Gyroscopic Investing

MediumTex wrote: Are you saying that politicians are dishonest and self-serving?

TripleB wrote: I didn't watch the video but I read a study recently that showed the average junior congressman outperforms the market by around 10%.

i.e. market returns are about 10% annually. junior congressmen get about 20% annually.

The average senior congressman was about 5% or so above market returns. Theoretically they get less greedy and are more risk-averse to being caught for insider trading.

It's an "us versus them" mentality. They are the ones that make the laws so if they break them, it's OK.

Take a look at the internet discussion forums the last few weeks on the case of the Florida Highway Patrol Officer who pulled over a City of Miami police officer for doing 120 MPH in his patrol car, outside of his county, on his way to a second part-time job he had.

All the private citizens are applauding the FHP officer. All the officers are disgusted with her, because "cops dont pull over other cops." Once you're a cop, you're above the law. If you're speeding, you must have a good reason. The female FHP officer had shit on her patrol car a few days after the incident. Yes. Another officer defecated on top of her car.

A regular person only stops for 2 seconds at a stop sign on a clear intersection and gets a $100 ticket because they didn't stop the full 5 seconds. A cop can go 120MPH and it's OK because he's a cop.

A congressman can perform insider trading, because they write the rules on insider trading so they can interpret them how they want to meet their needs.

What's the solution? As HB put it, insider trading is a victimless crime. It shouldn't be illegal. HB wrote a great essay on it that you can find on Google.

Schweizer: We know that during the healthcare debate [Congressmen] were trading healthcare stocks. We know that during the financial crisis of 2008 they were getting out of the market before therest of America really knew what was going on.

In mid September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed doorbriefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.

Schweizer: These meetings were so sensitive-- that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options basedon apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip.

While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts.

Congressman Bachus declined to talk to us, so we went to his office and ran into his Press Secretary Tim Johnson.

Kroft: Look we're not alleging that Congressman Bachus has violated any laws. All...the onlything we're interested in talking to him is about his trades.Tim Johnson: Ok...Ok that's a fair enough request.

Source: 60 Minutes

Another is the access to initial public stock offerings, the opportunity to buy a new stock at insider prices just as it goes on the market. They can be incredibly lucrative and hard to get.

Schweizer: If you were a senator, Steve, and I gave you $10,000 cash, one or both of us is probably gonna go to jail. But if I'm a corporate executive and you're a senator, and I give you IPO shares in stock and over the course of one day that stock nets you $100,000, that's completely legal.

And former House Speaker Nancy Pelosi and her husband have participated in at least eight IPOs. One of those came in 2008, from Visa, just as a troublesome piece of legislation that would have hurt credit card companies, began making its way through the House. Undisturbed by a potential conflict of interest the Pelosis purchased 5,000 shares of Visa at the initial price of $44 dollars. Two days later it was trading at $64. The credit card legislation never made it to the floor of the House.

Congresswoman Pelosi also declined our request for an interview, but agreed to call on us if we attended a news conference.

Steve Kroft: Madam Leader, I wanted to ask you why you and your husband back in March of 2008 accepted and participated in a very large IPO deal from Visa at a time there was major legislation affecting the credit card companies making its way through the-- through the House.

Nancy Pelosi: But--

Kroft: And did you consider that to be a conflict of interest?

Pelosi: The-- y-- I-- I don't know what your point is of your question. Is there some point that you want to make with that?

Kroft: Well, I-- I-- I guess what I'm asking is do you think it's all right for a speaker to accept a very preferential, favorable stock deal?

Pelosi: Well, we didn't.

Kroft: You participated in the IPO. And at the time you were speaker of the House. You don't think it was a conflict of interest or had the appearance--

Pelosi: No, it was not--

Kroft: --of a conflict of interest?

Pelosi: --it doesn't-- it only has appearance if you decide that you're going to have-- elaborate on a false premise. But it-- it-- it's not true and that's that.

Kroft: I don't understand what part's not true.

Pelosi: Yes sir. That-- that I would act upon an investment.

Congresswoman Pelosi pointed out that the tough credit card legislation eventually passed, but it was two years later and was initiated in the Senate.

Pelosi: I will hold my record in terms of fighting the credit card companies as speaker of the House or as a member of Congress up against anyone.

Corporate executives, members of the executive branch and all federal judges are subject to strict conflict of interest rules. But not the people who write the laws.

Schweizer: If you are a member of Congress and you sit on the defense committee, you are free to trade defense stock as much as you want to if you're on the Senate banking committee you can trade bank stock as much as you want and that regularly goes on-- in-- in all these committees.

Indices wrote:While this should obviously be illegal, I doubt it really helps their portfolios too much.

An academic study released in 2004, as well as some other more recent developments, indicates that this Congressional loophole to the insider trading laws isn’t just theoretical. Georgia State University professor Alan Ziobrowski released a study showing that during the 1990s, senators’ stock picks (which must be publicly disclosed periodically) beat the market by 12 percentage points a year on average. By comparison, corporate insiders only beat the market by about 6 percentage points a year, and U.S. households underperformed the market by 1.4 percentage points.

Source: http://www.securitiesdocket.com/2009/03 ... -loophole/

We find that stocks purchased by Members of the U.S. House of Representatives earn statistically significant positive abnormal returns. The returns outperform the market by 55 basis points per month (over 6% annually). As additional evidence of information advantage, the trade-weighted portfolio of purchased stocks significantly outperforms the equal-weighted portfolio indicating that Representatives invested much larger amounts in those stocks that performed best. The regression coefficients also suggest that House Members favor the common stocks of smaller growth companies with slightly above-average risk.

Source: Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives

In sum, the findings from this study of the U.S. House of Representatives’ common stock transactions are generally supportive of the previous study of the U.S. Senate. We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain. That having been said, abnormal returns earned by Members of the House are substantially smaller  than those earned by Senators during approximately the same time period. These smaller returns are due presumably to less influence and power held by the individual Members. The nature and source or sources of information is unknown, but clearly further research is warranted. We recommend that congressional committees should be studied for abnormal returns and indications that members of those committees may favor stocks in industries their committees oversee. Abnormal returns associated with the common stocks of specific industries or companies should be investigated for patterns of potential misconduct. We suggest the examination of the relationships between campaign contributions, common stock acquisitions, and abnormal returns.

Source: Source: Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives

• July 14th: Bachus bets $4,500 that the financial sector will fall, and sells short. Bachus comes up a winner and cashes out the next day for $1,500 in profit.
• August 15th and 22nd: the Alabama congressman buys over $11,000 of SPDR sector option contracts, and sells them a few days later for $5,000.
• September 8th: Paulson gets a troubling call from General Electric CEO Jeffrey Immelt, saying GE is having trouble moving its bonds. Two days later, Bachus shorts GE options four times in a single day, more than doubling his money.
• September 10th and 15th: Bachus shorts GE a total of 12 times and comes up a winner 9 times—an impressive average for the high-risk options game.
• September 18th: Bachus and congressional leaders receive a private briefing from Paulson and Federal Reserve chairman Ben Bernanke inside then-Speaker Nancy Pelosi’s office. Bernanke warns of a total financial meltdown in a matter of days. The very next day, September 19th, Bachus shorts the market by buying contract options on Proshares Ultra-Short QQQ, an index fund that strives for results 200% of the inverse of the Nasdaq 100. He nearly doubles his money when he sells his shares four days later for over $13,000.
• October 21st: the Federal Reserve announces it will spend $540 billion to buy debt from money market mutual funds. The next day Bachus buys over $5,000 of options in Market Vectors TRN, and more than doubles his money.

Source: http://biggovernment.com/whall/2011/11/ ... p-bailout/