I ran across this article today and I felt compelled to offer my comments on a paragraph by paragraph response. Even though this is taking time out of my day I felt it was that important. You can read the article here… Value Creation Vs. Value Destruction and post your own comments as well.

Capitalism 2.0: Value Creation vs. Value Destruction

“In the Creator vs. Speculator debate, there is also the need to deal with the issue of when speculation becomes a way of value destruction as opposed to value creation.”

MY RESPONSE: The first paragraph begins with the presupposition that speculators are somehow either responsible for or advocate value destruction. Truth is speculators are just as strong, if not stronger on the “value creation” side of the markets. There are far more “bullish” speculators than “bearish” speculators.

“One of the problems that we have with Wall Street compensation is that traders make money both as the market goes up and as the market goes down. And often, a tremendous amount of market manipulation is going on in the process, destroying many people’s honest, hard work.”

MY RESPONSE: Why is making money “both as the market goes up and as the market goes down” a problem? This avenue of profit is available to anyone who chooses to educate themselves in the markets behavior and compensation structures. Why should we only be able to profit if an asset appreciates in value? This would assume that assets never fall in value to do external events, market cycles, intra-company news releases and the hundreds of other reasons a company’s share price may fall in value. Just because one “speculates” that the price of an asset may fall, this does not mean that the speculator has any desire in the the devaluation of a companies true net worth.

How many companies became overinflated (in price) during the “dotcom” era? These price levels were not based on actual earnings, (”many people’s honest, hard work” - see above) and fundamental value, they were based on greed. The speculators (including many “average Joe” investors drove the stock prices up.

Based on the original article writers premise if speculators drive the price of an asset up, we shouldn’t be able to profit from that behavior either. If that is the case let’s just close the stock markets and price every company at $1.00 a share and call it “fair trade”.

Oh and by the way, the original author forgot to mention that traders can also profit if the price of the asset “stays the same” or trades in a range. This is the ultimate speculation.

“Jim Cramer has openly described mechanisms used by hedge fund managers to manipulate stock prices. He also points out that some hedge fund managers spread false rumors to drive a stock down. In his days as a hedge fund manager, he did it too.”

MY RESPONSE: You know what, this is true and it is shameful. However, the exact same process is done more on the Up side of the markets than the down side… still shameful, but true. So I guess the argument should be… no one can ever say positive or negative things about a publicly traded company as this may cause the stock price to rise or fall causing people to make or lose money.

Here is my question… Do stocks always rise on good news? Do they always fall on bad news? Hardly. Being able to profit from any market direction is CAPITALISM at its best. I say; “if you don’t like capitalism… MOVE.” In fact I will help you pack.

“I have been thinking about the short-selling issue for a while, and have pretty much come to the conclusion that short-selling needs to be banned. No one should be making money if a company’s stock is going down. And especially, no one should have the incentive or the tools to bring a company’s stock price down.”

MY RESPONSE: Are you serious? Ban Short-Selling? Then I guess we should also ban Long-Buying. If we can’t profit from the fall in price of a poorly run company (GM and others) then we shouldn’t be able to profit from one that is well run (GOOG and others).

And while we are at it why not let the fools run the country. You know, the ones that believe “Too each according to his needs and from each according to their ability.” - Karl Marx.

Oh wait, it appears the fools are already in power and writing articles to ban capitalist profit streams like Short-Selling.

“The common counter-argument I have been hearing is that short-sellers keep the market in check, and prevent bubbles. My response: that is the job of analysts, to ensure that bad news, problems, concerns, etc. are reported.”

MY RESPONSE: Yes short-sellers do provide a hedge and do help to keep the markets in check. I, however, would like to spend more time on the argument of “analysts”. It is (in the words of the original author), “the job of analysts, to ensure that bad news, problems, concerns, etc. are reported.” Are you serious?

First, lets assume that analysts always tell the truth… (wink, wink, nudge, nudge) and there has never been a case of impropriety. Second, lets assume that the companies that the analysts are tracking always tell the truth to the analysts and the public (Enron and others).

So the argument is… since the companies always tell the truth and the analysts always tell the truth then the only thing we would ever hear from either of them would be happy, joyful, sparkling news causing the stock prices to only go up and everyone to accumulate wealth beyond their wildest fantasy. Wow I can’t even believe I typed that. I must be going insane as well.

Reality Check: Companies, management and workers sometimes make mistakes causing bad things to happen (Merck and Erbitux 2006), this was bad news and quite harmful to Merck. This caused the stock price of Merck to gap down over night when the news was released. The original authors defense in this situation would be to just sell the stock (after the loss) with no way to recoup any of those overnight losses as the stock continued to sell off over the next days.

Short-sellers were able to profit from this news without speculating and causing any “value destruction” Merck brought this price action on themselves and educated capitalists profited.

“And finally, the P&L is a perfectly sound mechanism to gauge company performance, unless it is cooked. And since cooking books is illegal, I believe that we have all the mechanisms necessary to keep markets in check without short-selling. Without value destruction.

MY RESPONSE: Yes Virgina, “cooking the books” is illegal. So is writing a sign in any other language than English in Georgia or acknowledgment of a supreme being before being able to hold public office in Texas or taking more than three sips of beer while standing in Texas or the law that clearly states that sunshine is guaranteed to the masses in California… shall I go on?

Just because “cooking the books” is illegal doesn’t mean that companies won’t continue the practice and when they get discovered (as I hope they all do) I and thousands of other capitalists just like me want to continue to profit from it.

So, once again, I say; “if you don’t like capitalism… MOVE.” In fact I will help you pack.

“And, if we prevent value destroyers from making money by destroying value, Wall Street compensation - compensation of the speculators - will also fall in alignment with those of the creators.”

I know this is a controversial point of view, and I welcome debate on the topic.”

Well, my socialist leaning friend (my opinion only), here is my response to your request for “debate on the topic”.

- Rant Over. Back to your lives people.

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