May 6, 2004
A RULE WITHOUT A REASON As I have written before, one of the prime catalysts for this rule is the supposed international arbitrage, which, I submit is nothing more than a trade which sometimes works, and sometimes does not. Just like any other trade. Lets look this week. Japan has been closed for three days for a holiday. As of last Friday, Rydex Japan, which uses Fair Market Value pricing and therefore would not need your rule closed at 31.28 per share. Then, while Japan was closed, and no trading was done in Japan, the US markets rose for three days. Following their fair market value pricing model, Rydex raised the price of its fund from 31.28 to 32.76 on Wednesday night, a gain of just under 5 percent. This makes sense since the international arbitrage and stale prices rationale works so well. As I awoke this morning, according to your theory, I was all prepared to see Japan up sharply. Alas and alack, if I had invested on the basis of your theory, I would be sorely disappointed since Japan was down 190 points. The fair market value guys are also hurting on this one. They priced in the anticipated gain, and now that it didnt occur, but in fact lost 1.5 percent they have to drop the price of the fund more than 6 percent.
Your international arbitrage and stale prices thesis is full of holes. Your solution will absolutely raise expenses for all fund holders, not save them money. You will put untold numbers of small businesses out of biz due to your reporting requirements. Altogether a bad idea for a problem that no longer exists, if it ever did. Bad policy, bad politics, bad idea. I wonder if you guys are smarter than those at the Defense Department, or if you will persist with this bad idea. Darrell Wiard