| Submit your comments on this article |
| Home Front Economy |
| Financial company tells SEC to take its stock off the list subject to a short-selling ban |
| 2008-09-22 |
| Like I said, companies that haven't made losing bets with too much money (i.e. they're not hedge funds in drag) have nothing to worry about from short sellers. Okay, someone left this in comments but we can't find anything like it online (we also called DHIL for comment but apparently the guy who answers questions on the matter is out to lunch 'til 2:30). "NASDAQ issuer Diamond Hill Investment Group, Inc. (DHIL) has voluntarily opted-out of NASDAQ's list of Covered Securities under the SEC's Emergency Order, effective today, September 22, 2008. Diamond Hill Investment Group, Inc. will not be subject to the restrictions of the Emergency Order." If this is true, GOOD FOR DIAMOND. While GS et. al. apparently need the protection of Christopher Cox, you are sending a message that the big bad short sellers can huff and puff all they want, but unlike Lehman's house of straw and Bear's trailer park of hemp, your house of bricks ain't coming down. |
| Posted by:Zhang Fei |
| #17 Alternatively though, they could invest that cash in their business, which grows the company and economy and pays a better return than the market or the company would dissolve, and then borrow at market rates for operating funds. Even a small amount more growth compounded over time provides a competitive advantage. |
| Posted by: rammer 2008-09-22 23:16 |
| #16 Now with that said, why is it better for a firm to hold their operating capital? Here's the analogy - why do you keep money aside for rent and groceries every month? Why not max out your margin brokerage account with investments and rack up charges on your credit card to pay for day-to-day expenses? Because you might not be able to service your debt due to job loss, your credit line might get canceled, your car might need fixing in a way that more than maxes out your credit line or the market might crash just as you need money for some major expense. This is why having some cash for emergencies is so important - nobody knows what tomorrow will bring. |
| Posted by: Zhang Fei 2008-09-22 23:00 |
| #15 If businesses have to make dumb investments that prevent them from wisely holding their own operating capital, then this item is a perfect opportunity for regulation. With an enforced regulation, the playing field would be even and cheaters would pay big enough fines to make cheating unprofitable. Just like environmental or safety regulations. Now with that said, why is it better for a firm to hold their operating capital? |
| Posted by: rammer 2008-09-22 22:17 |
| #14 RNJ: They don't issue new stock to fund ongoing operations. Wrong, Ford just did exactly that, selling 500 million bucks (Around 125 Million new shares) In 2000, management handed out $5 in special dividends and bought back $5b in stock priced at $25. My feeling is that that is $10b they could use today. Some managements have no concept of saving for a rainy day, even in industries that live by the product cycle. This is why Ford suddenly had to issue stock at $5 that they had previously bought back for $25. |
| Posted by: Zhang Fei 2008-09-22 22:02 |
| #13 The only way to teach this lesson is to let their investments tank. But this would tank everybody else's investments as well. And the cost would be greater than the cost to bail them out. So we will bail them out and no lessons will be learned. Like busting up concentrations so no one is too big to fail. We let the Nasdaq tank from 5000 to almost 1000 not too long ago. We seem to have made out OK. The Japanese organized bailout after bailout. They've been stuck in a zero-growth time warp for 20 years. The cost of bailouts is no growth. We pay off the enablers only at the expense of everyone else. |
| Posted by: Zhang Fei 2008-09-22 21:16 |
| #12 investors and company management need to learn the meaning of prudence The only way to teach this lesson is to let their investments tank. But this would tank everybody else's investments as well. And the cost would be greater than the cost to bail them out. So we will bail them out and no lessons will be learned. Like busting up concentrations so no one is too big to fail. |
| Posted by: Nimble Spemble 2008-09-22 19:52 |
| #11 And the pension funds, and the university endowments and the mutual funds and... |
| Posted by: Nimble Spemble 2008-09-22 19:48 |
| #10 B-school 101A. But don't blame it on the MBAs - blame it on investors (at the big houses and Mr. I'm Getting Rich By Day Trading In My Free Time From My PC) for demanding very short profit horizons instead of investing for the longer run. This is why these types of companies need to be liquidated. This would wipe out the stock holdings of this class of investors. Rescuing these companies with taxpayer |
| Posted by: Zhang Fei 2008-09-22 19:47 |
| #9 It's practically criminal that they don't have any working capital on hand. If these companies need to borrow money just to stay afloat, they've made too many bad bets with too much borrowed money, and deserve to fail. Shareholders demand the most return possible on quarterly financials. Any corporation that kept major amounts of cash on hand would have a lower ROE and ROA than one that stayed cash lean by investing cash in a variety of instruments, usually money market funds and short term CDs, and then in option positions related to their industry, etc. B-school 101A.  But don't blame it on the MBAs - blame it on investors (at the big houses and Mr. I'm Getting Rich By Day Trading In My Free Time From My PC) for demanding very short profit horizons instead of investing for the longer run. When I was an operating executive that investor mindset drove me crazy. |
| Posted by: lotp 2008-09-22 19:19 |
| #8 They don't issue new stock to fund ongoing operations. Wrong, Ford just did exactly that, selling 500 million bucks (Around 125 Million new shares) Well, that just proves my point - Ford is a basket case, along with Chrysler and GM. They just asked for $50b from the federal government. And their stock prices (and yields for Cerberus's debt) reflect this. The right thing to do would be to grind the unions to powder by declaring bankruptcy and wiping out the union contracts, so that in the long term, they can survive against foreign competition. Instead, they're asking Uncle Sam for a handout. And you know what? If we're gonna give handouts, I prefer to give them to the Big 3. They are the repository of a lot of manufacturing technology. In the long run, we can do without the specific banks and brokerages that might go under without a bailout plan. But the Big 3 are the last of the Mohicans. If they go under we will have lost access to an important set of manufacturing skills. This country will never have a shortage of banks and bankers. Car makers are a different story. |
| Posted by: Zhang Fei 2008-09-22 18:47 |
| #7 They don't issue new stock to fund ongoing operations. Wrong, Ford just did exactly that, selling 500 million bucks (Around 125 Million new shares) |
| Posted by: Redneck Jim 2008-09-22 18:30 |
| #6 For rantburgers who know nothing about finance, for a company, cash from operations can be explained in this way - if you were given - free and clear - the company tomorrow, with its payroll, assets, and so on, would more cash come in than go out? If this company can't make payroll without borrowing money, it shouldn't be in business. Note that companies in technology don't borrow money to make payroll; banks don't generally lend to them, because nobody knows if they'll ever make a buck. What they do is issue lottery tickets in the form of stock. |
| Posted by: Zhang Fei 2008-09-22 18:26 |
| #5 Companies don't use equity to fund ongoing operations. Even if they have lots of money in the bank, they still borrow short term to meet operating expenses. They don't issue new stock to fund ongoing operations. But some of the cash from their previous stock issues ought to have been on hand as a buffer in cash of a temporary hiccup. If they can't generate sufficient cash from operations to pay for day-to-day expenses, they ought to be in liquidation. |
| Posted by: Zhang Fei 2008-09-22 18:18 |
| #4 Companies don't use equity to fund ongoing operations. Even if they have lots of money in the bank, they still borrow short term to meet operating expenses. |
| Posted by: ed 2008-09-22 17:53 |
| #3 By limiting short selling and rapid price declines, stocks will still have some value that they can use to borrow working capital until some confidence in the capital market can be restored. One of the big reasons for a public stock listing is to get working capital and money for expansion. These companies are publicly listed. They have gotten their pound of flesh from stockholders. It's practically criminal that they don't have any working capital on hand. If these companies need to borrow money just to stay afloat, they've made too many bad bets with too much borrowed money, and deserve to fail. |
| Posted by: Zhang Fei 2008-09-22 17:36 |
| #2 ZF, I believe the Feds are looking for breathing room until liquidity can be restored. By limiting short selling and rapid price declines, stocks will still have some value that they can use to borrow working capital until some confidence in the capital market can be restored. |
| Posted by: ed 2008-09-22 17:10 |
| #1 The one sure way to prevent financial stocks from going down is to ban selling. It's possible that the best minds at the SEC are working on this as I type this. |
| Posted by: Zhang Fei 2008-09-22 16:56 |