Pulling on threads

Guambat oft entertains himself curiously following the search results that result from hits noted by Guambat's StatCounter hit-o-meter. Some threads are plain ridiculous, but most lead to interesting commentary, some germaine to Guambat Stew bits and others more tangential.

It gets kinda hard working these threads into new posts, or going back and editing old posts to include them (even finding the old posts that are relevant is tedious), so Guambat may make this item a recurring feature. What Guambat will do in this type of post is share some of those threads so that you, Dear Reader, can pull them yourself.

In this post at WRA Strategies & Observations, the blogger also tells the tale of Sam Zell, which Guambat mentioned just yesterday in the context of trying to understand the dynamics generated by the perception of too much liquidity. That blogger had this take:

Cash continues to spur increases in many markets. However, today's WSJ mentions in column one of the Money & Investment section that perhaps "Investors might not be pushing up prices for assets like art or high-yield bonds because they have so much cash. They might be seeking out more and more cash so they can push up prices while the going is good. Once they lose faith in an asset class they'll turn tail and all of that so-called liquidity will turn with them. That's what happened in the copper market . . . [with] the price of copper [falling] 39% since May."

"By the same token, all that cash doesn't seem to be pushing up prices for Florida condos or oil anymore. 'Liquidity is an ex-post justification for why markets are going up,' says Dresdner Kleinwort's strategist Albert Edwards. 'There's lots of liquidity around -- well, there always is until there isn't, and then it just disappears.'"

Guambat won't argue the toss, but notes that the only reason that investors can so easily chase up the price of any asset class is because of the cheap and abundant pool of available (to those in the loop) pool of cash. Still, point taken.

Another thread lead to this article at FT.com by Arne Alsin: The story brokers don’t want you to read. Arne Alsin is a portfolio manager for Alsin Capital and for the Turnaround fund. It is about how brokers like to plump up their income statements using your balance sheet:

This is a column that the brokerage industry does not want you to read. That is because it will embarrass them. Brokers don’t want you to know that they reap big profits by withholding important information from investors. Brokers don’t want you to know that they are the reason why shareholder voting has become a farce. And they don’t want you to know that they regularly and systematically discriminate between classes of investors.

The reasons for broker misbehaviour should come as no surprise. They misbehave because: (1) it is profitable; and (2) they can get away with it.

Brokers, as fiduciary agents, are supposed to act in the “best interests” of investors. But many brokers act in their own interests when they have an opportunity to generate more profits. Before I get to the cold, hard facts regarding the self-serving conduct of brokers, I will identify the root cause of the problem. That is, brokers wield too much power and influence.

There is no other asset class where brokers have such enormous power. A real estate broker or an auto broker, for example, is not able to lend your house or your car to someone else without your knowledge.

In the stock market, it happens every day. Brokers lend investor property to short sellers, often at annual yields in excess of 10 per cent, without notice to investors. After lending investor property, brokers have the gall to keep 100 per cent of the proceeds.

Broker lending of investor property generates $10bn a year for the brokerage industry. Because brokers are reluctant to share this booty, they wilfully and systematically discriminate between investors. They discriminate between those investors who have information and those who don’t have information.

Per the industry-standard hypothecation agreement, brokers are able to lend out investor property and secure high returns while putting none of their own capital at risk. So, all of the capital is put up by the retail investor; all of the reward goes to the broker.

The key to the ruse is this: keep the retail investor uninformed. Broker behaviour borders on the absurd in this regard. When a broker lends the shares of a retail investor to a short seller, who then sells the shares to someone else, the right to vote goes with the shares. To keep the loan a secret from the owners, brokers mail proxy voting materials to investors even when the broker knows that the shares have been lent to someone else.

The deceit is carried a step further. Even though the shares have been lent and the retail investor is not legally entitled to vote, brokers allow the investor to vote anyway. As a result, shareholder voting has become a farce. That is evident, in part, by rampant over-voting.

The common broker complaint – that it is too difficult to track shares for voting purposes – is a canard. That is because brokers already track shares pursuant to Internal Revenue Service rules.

Brokers track shares for tax purposes because they have to. They permit systematic violation of the “one share, one vote” rule because they can get away with it.

See, Unrepresentative Swill (Part 3)