Financial Insight : POOR RICHARD’S REPORT

Richard De Graff [[email protected]]

860-522-7171

800-821-6665-watts

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            I would like to start this letter with an explanation of my disclaimer. I receive information from various sources that over the years have a ninety five percent rate of accuracy. Some I pay a handsome fee for and they in turn carry a hefty fine for plagiarism, so I rephrase parts in my own style. In times of crisis it would be very difficult and time consuming to sue when the information is for the public good. The statements I make are well founded on over 48 years of experience.

            For the past 2 ½ years I have been warning about this stock market. We are in a major long term bear market that can have tremendous rallies only to fall to new lows. If you have not figured that out yet – then you never will. My prayers go out to you.

            Instead of searching out whom to blame, I am going to write about how to improve the system. We are the largest economy in the world. One would have to combine the next five largest economies just to equal ours. We should be preaching love and kindness and setting higher standards of trusting ethics.  Don’t laugh, I believe it can be done, but first we must rein in the greedy choirmasters.

          The President of the United States receives a base salary of $400,000 per year. It is a lousy job, but the greatest retirement, the problem is getting there.

            Members of Congress receive $169,300 per year. After serving one term when they reach retirement age they will receive full pay. I wish I could do that. Then I wondered why they run so hard to get reelected? It suddenly dawned on me- the lobbyists. What do these politicians do with all that money?  They keep a lot of it. Especially if they are not wealthy to begin with. I can just see those republicans waiting to come into power in the early 1990’s, with their mouths drooling with greed. They were not too smart handling those slush funds, as many went to jail.

            The first matter of business is to have the lobbyist publically report exactly how much money they spend on everything- just like a public corporation. Failure to do so would be 5 years of jail with no parole and return of family properties to the IRS. Once their wife, kids, and home are involved they should become squeaky clean. Then we will only have to worry about the ones that are single.

            The next important change on my priority list is to bring back the UPTICK Rule for short sales. Usually, we dream of buying stocks at a low price and selling them high for a nice profit. Well, a short sale is the opposite. One sells first and hopefully buys back at a lower price. First one must find a stock to deliver to the buyer when he sells. If the firm cannot find shares to deliver to the buyer – then they cannot have a trade. Next, and this is very important before the stock can be sold short – the stock must trade up from the previous trade. That is called an uptick. Joseph Kennedy, the first SEC chairman instituted this rule and brought instant calmness to the market place. Since this rule has been rescinded in July 2007 the market has been subject to all kinds of abuses and the volatility, in my opinion, is a result of this. John McCain is right in asking for the removal of SEC Chairman Cox.

            Since rule breakers in Washington are dealing with public funds that affect our families, we must also pass punishment on their families too. That would sure clean up Washington real fast, or we might find a spate of divorces.

            So what has the administration been doing? They are banning shorts sales in 700 odd financial institutions until October 2nd!

            I smell a rat. This is a lousy band aid. Mutual Funds’ year ends September 30th so you have seen a lot of short covering. When you buy a stock all you can lose is what you paid for it. If you sell short, first you are on margin and your losses are unlimited. Traders who want to squeeze the short sellers can just keep buying until the last short stock has been covered. (That means the short seller has found a seller who will deliver a stock certificate so that he can deliver it back to the one he borrowed it from. So the upside is unlimited as far as losses are concerned, versus your profit being limited once the security you shorted goes to zero.) This writer has never sold short and there were many occasions I should have, but that is making money off someone else’s misery- sometimes mine.

            Well, certain powerful global corporations thought they could do anything. There are greedy guys breaking the cardinal rules of honest finance and breaking the backs of honest investors; some of whom will never return to the market place. The investment pool is evaporating and these big “fishes” lack the water to swim in.

            The central bankers, like an expert fisherman, gave them all the line they wanted and then yank! Pow! Oh the pain of being reeled in. Imagine the pain they have caused upon the poor trusting consumers.

            Central Bankers make good money. Chairman Bernanke makes $212,000 per year.  That makes him the second highest paid official in the US Government. Among central bankers he is one of the lowest paid officials.

          Moral#2:

          Don’t mess with your central bank- he holds all the cards!

 

                                               Addendum

            Future letters will dwell on how to improve the investment environment while curtailing the abuses going on today. With instant communications available today, we must devise new checks and balances to protect the ordinary investor.

            The Investment Act of 1940 should be revisited. There are provisions there that are antique by today’s standards. Their size brings corporate power to their management instead of the shareholders.  

            Management should be paid on corporate performance. Corporate earnings decline, management salaries should drop by the same percentage.

            These are just a few ideas and I will go into more detail in future letters.

Thank You.