I'm at half-time watching the Super Bowl. Dimitri was conscripted to do some back-testing, but is nowhere to be found. Fifi is out somewhere with her current beau, probably chiding him that he knows nothing of fine cuisine. (Her paramours don't seem to last long.) So, I'm left to my own devices, looking at charts. Like Tom Petty, who is singing at the moment, I'm “Free..Free Falling.”
Right now I'm looking at charts of penny stocks. Looking at how they are bid up and down. I know that in penny stocks there's a lot of manipulation, not only on the part of market makers trying to drum up interest in the stock, but also with traders looking to make a quick kill. It doesn't take a lot of capital to move penny stocks. But with the gazillions of bucks behind major brokerage firms, I'm sure they're doing the same thing, only with on a bigger scale. Being a chartist, I see that reflected everyday in the price movement, and if these price manipulations were illegal, even if the SEC had all of the attorneys in the world, it still couldn't prosecute everyone. Even if they could, we'd have to build a prison the size of Montana to house all the offenders.
I remember the Enron scandal and the oil futures going crazy. The Los Angeles Times did an article on “The Bunny Slipper Lady,” the woman who worked out of her Long Beach condo (presumably in her bunny slippers hence her name) who was part of the Enron scandal. She was a skilled futures trader employed by Enron and others to make money for them. What she did wasn't ethical, but it wasn't illegal, either. The funny thing is that what she was accused of is done on Wall Street all the time. Her only error was that her clients finally got caught and went down in a spectacular flame of publicity.
The LA Times journalists had as much of a hard time understanding her manipulation of the futures markets as did the courts. I don't know what they couldn't grasp--her technique was pretty simple: buy low, sell high. On Wall Street, her fantastic profits would have granted her a partnership, a corner office, and, possibly, a cool house in the Hamptons. She was calculating, informed, experienced and manipulative--all cornerstones for success in the investment world.
What she had at her disposal was a lot of money. What she did was wake up in the morning (presumably in her bunny slippers--ha ha! LA Times!), watch the oil futures market, and, at the right times, start buying in dribs and drabs. Eventually someone on the sparsely populated futures floor (we'll call him Mr. Market) would scratch his head and think, “Hey, there's some interest here. I don't know what, but something must be going on. I'll be smart and buy now before the price goes higher.”
He buys more and Ms. Bunny Slippers buys more. The movement attracts the attention of other Mr. Markets and they jump on the bandwagon. Because of the escalating buying pressure, the price starts going up. Thus, the futures are bid up to an unreasonable price for no apparent reason other than people are buying.
That's when Ms, Bunny sits back, kicks off her slippers, runs her fingers through her hair, and says, “I am woman, hear me roar!” She starts selling her positions for a tidy profit as the oil market starts to tank. If she performed her act well enough, she made a ton more on the way down than on the way up. Buy low, sell high.
Ms. Bunny Slippers did this for a good while. And nobody caught on to it. As the Enron scandal devolved, her actions finally came to light but she wasn't convicted of anything because technically she didn't do anything wrong. What she did was unethical, but it wasn't ruled to be illegal. This type of thing is what Wall Street is made of. Buy anything saleable (whatever is mispriced and/or hot at the time), artificially run it up, then, on the basis of this fantastic run, sell this over-priced dog to your clients and pocket the profit. I'm wondering how many unsuspecting victims have been snookered into buying into their brokers' recommendations at, or near, a stock's high only to see their investment subsequently lose value? In his famous and hilarious book Liar's Poker on bond-trading at Salomon Brothers during the late 70s and 80s, Michael Lewis says that this type of stuff was done with regularity by the firm's bond traders.
The moral of this musing isn't anything more profound than caveat emptor: Let the buyer beware! The point of my relating this story is so that you, the individual investor, can be armed with this knowledge before you act on any investment advice. Knowledge is, indeed, power.
Super Bowl update: Congrats to the Giants. Who knew the game would be this exciting? After you read this, I hope you'll be more circumspect. As Tom Brady is now saying during the post-game interview, “You need to have the ball in your hands.”
I hope I've tossed the market ball into your hands. At least, you'll have a heads-up, and not be free-falling like Tom Petty.
Posted by Dr. Kris at 11:53am PST
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