Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Five Things You Need to Know: Short Interest Uninteresting?, The Myth of Housing "Wealth", Are We Almost Home Free?, Economics Statistics: Oops, Minyanville Flashback: Major Statistical Errors in Economics


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Short Interest Uninteresting?

It was reported yesterday that short interest on the Nasdaq for the September reporting period had reached a record.

  • The conventional wisdom is that short interest is a contrary indicator; high short interest is believed to be bullish, low short interest is believed to be bearish. Why?
  • Investors who "short" shares borrow them and sell them, betting the price will fall and they will be able to buy the shares back later at a lower price for return to the lender.
  • A high level of short interest in theory should therefore provide a layer of "demand" since those shares must eventually be repurchased, right?
  • Minyanville Professor John Succo says not so fast.
  • "Short interest is now absolutely meaningless," he wrote on the Buzz and Banter yesterday, thanks in part to the derivatives market, which is 10 times the size of cash markets.
  • "Never in the history of man have so many call options been sold on stocks," Succo explained. "This causes large funds like mine to buy those calls and short stock. I will never cover that short stock. As the stock rises, I will short more and more until I am one up against the calls I own. At or near expiration I will then exercise those calls and my position will be gone. No more short interest."
  • We thought that was an interesting point, but wondered if it was possible to see that kind of expansion in derivatives usage and call selling in action.
  • So we asked Minyanville Professor (and stats guru) Jason Goepfert of if he could come up with any charts that highlight what Succo was talking about.
  • "The following chart is one depiction," Goepfert said. "It shows the total number of call contracts that were sold to open across each of the options exchanges, but filtered for trades that were for 50 contracts or greater (presumably reflecting mostly institutional trades). It is plotted against total short interest for both the NYSE and Nasdaq."

  • Another possibility for an enterprising Minyan might be to run call open interest versus short interest or perhaps match up call open interest with short intensity by individual stocks and even sectors.
  • This is not to say that viewing and understanding short interest has no value whatsoever.
  • Rather, it is simply to point out that there is more to understanding short interest and how it may impact a specific stock's price action than viewing it as a simplistic contrary indicator.

2. The Myth of Housing Wealth

The rate of losses on U.S. home-equity loans in June reached its worst level since 2001 because of more foreclosures, Moody's Investors Service said, according to Bloomberg.

  • Moody's Investors Service recently reported that the loss rate on home equity loans surged to 1.05% of total loans from 0.8% in June 2005.
  • The amount of loans with payments more than 60 days late rose to 6.76 percent from 5.86 percent.
  • There were $551.1 billion of securities backed by home-equity loans outstanding at the end of last year, according to the Bond Market Association, Bloomberg said.
  • Among the culprits being blamed are the following:
    - Hurricane Katrina losses
    - GM and Ford layoffs
  • Meanwhile, does anyone care about potential home-equity loan defaults? Not so much.
  • The yield premiums on floating-rate home-equity loans fell to 83 basis points, or 0.83 percentage point, over Treasuries with similar maturities from 86 basis points a year ago, according to Merrill Lynch, Bloomberg said.
  • Don't home-equity loans fuel consumer spending, and hasn't the surge in home prices therefore created more wealth?
  • This is precisely the point housing bears make. Since 1997 real home prices have risen by some 90%. There is no economic fundamental that can explain that surge in real home prices.
  • Moreover, the corresponding surge in home-equity loans suggests that even if there were a fundamental explanation for the surge in home prices, those home prices have simply fueled more debt, not created more wealth.
  • The myth of housing wealth is that people whose homes have increased in value are richer today.
  • Indeed, people may feel richer. But are they really?
  • In order to take out my "housing" wealth I can do one or two things: 1) sell the home and buy a home that has not seen a rise in value corresponding to the one I have sold (otherwise that would simply be an equal-value asset trade), or 2) borrow against the value of my house betting that my home's value will continue to rise at a greater rate than the interest I am paying on the loan, or that whatever I "invest" the money in will increase in value.
  • Meanwhile, prices of existing homes fell last month for the first time in 11 years.

3. Are We Almost Home Free?

An interesting article in the Wall Street Journal today on how pricing your home for sale is getting "trickier."

  • Real estate brokers have typically helped sellers price their homes by evaluating how much comparable homes have sold for in their neighborhoods.
  • Now, some brokers are telling customers they need to underprice the competition -- even if they think their home is more attractive, the WSJ says.
  • Sellers are also being told to cut prices aggressively if their house isn't moving - or risk chasing the market down.
  • The National Association of Realtors this week reported that the median sales price of existing homes fell 1.7%, the first drop in 11 years.
  • House price deflation may not be something a seller can see coming down the pike.
  • One aspect of pricing that will be slow to materialize is the hidden price reductions contained in seller incentives.
  • For example, some sellers are offering to pay closing costs.
  • And according to the Journal, in Tampa Bay, Fla., Craig Beggins, president of Century 21 Beggins Enterprises, recently put together a list of 16 incentives homeowners can offer, from paying the mortgage for several months, to outfitting a media room with a big-screen TV, to picking up the cost of day care for some period.

4. Oops

England's Office for National Statistics yesterday said it discovered an error that makes inflation far less likely, the Financial Times reported.

  • The Office for National Statistics (ONS) says it has uncovered a statistical error that shows the cash value of national income grew by a 4.8 percent annual rate in the second quarter rather than the unsustainable 6 percent rate it reported last month.
  • The ONS slashed its estimate of annual inflation in export prices from 3.8 to 0.6 percent after it found it had introduced an error into the calculation, the newspaper reported.
  • The ONS's estimate of overall inflation for goods and services produced by British companies and government went down from 3.4 to 2.2 percent.
  • The Bank of England's monetary policy committee had expressed concern at the rapid growth of the nominal gross domestic product at its meeting earlier this month, the FT reported.
  • Danny Gabay of the Fathom consultancy told the Financial Times: "It looked as though inflation was rising more rapidly than growth - not any more."

5. Major Statistical Errors in Economics

Minyanville has learned that statistical errors in economics reporting are actually far more common than one might think, especially before the computer age.

  • England's Office for National Statistics discovered a major statistical error in reporting inflation yesterday.
  • The error reduced overall inflation from 3.4% to 2.2%, quite a haircut, and it will likely reduce the chances the Bank of England will raise rates at its next meeting.
  • It turns out, however, that major statistical errors in economics have occurred quite frequently over the years.
  • Below are some Major Statistical Errors in Economics throughout history Minyanville has uncovered:

Minyanville Flashback: Major Statistical Errors in Economics

400,000 BCE: Homo sapien 1 crushes skull of homo sapien 2 with boulder after economic release mistakenly shows dramatic 100% decline in expected fish output. Homo sapien 1 later learned the error was related to demographics and an increase in dinosaur population shortly before being eaten.

June 21, 1979: President Jimmy Carter signs Congressional bill mandating 68% tax increase on The Man. A statistical error in US Census Bureau Report incorrectly showed The Man's share of total US wealth had risen to 99% of GDP from its actual reading of 98% of GDP.

November 18, 1983: All beige books in Kansas City, MO libraries are burned after local television news station anchor mistakenly reports economists believe "beige books" indicate pending recession. It was later learned that economists believe the Fed's Beige Book report indicates a pending recession.

February 9, 1998: Stock market rallies 23% after then-Federal Reserve Chairman Alan Greenspan inadvertently substitutes Crazy Eddie Discount Electronics ad for interest rate testimony and promises to slash short-term Fed Funds rate to 90 days same as cash.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos