from State Street Bank & Trust after the 6th Circuit Court of Appeals had given the go-ahead to litigation against it. So, without having to do the work of listening to arguments or reading briefs and writing an opinion -- all that tiresome stuff -- the high court has determined this lawsuit will proceed. The underlying lawsuit is a big enough deal to make that nod a big deal as well. Here's a link to the 6th Circuit decision which, we now know, stands. Before the fateful year 2008, auto giant General Motors offered its employees 401(k) plans with a variety of investment options, including mutual funds, non-mutual fund investments, and the General Motors Common Stock Fund itself. The later option was intended to enable both salaried and hourly employees to acquire an equity interest in their employer. Defendant State St...
Thoughts in the manner of Hazlitt: Any commodity market is of necessity about hedging from more than one side, as well as about speculating. An industry that consumes a lot of energy (say, an electric utility) wants to hedge against the price of its supplies spiking up, just as the suppliers, in Texas or Saudi Arabia, want to hedge against the possibility of a sharp downward move. So the markets can serve both hedges. No: there is no reason why this should artificially drive prices up. Anymore than it artificially forces them down. The risks of fluctuating crude oil prices will be borne by somebody. The risk exists, nobody other than an advocate of central planning believes that it can be ordered to go away. Somebody will bear it. Utility company, oil producer, speculators, or some combination. Under normal conditions, then, by letting speculators come in to play a role between the two hedging operational parties I have mentioned, commodity markets perfor...