According to Federal Reserve flow of funds table B100e, ownership of equities, as a percent of total household assets has ranged from 20% to 25% since 2002 — about the same level as in 1994-1995, before the speculative bubble over the turn of the century.

How can this be? Flow of funds table F100 shows that net sales of equities by households were over 2 trillion dollars since 2000.

With prices falling after the market peaked in 2000 and with massive net sales of stocks indicated by the Federal Reserve flow of funds accounts, how can the percentage of assets represented by stocks still be about the same as in 1995?

The graph shows equity holdings by US households as a percentage of total assets and financial assets over the last decade.

	Paradox? Steady % of Household Assets Despite Heavy Stock Sales

The Paradox Explained

The apparent paradox of selling without reducing holdings is resolved by answering this riddle:

How can you sell stock and still have the same position as before you started to sell?

The answer is simple:

You sell stocks that don’t belong to you (short-selling) or that you never owned (exercising options).

As suggested in the earlier article, “Buybacks + Options + Hedge Funds + Insider Information = Crime?“, the primary explanation for the reported net sales of equities by households in recent years has been the exercise of executive stock options, and short-selling by hedge funds and speculators.

1. Exercising Options: When an executive exercises a stock option, he buys a stock he never owned for one price and then sells the stock for a profit. This appears on the flow of funds accounts as a net sale of stocks. With corporations buying back their own stock, the amount of stock outstanding remains about the same.

2. Short-Selling: When a hedge fund sells stock short, they do so by borrowing stock from someone else to settle the initial transaction, and then buying back the stock when prices fall, realizing a profit that appears as a net sale of stocks.

Since there are indications that stock options and short-selling have been of an order of magnitude that explains the net sales of two trillion in equities over the last five years, it seems that the paradox is explained.

As reported in the BusinessWeek Online article, “The Skilling Trap” (June 12, 2020), Jeffrey Skilling, former CEO of Enron, said on the courthouse steps, after being convicted of white-collar crimes that will send him to jail, probably for the rest of his life,

	Gamblers' Ethics: Win Some, Lose Some

“Obviously I’m disappointed. But that’s the way the system works.”

The BusinessWeek article, went on to say:

… walking out of his trial into the prospect of decades of imprisonment, he stayed in character. He did not say that he was robbed of justice or express regret or defiance. He proved himself, considering the circumstances, a maestro of emotional detachment.

Jeff Skilling’s comments suggest a professional gambler who, having lost a fortune, shrugs and says,

“That’s the way the game is played. You win some, you lose some.”

It may be unfortunate and lamentable for society, but Jeff Skilling was simply telling the truth as he saw it, according to tenets of moral relativism learned at the Harvard Business School and his interpretation of corporate behavior observed while working as a consultant with McKinsey and Company.

More »

Wall Street ballyhoo and flim-flam to the contrary, the year 2005 closed-out half a decade of misery and pain for the average investor in US equities according to Federal Reserve flow of funds accounts F102 and L102.

	Investors Forsaken by the SEC

During these years, the SEC, the investors’ watchdog, had forsaken investors and averted its gaze from the diversion of shareholder wealth through buyback-option schemes, while appearing to protect shareholders’ interest with the show trial of Martha Stewart, for a matter unrelated to ordinary investors’ well-being.

With January 2000 as a starting point, the Federal Reserve flow of funds accounts show that stock investors were down $4.3 trillion in portfolio value and dividend payouts in 2005 were only running at about the same level as in 2000, five years earlier.

More »