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In my previous financially focused post (link) I expressed frustration at how the media continue to misrepresent the perfectly legitimate practice of ’short selling’. As I was watching the news yesterday (with their on-screen live FTSE and DOW figures), and reading the newspapers again this morning, I was reminded that there are further examples of oversights and simplifications in financial reporting, that all go to make me concerned there are few places to go for solid news (Radio 4, Newsnight and Channel 4 news, largely).

One example is, perhaps, well known. It’s the reporting of the FTSE 100 index figure as some generic financial indicator. Remember, this is just a selected index of a basket of equities (ie. stocks), and it is adjusted over time. Whilst it constitutes about 80% of the total value of the FTSE shares, it is still an equity indicator, and a general purpose one at that. It’s of interest as many people invest in FTSE-100 trackers. Personally I prefer a FTSE-All Share tracker.

In the context of the ‘credit crunch’, equities are not really a particularly good indicator. Whilst it’s clear that share values fluctuates, it doesn’t in itself show very much about the underlying problem that faces financial institutions. Let’s not forget too that in times of doubt there is always a flight of money from equities to fixed income products and commodities (particularly gold). When people sell their equity investments in large numbers, share prices naturally drop (a surfeit of sellers), and it’s likely to see ’safer’ investment values rise (due to limited availability; commodities need digging/drilling!). Just compare the graph for last months gold price, particularly it’s big spike in September 2008, and last months stock market indicator graphs.

Oil prices are an interesting case - they were a solid investment earlier this year - it was doing nothing but rise - but with the doubt and fear about a global recession, oil prices drop over fears about reduced demand. A good thing too, clearly, as the knock-on effect on heating bills has serious consequences for societies most vulnerable members. But let’s forget the halcyon days of less than $25 barrel oil - many of the oil-rich Gulf states are funding huge investments on the basis of (relatively) high (>$75) oil prices. I for one was not in the least bit surprised by the news in early September that OPEC were cutting production. Let us not also remember oil is priced in US$, so as the US$-Sterling rate falls, so oil price rises for us. But it’s not really been mentioned in the media that oil prices are safely below $100 at the moment: It’s been ignored due to other financial events.

So share price drops are inevitable in days of doubt. Investors seek safer shores. In today’s Guardian it’s reported that is also happening with people’s savings, as they move from perceived ‘at risk’ banks to National Savings products and other government backed savings accounts. You’d almost think that the financial professionals are people too! On a side note, the term ‘Masters of the Universe’ used a lot at the moment (in reference to financial high-flyers) comes from The Bonfire of the Vanities, rather than the children’s cartoon series.

Equities are a good indicator of confidence, and the massive dives in recent weeks indicate the failing confidence. The problem was exacerbated, in my mind at least, by an inept US President. By making the announcement that something of that scale was planned so far in advance, expectations were set. Financial institutions felt the cavalry was coming. So when Congress refused to pass the bill in it’s proposed form, expectations were shattered, and confidence plunged.

The other key word is volatility. Prices are moving about as much as they are as investors take differing views on insufficient, inaccurate, incorrect information. Throw in a healthy dose of fear, and you’ve everything you need. One figure that seems to be missing from public resources is traded volume. Prices are naturally volatile when volumes are lower (fewer people competing to sell/buy assets), and I’m curious to find out how traded volume compares in September, with that of previous months or years. Although I suspect the confidence figures remain the dominant factor here.

But as far as measuring the ‘credit crunch’, it’s LIBOR (London Interbank Offer Rate) that’s king. These are the rates at which banks lend to each other over various periods of time. The credit crunch is all about this lending drying up, represented by spikes in the rate, which is normally closer to the Bank of England interest rate. Just yesterday the overnight rate hit 6.87%, compared to the 5% for the Bank of England. This rate is finally getting reported more often by the serious media, but it’s still difficult to find on market data websites.

As we all know the Credit Crunch is about banks not lending to each other, at least without a prohibitive premium. For the ‘real economy’ that means borrowing of any sort are going to be more difficult. As such borrowed money - vital in the short-term - dries up, we can expect to see in the coming months businesses struggling to find money to help them grow, invest or simply get through a difficult patch. When cash runs out, for whatever reason, businesses fail, and jobs start to go. If the complete grid-lock in the finance sector isn’t eased soon, the bad news from successful businesses will start to grow in numbers. Sadly it’s a delayed consequence, which doesn’t sit well with the 24 hours news cycle that seems to demand cause-and-effect to be observable.

So if you want a figure that indicates how the credit crunch is affecting lending, LIBOR is the one to look to. If you want an indicator of confidence and fear, the FTSE figures. Whilst confidence remains so low, and the US government struggles to find the rescue package it needs, I’d expect prices to remain volatile, and many valuable commodities, will rise.

But it’s not all bad news. If, like me, you’re some years away from retirement, take the pragmatic view that lower prices can make for a good buying opportunity. A complete economic meltdown is unlikely as fundamentals are, I think, still quite sound and the crises is still solvable if fingers are extracted and US politicians get a grip and stop playing, er, politics. But look to the other figures for a better indication of what’s going on. It’s certainly not all about what the FTSE or DOW is doing day to day.

There seems to be some bizarre hysteria blowing through the country at the moment: The fear of shorting stocks, and the companies that practice it. The newspapers seem to be all over the mechanism, and journalists seem to be failing in their duty to provide accurate information. Also in the firing line seem to be pension companies, who loan their stock and thereby allows this to happen in the first place, companies that do it, and even various characters who naively stepped in to condemn traders without first checking their own portfolios. 

Unfortunately it seems that a huge amount of misunderstanding is going about, and I fear it may be a similar as with science reporting (See badscience.net, from Saturday Guardian column of the same name). The media is full of journalists (many of whom will necessarily be english/media/journalism graduates) with very little understanding of technical subjects. They are asked to write pieces on subjects they may not have much knowledge or interest in, and then proceed to clamber about the subject with painful naiveté. Unfortunately, their naiveté goes on to misinform huge numbers of people, and hysteria results. 

I’ll give an example of one of most horrifically tenuous pieces of journalism I’ve read in a long while. The Sunday Herald tries to throw some mud at Alec Salmond who made headlines with his “Spivs and Speculators” comment. The Herald has this to say in a piece (link) trying desperately to throw some mud at the SNP:

One of the companies that “short-sells” shares, Morgan Stanley, last year received a £6 million grant from the SNP Government to boost jobs in Glasgow. It has also emerged that the Scottish Government is funding another business, Timberpost, which creates artificial intelligence for short-selling firms.

What can we conclude? Er, Alec Salmond’s government gave grants to companies who employ people and operate on the stock market, or develop software, in a perfectly legal way. I really struggle to understand how that is a problem, or implicates the SNP in anything. It does, however, speak volumes about a journalist who’s trying to eek out a story and latch on to a misplaced fear (largely of their own creation) of a perfectly legal practice.

Can we also (Sunday Herald journalists please pay attention) try and remember that the current ban on short selling applies only to bank stocks and not the practice as a whole. It is NOT inherently bad practice. Quite the contrary, it’s a valuable tool in markets that enables downwards pressure on stocks that may be overvalued for some reason. Look at the hype that surrounds IPO’s and companies that hit the headlines. What if you, as somebody taking a position on the market, disagrees and think there are fundamental problems? Shorting a stock is one of the fundamental ways to do this.

Also, let us not forget that the banks that have been torn to pieces had (it’s now clear) fundamentally poor business models when cheap credit dried up. High risk loans without sufficient deposits, or self-certified mortgages, or even (dare I say it) falling asset values. But house prices never fall, do they? Whilst there is clearly a wider crises exacerbating many of the problems, it’s clear there was and is a shake-out required. 

Pension companies (largely) invest for the long term. Certainly if I’m investing in a fund, I’m indirectly holding an asset (shares) for a period of time. Now that can either sit in the fund, and grow in value and no more. Or the pension company can lend it out and earn money from it, which in turn can be reinvested. It may even add to the yield that helps pay out income funds. There is no risk to the pension company, as the value is associated with the asset itself, and the loaner must return the stock. They’re just oiling the wheels, and making money for their investors in the process. If the value of the asset falls as a result of the shorting, so what? That’s the position the investors took, largely with a longer term view than a 5 year stock market chart in mind. Personally, I’m losing no sleep over the drop in value of my ISA’s, pensions and so forth. I’m taking a 30 year view. I’ll also phase money into bonds as time passes. Because putting all your eggs in one basket (the stock market) is a Bad Thing. 

Now I’m certainly no financial expert. I may have worked in finance for a good few years, and enjoy reading the financial pages of newspapers. There may have been dubious practices going on with some of the short selling. That’s not for me to judge. But what is for me to judge is some of the atrocious reporting going on associated with regards financial issues, not least the inappropriate demonisation of short selling as a practice.

So if relatively simple concepts such as shorting are being mis-reported, stigmatised and pilloried, what hope have we that the really significant financial news dealing with almost $1 trillion of government intervention, is to be accurately portrayed?