public policy and share prices

“Lex”, a Financial Times column directed to active traders of company shares, has an interesting report today on fluctuations of the share prices of firms that manage private prisons.

Last August, when the Obama government announced its intention to phase out use of private prisons, share prices in affected firms fell sharply. They climbed after Donald Trump won the election. Yesterday, after the Trump government reversed Obama’s August decision, share prices increased further.

Share prices are volatile so, as the column notes, the fall in price last August was larger than justified (at least in retrospect), and its current price may well be higher than justified. But, suppose you knew with certainty that a policy change was coming. Then you  could have purchased shares on Wednesday, then sell them today at higher prices.

Did Donald Trump profit from such a transaction? We may never know, as Trump never placed his assets in a blind trust. Indeed, he has never released his tax returns.

This is a clear example of how it is possible to profit from inside knowledge of government policy. This is why it is important that the President, indeed all government officials, refrain from ‘playing the market’, from using inside knowledge of public policy for private gain.

When President Donald Trump rounds up the “bad hombres”, he will need somewhere to put them. His officials on Thursday evening reversed an Obama administration edict to shun private prisons. ….

Last August, the Department of Justice said the Bureau of Prisons would stop using them after a report found them to be more dangerous and stuffed with contraband than government-run facilities. The new attorney-general has reversed that with the stroke of a pen.

Even better news, for investors at least: Mr Trump has ensured much greater demand for prison beds by deciding to detain and deport hundreds of thousands of illegal immigrants to whom the Obama administration had turned a blind eye. It is no surprise that CoreCivic and Geo’s shares have overshot their pre-August levels.

Yet just as we argued the 30-40 per cent fall in August was too far, the surge looks overdone now. The federal government is not the only game in town and this government will not endure forever.

Lex, “Private prisons: turning the screw“, Financial Times, 24 February 2017 (gated paywall).

Comments are closed.