Finance's Changing Playing Field

Welcome to the “new” rules of finance.

As you know, two weeks ago stocks were beginning to collapse in a very significant way. By the time Friday rolled around, the S&P 500 looked to have broken the bearish rising wedge pattern that I’ve been tracking for the past few weeks.

A confirmed breakdown (meaning stocks fall below the trend line and fail to rally back) was the confirmed “sell” signal most traders have been looking for. Stocks truly looked about to collapse.

And that’s when it happened.

Friday morning, October 2, stocks rallied… hard. As I’ve noted in previous essays, collapses involve three stages:

1. The initial drop (usually 5-6%)
2. The bounce
3. The “real action” (a large scale correction of 10-30% depending on if it’s a correction or a Crash)

However, the October 2 rally was different in several key ways. Firstly, the reversal began with bank stocks, the same stocks that were nose-diving Thursday, October 1.

Look at what happened on Friday: CitiGroup (red), JP Morgan (black), and Bank of America (green) all exploded higher in the first hour of trading. Meanwhile, the S&P 500 (purple), traded sideways for most of the day before finally catching a bid in the last hour of trading.

Looking at this action, it is clear that someone (someone big) piled into banking stocks first thing Friday morning. However, there were no significant announcements for financial or banking stocks that day at all. Why would banking stocks explode higher -- leading the rest of the market higher -- on no news at a time when stocks were literally on the verge of entering a full-scale collapse?

We got the answer on Monday, October 5 (see the news story below):

Major bank stocks get a boost from analysts
By Alan Fein

(AXcess News) New York - Major US bank stocks got a boost Monday morning from analysts with Wells Fargo (WFC), Bank of America (BAC), Citi (C) and Goldman Sachs (GS) trading up as the economy still remains uncertain.

The increase in market price for big banks came after Goldman Sachs raised its outlook for large banks to outperform regional lenders with Wells Fargo's shares leading the pack, up $1.46, or 5.56%, at $27.74. CIT gained 5 cents, or 4.27%, at $1.22, Bank of America rose 40 cents, or 2.45%, at $16.74 and Goldman Sachs itself climbed $4.56, or 2.54%, at $184.17.

The analysts at Goldman Sachs believe large banks are showing a "dramatic improvement to earning power" verses the regional banks, which Goldman is keeping a 'cautious' outlook on.

Goldman's analysts pointed to 'tangible asset's per share at large banks having increased 29 percent, compared to a 25 percent drop at regional banks, with Wells Fargo the leader at a 70 percent gain.

The explanation here is obvious: Goldman Sachs told its private clients that it was about to upgrade bank stocks Friday morning. The “smart” or “informed” money piled in, making a fortune as the shorts got killed (just imagine the profits you could make using options or futures to front-run the entire market). The “dumb” money then invested on Monday when Goldman made its upgrade announcement public. Meanwhile, the “informed” Goldman clients took their profits.

Put another way, Goldman not only manipulated the market, but it actively engaged in insider trading by helping its private clients front-run everyone else. We know this is common practice at the firm: the below article from the Wall Street Journal (published August 23, 2009) delves into this Goldman practice in detail:

Goldman's Trading Tips Reward Its Biggest Clients

Goldman Sachs Group Inc. research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman's traders the stock was likely to head higher, company documents show.

The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry's research didn't find out he was bullish until his written report was issued ...

The Average Investor is Last to Know

Welcome to the new “rules” of the financial game: where Wall Street is openly permitted to front-run, use insider information, manipulate the markets, and make fortunes doing it (Goldman had only two losing days for its trading department in 2Q09, a statistical impossibility).

This is why it’s not yet time to sell the farm: the market is openly being manipulated higher. I’ve detailed the manipulations on these pages previously -- high frequency program trading, front-running, etc. But the trading action two weeks ago took things to a new level. Goldman Sachs is now openly flaunting its financial misconduct. It is literally allowed to commit financial crimes with impunity. Why?

Because the SEC, the federal government, the regulators and the like have all failed to reform the system. They have failed to do anything to rein in the corruption of the financial markets. They have failed to enact any meaningful change. In the words of former SEC Chairman Harvey Pitt (from an interview with CNBC no less):

Those who sit back and think that they can rely either on the government or rating agencies or even third party experts, are making a huge mistake. -- Harvey Pitt, former SEC Chairman

... and that's coming from a former SEC Chairman!

Comments

[sjz85:]

"Welcome to the new “rules” of the financial game: where Wall Street is openly permitted to front-run, use insider information, manipulate the markets, and make fortunes doing it (Goldman had only two losing days for its trading department in 2Q09, a statistical impossibility)." - new?

Oct 16 11:26 AM

[predictorma...:]

Don't you love this administration? They are in bed with Labor, Government workers, and Wall Street. Apparently it's a new coalition.

Oct 16 12:43 PM

[Ricard:]

Has the government pressed GS about these arrangements? This was front page news on nearly every paper several weeks ago.

I'd normally be suspicious of someone making a case like this, but you've substantiated it to no small degree.

Oct 16 07:59 PM

[swaps:]

The dumb money won't complain yet because the big banks led the broader market up from the edge of the abyss that your charts show was forthcoming. Disclosure. Still long.

Congress clearly still does not understand central banking, investment banking - or should we say inwestment banking, cute tv ad.

Congress understands that money comes to it from the financial sector. Maybe that is why they bailed out the banks and turn their heads away from the obscene bonuses being paid to bankers who would be on the street if their holdings had not been bailed out by fiat money.

The uptick rule is still abolished. No get-tough agency has been formed to oversee that FDIC and SEC enforce laws on the books already.

GS rules. Congress follows. The regulators look at porno on their computers during the work day, I guess. They are accountable to no one.

No one.

As Paulson warned last autumn. If Congress gets tough, if Congress does not authorize a private bank to print all the money it wants, if Congress audits the Central Bank - then "we" will take the country down.

As if they haven't already.

Oct 17 04:45 PM