The Market as a House of Cards

Most on my mind now is the massive shorting and short-covering that is going on in the market these days. Wednesday, there sure was immediate short-covering after a strange and surprising gasoline inventory report was issued.

I got to thinking that maybe the SEC will rule against the ‘temporary’ short-selling in oil and silver [LOL] or is that the job of the CFTC (another LOL)?

Immediately following the 10:00am ET publishing of the surprising decline in US gasoline inventory for the prior week, traders who were short oil and precious metals contracts rushed to cover. Prices spiked for a couple hours. Crude Oil contracts rocketed from just under 121 to just over 127. Silver contracts shot from 16.85 to 17.59 in what could be described as a silver moon shot. Gold jumped from just under 895 to 910. All in a few minutes. Almost all of it short-covering.

So what happens if and when next week’s oil inventory estimate is a ‘surprising’ increase? Obviously, the short-sellers will return, and the prices will dive.

The market has become a casino. How else can one describe it? The house (Wall Street and Washington) is doing all it can to attract the high-rollers. Why? Because they are in trouble. Not the high-rollers, but the house. It has become a house of cards in many ways.

Regrettably, traders either become day traders or they stay away or they turn to money managers. If silver can rocket +4.4% in a matter of minutes based entirely on a dubious government agency estimate of the amount of gasoline inventory in storage tanks across America, then obviously the doctor, lawyer, business person, factory worker, construction worker, farmer and the rest of the hard working Americans will miss out. They are unable to day trade because they are out working to create real wealth for themselves and for America.

So, who really wins at this market game that at the best of times is one that plays people? The answer could be ‘It’s Wall Street, Stupid’ but I don’t want to offend anybody—at least nobody other than the prop traders working for HB&B who trade against the public order flow, which is like shooting fish in a barrel since they know everything about the client—the orders, the thinking, the assets and liabilities, the margin debt, the milliseconds longer it takes even the fastest of them to hit Buy or Sell market order buttons to execute a trade. These people have every advantage.

If you doubt what I say, ask a prop desk trader at Goldman Sachs (GS) or Morgan Stanley (MS) how much profit they cleared Wednesday. Ask the ones at Lehman (LEH), Citi (C) and Merrill Lynch (MER) how badly they think their firms depend on them to stay afloat.

Yes, they have every advantage, and when they are desperate, they use it. Wednesday, they took every bit we gave them. Is it any wonder why trading has become so difficult for the average person—even the average hedge fund or mutual fund desk trader.

What we need is a level playing field, one where banks and dealers (ie, the sell side) and the public alike use independent brokers whose only function is to execute orders. We need an independent depository for our assets—one that is debt free and clear of any credit issues. The SEC (and an international body of securities administrators) should be the supreme regulator of the trading, brokerage and asset depository functions of the market. If traders want to go into debt, that should be a different system, one regulated by the Fed (and its international counterparts) because that’s what banks do, or ought to do -lend money.

I have said this for years, even presented it formally to the highest securities regulators in Canada. Politics and well-connected big money stop this from happening. Some day, however, the buy-side will come up with a solution that is in their best interests. Surely, the sell-side will fight it tooth and nail. They’ll tell the public you already have a level playing field.

I am eagerly awaiting a flood of new books being written by some of the 100,000-odd workers cut loose by HB&B. I expect they’ll tell it like it is, unlike the pabulum we get fed every day by Financial Entertainment Television [FETV]. By FETV, I think you know the network I refer to.

Wednesday, I must confess that I almost puked at the FETV push for Disney (DIS). Now Disney is a Cara 100 Global Best Company, so, in my case, the talking heads were preaching to the converted, if you will. But it was so obvious to me that they were the take-out facility, setting up the buy-side for a post-closing hit, after the promoters had offed their stock. Yes, DIS lifted right into the close, then reported, and then, with no support, the shares collapsed.

DIS had closed at $30.92 on Tuesday. With all the pre-market hype on FETV, DIS opened Wednesday at $31.94, lifted to $31.77 early in the session, then sold down to $30.89 as FETV was grinding out their rosy stories, then a late session rally on more hype from FETV, closing at $31.67. Then, boom; fiscal Q3 earnings were so-so, and the after-hours trading sank the price back to $30.90, a bit lower than where it had closed on Tuesday.

So who won? The people who paid the people at FETV to hype the stock all day are the people who won.

The market is a rugged place, but then it’s not a level playing field. Is it?

 I don’t let the game play me. I know the ground I walk on.

Comments

[notsosmart:]

wow-after many years of saying that wall st. has turned into vegas(slower & nobody brings you a drink) i think people are beginning to figure it out. there are no experts.only people with agendas to grab as much money from you as long as possible.believe nobody about anything & think for yourself.go long on good dividend stocks,trade as little as possible & you might,might,might, with some luck,come out ahead.i have no connection to any finance,co. or the st.

2008 Aug 01 09:34 AM

[contender:]

Nahh - in the long-term the fed destroys any gains by devaluing the dollar.

Take your paycheck and spend it. It helps the economy, and saving means you just give the crooks a means to steal it. If you buy 'stuff' with your money then all you need is a gun to protect it.

Spend spend spend -- and maybe the government will have a bailout for you !!!

Thanks Bill -- I hope you keep your views on the crooked markets front and center, even in 'good' (aka government and wall st. contrived ) times.

The whole thing really makes me sick.

2008 Aug 01 10:41 AM

[User 30121:]

God bless you, Bill! It is so REFRESHING to read the TRUTH since its indeed a RARE commodity. And speaking of commodities, how do you think gold and silver(especially silver) that is being SHORTED to DEATH is going to fair over the next six months 4Q-1Q?

LOVED this article!!!!!

2008 Aug 01 11:07 AM

[ain't no fo...:]

Good article. FETV is just being used by the administration, the RNC and big business to run their cons on the retail trade (us!). The more they put out fluff by Kudlow, Burnett, and all the rest of the cheerleaders, you know who's paying them. And every time I see them trot out the pom-pom twirling Sec Treas, dumya's crack economic "gurus", one hour guest spots with head cheerleader Maria Bartiromo and Carlos Guttierez, and every sell side analyst on the street, I don't know whether to puke or go for the sell button. The more they scream how good things REALLY are, the more terrified I get because its SO obvious... they're trashing the democrats and Obama (Duh!) and doing everything possible to keep a broken economy and stock market artificially inflated into the elections... house of cards????? That may be the understatement of the decade... try end of empire.

2008 Aug 01 12:11 PM

[notsosmart:]

i dont know how to do it but this article should be moved around the net as much as possible.thanx

2008 Aug 01 03:19 PM

[lobsterboy:]

Bill interesting article thanks the prospective is refreshing but things will never change like you suggest. The struggle for money and power is to great for things to be fair. Notsosmart: I would agree with you as well but as far as the trading I think it depends what your looking for. If your not greedy it's possible to create weath that why.
One comment I do have is that fact that many on SA talk about all the terrilbe things that this FETV but they continue to watch or know all the people. Turn it off: that would be a start.

2008 Aug 02 12:58 AM