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Five Reasons the Market Could Crash This Fall

Aug. 04, 2009 7:55 AM ETSPY, JPM, GS, BAC, C, HSBC194 Comments
Graham Summers profile picture
Graham Summers

With all this blather about “green shoots” and economic “recovery” and new “bull market,” I thought I’d inject a little reality into the collective financial dialogue. The following are ALL true, all valid, and all horrifying…


1) High Frequency Trading Programs account for 70% of market volume

High Frequency Trading Programs (HFTP) collect a ¼ of a penny rebate for every transaction they make. They’re not interested in making a gain from a trade, just collecting the rebate.

Let’s say an institutional investor has put in an order to buy 15,000 shares of XYZ company between $10.00 and $10.07. The institution’s buy program is designed to make this order without pushing up the stock price, so it buys the shares in chunks of 100 or so (often it also advertises to the index how many shares are left in the order).

First it buys 100 shares at $10.00. That order clears, so the program buys another 200 shares at $10.01. That clears, so the program buys another 500 shares at $10.03. At this point an HFTP will have recognized that an institutional investor is putting in a large staggered order.

The HFTP then begins front-running the institutional investor. So the HFTP puts in an order for 100 shares at $10.04. The broker who was selling shares to the institutional investor would obviously rather sell at a higher price (even if it’s just a penny). So the broker sells his shares to the HFTP at $10.04. The HFTP then turns around and sells its shares to the institutional investor for $10.04 (which was the institution’s next price anyway).

In this way, the trading program makes ½ a penny (one ¼ for buying from the broker and another ¼ for selling to the institution) AND makes the institutional trader pay a penny more on

This article was written by

Graham Summers profile picture
Graham Summers is Chief Market Strategist of Phoenix Capital Research, a global investment strategy firm located in Washington, DC. He is a Fuqua Business School MBA graduate, and has over a decade of experience in investment strategy, financial research, and private wealth management. An acclaimed communicator and strategist, Graham’s cutting edge business and research insights have been featured in several media outlets around the world including: CNN Money, Fox Business, Rolling Stone Magazine, Crain’s New York Business, the New York Post, MoneyTalk Radio, and The Huffington Post among many others.

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Comments (195)

am posting this with sp500 at historic highs ....which means that the writer who was looking down is and was just a beginner and hasnt a clue what the market is all about
Lets not forget about the 800 billion dollars worth of Alt-A and Option Arm mortgages set for readjustment in mid 2010.
Lets not forget about the Option Arm & Alt-A mortgages set for readjustment in mid-2010. Ahhh...another 800 billion dollar problem.
My summary of what this article say, and its meaning:


At least 70% of "market trading" is meaningless.

It only flip & flips again, for some quick profit.

No surprise, Goldman Sachs is the 'leader'
in making money from such quick flipping.

Since 70% of market trading is simply
players inside of an enormous casino,
they could decide to walk away from
the game, and it would then collapse
down t less than 30% of before then.


The real economy is shrinking ...

Huge numbers of people have become unemployed,
and they are running out of alternatives
to starving on the streets ...

There is vicious spiral of more shrinking economics.


The $1 QUADRILLION Derivatives Time Bomb

... the total notional value of derivatives
in the financial system is over

(that’s 1,000 TRILLIONS).

US Commercial banks alone own an unbelievable
$202 trillion in derivatives.

The top five of them hold 96% of this. ...

The INSANELY EVIL USA government,
controlled by the banksters, is attempting
to bail out the biggest of those banksters,

BUT, to put those numbers in perspective:

$5 trillion in losses:

an amount equal to HALF of the total US stock market.

Amounts of money created out of nothing,
in order to gamble, were at least an
order of magnitude greater than
everything in the real world.

That was inherent in the dynamics of fiat money systems.

There is irreconcilable social polarization ...

Some are getting away like bandits from this!

... lots are having their lives being destroyed.

These problems due to this fundamental fraudulent accounting
are still only human creations, however, they are constantly
feeding decisions which are destroying real future options,
since they lead to more and more unsustainable decisions.

Clearly, there are still enough natural resources
left to strip-mine, and new technologies are now
being developed which show some great promises.

The real economy is not yet, dead.

But, it is being killed off by its
control by fiat money insanity!

It is not clear to me where this is going ...

However, I am certain that there are millions
of people in North America who are suffering,
and, in many other places, they already are
reaching real limits of over-population,
and basic limits on natural resources,
such as enough water to even survive.

I have zero faith in a vast majority of people
to start behaving more sanely under stresses.

Therefore, I continue to predict bad things.

A few may do better through all of this ...

However, most will have a rough ride!!!
Judging by the number of ticks, your smoke and mirrors are working well. There is such a thing in economics as a multiplier, which will ensure that a small injection of cash into the economy will have the desired effect of increasing money supply. The market, if you like it or not, has rallied more than 45% since March. Whether the Fed has financed this rally or not is irrelevant, since the $2.3 trillion windfall that you speak of has now turned into $3.3 trillion, of which an additional $1.1 trillion in new money will now be injected into the economy through spending and/or lending. On the other hand, without the $2.7 trillion injection, the banks would have had to liquidate their already diminished assets to pay creditors. Shareholders lose their investment while the banks lose out on potential profits. The result is a further contraction in the economy as more people lose their jobs whence the spiral continues its downward trend.
This, good sir, is the reason why markets will continue to move forward, and why the current rally is merely a reflection of improving economic conditions and not the result of an artificial bubble waiting to implode in some spectacular fashion.

On Aug 04 12:24 PM conceptwizard wrote:

> Over at Zero Hedge, Tyler Durden did the math and figured that the
> recent 45% surge in the S&P 500 had nothing to do with the fictional
> economic "recovery", but was just more of the Fed's hanky panky.
> Durden noticed that the money that's been sluicing into stocks hasn't
> (correspondingly) depleted the money markets. That's the clue that
> led him to the truth about Bernanke's 6 month stock rally.
> Zero Hedge: "Most interesting is the correlation between Money Market
> totals and the listed stock value since the March lows: a $2.7 trillion
> move in equities was accompanied by a less than $400 billion reduction
> in Money Market accounts!
> Where, may we ask, did the balance of $2.3 trillion in purchasing
> power come from? Why the Federal Reserve of course, which directly
> and indirectly subsidized U.S. banks (and foreign ones through liquidity
> swaps) for roughly that amount. Apparently these banks promptly went
> on a buying spree to raise the all important equity market, so that
> the U.S. consumer who net equity was almost negative on March 31,
> could have some semblance of confidence back and would go ahead and
> max out his credit card. Alas, as one can see in the money multiplier
> and velocity of money metrics, U.S. consumers couldn't care less
> about leveraging themselves any more."
> So, the magical "Green Shoots" stock market rally was fueled by a
> mere $400 billion from the money markets. The rest ($2.3 trillion)
> was main-lined into the market via Bernanke's quantitative easing
> (seekingalpha.com/symbo...) program, of which Krugman and
> others speak so highly.
> Wouldn't you like to know if Bernanke sat down with G-Sax and JPM
> executives and mapped out the details of this swindle before the
> printing presses ever started rolling?
wwwtractor profile picture
I am still waiting for the negative interest rates where they pay us to take the dollars. hehe ;)
Ricard profile picture
That's still a bullish bet. Buying $1 for $0.50 is one of his favorite activities.

On Aug 12 01:29 AM ron_paulite wrote:

> It's been reported that he has recently stopped buy equities.
> he's buying corporate bonds now.
> a crash or at least big correction on the horizon?
Cpowell profile picture
Amen to this article. But I am flat right now after getting gored by bulls in early June. Like they say, "The Market can remain illogical longer than you can stay solvent."
ETFdesk profile picture
Track Graham Summers call over time tinyurl.com/malavv
Companies like Hewlett Packard continue to offshore American jobs to places like Brasil and India. These are the true criminals in this scenario. These companies which are investing in squalor and illegal immigrants and acting as their pimps HP determined to put its finger in the Democratic administration's eye, they remain determined to cause further stages of failure in the US economy. Slap these companies hands. Force them to bring jobs back to the USA and you will see the economy, stock market and consumer purchases all begin to recover as they need to for a TRUE recovery to begin.

Continue to sit on our hands while they are robbing the people blind and buying up every competitor is a recipe for real disaster.
It's been reported that he has recently stopped buy equities.
he's buying corporate bonds now.
a crash or at least big correction on the horizon?

On Aug 11 08:39 AM zorrow wrote:

> Watch Warren Buffett. He's not the kindly old man next door. He's
> in on everything. When he starts to dump GE and GS, then dump all
> the financials mentioned above fast as you can. Until then, just
> like in Rick's American Cafe, let it ride, on the FED.
11 Aug. 2009
Ah, 'got it in one!'

Is this not TOO simple for these others here, to take such notice of? The 10-yr/Long Bond and U.S. equities markets have been in virtual reverse lock-step from the beginning of the bubble bursting since just past mid-2008.

Geithner and Bernanke have shown a willingness to participate in this not-so-subtle manipulation: jawbone the stock markets down to propel 'flight to quality' asset shifts, bringing Treasury bids down, easing the longer-term debt load.

They are not that concerned with the short-term pain, except to the extent that it may impede their larger goals. The U.S. needs huge amounts of cash or its liquid equivalents, shoved into the system at the lowest aggregate price possible. Individual and even some institutional investors are not as important as addressing U.S. economic costs and entitlements. If the prices paid for this deluge of cash/etc. become too high, it imperils any sensible attempts to plan and fix broken parts of the economy.

On Aug 07 02:13 PM DocRich wrote:

> I've been resisting letting myself think like a conspiracy theorist,
> but points in this article makes sense to me. As long as the US government
> can get subscribers to its debt offerings, I think this market can
> keep going up some (though I agree it's reaching a climax soon).
> Once the government has trouble financing its debt, it will change
> its tactics for the equity markets so stocks will fall, people will
> be stopped out, and they will rush to buy bonds. I just don't think
> they want this to happen until the 2010 votes are in...
Doom and gloom. Regarding unemployment - your assumption is that all people laid off or let go are the ones that are still unemployed - thus running of out benefits. that is False. We have been averaging about 500 - 600,000 people per week with first week UC claims - yet the total job losses per month have been around 500,000. That implies that about 75% of the people laid off have found new jobs. Otherwise, the math doesn't work. Regarding derivatives, not sure were the quadtrillion number comes from. But derivatives do not necessarily equate to risk. In fact, in many cases they are designed to mitigate risk. Use for example - Linn Energy - they sold derivatives in their gas futures in early 2008 at below market for the time - going thru 2010. While there is a large value to those derivatives, all they do is fix the priced of gas for both buyer and seller for a set period of time. of the Banks derivatives. Most derivatives do not represent risk to the marketplace - they remove risk. Only 14% if the $200 trillion is debt type derivatives.
Markets could crash for many many more reasons than just these five but remember that doesn't mean it will.
Maxe Paul is wrong . . . this last bear market was preceded by a five year long bull market.
Anyone who complains about high frequency trading better be driving a horse-driven buggy to work.
Watch Warren Buffett. He's not the kindly old man next door. He's in on everything. When he starts to dump GE and GS, then dump all the financials mentioned above fast as you can. Until then, just like in Rick's American Cafe, let it ride, on the FED.
Lots of writing here. Just buy SDS. Won't matter when the thing implodes or why. Simple solution unless you believe the Obmer crew. Make it simple... Feds stupid=SDS -- Feds smart=SPY.
I got my money on SDS.
Dear Venerable Master Che

How did you get this S&P 326.73 figure???

I like the number.

Thank you.

On Aug 09 09:31 PM Master Che wrote:

> Bear market rallies vex countless reasons when and where the Corrective
> price action ends. I believe most reasons are relatively valid.
> Although none of the above mention the Commercial real estate dilemma..which
> I believed combined with the termination of unemployment benefits
> will serve as a double edged sword...But in the mean the technical
> numbers are CLEARLY pointing up to immediately to 1083.40 (mini S.P.
> cash) before any significant correction occurs which will be short
> lived...We're reaching 1221.70 on this Bear Rally...Then we CRASH...
> down to 326.73
sutski profile picture
Well I own no shares or options or any other of these current ways to "invest" your money, so I cannot be accused of wanting to influence the market one way or the other. Here is my take on what is happening at the moment...

1. Think on this

“If the physical scientists who warn about limits to growth are right, confronting the global economic meltdown implies far more than merely getting the banks and mortgage lenders back on their feet. Indeed, in that case we face a fundamental change in our economy as significant as the advent of the industrial revolution. We are at a historic inflection point—the ending of decades of expansion and the beginning of an inevitable period of contraction that will continue until humanity is once again living within the limits of Earth’s regenerative systems. But there are few signs that policy makers understand any of this. Their thinking appears to be shaped primarily by mainstream economists’ assurances that growth can and must continue into the indefinite future, and that the economic contraction the world is currently experiencing is only temporary--a problem that can and must be solved.”
-- Richard Heinberg, author and commentator

2. China wants to dominate the world. To do this it will need to allow the use of it's own Yuan on the world markets (so they can buy oil without using the dollar for example ;) or they will need to invest their $$trillions in a new currency (such as the IMF SDR). but actually, I forsee an imminent announcement that they will trade the Yuan globally on the free market sometime in the next 3 months, in time to shout "HEY! we are a player" before the 2010 rehash of the IMF currency bundles...If this happens that will instantly make the USD NOT the currency of the world and a Bear market more of a certainty.

3. How on earth is the USA going to pay it's debts ? This is being ignored at the moment by simply money printing and the huge stock rally of the last few months blinding a lot of people who would normally be shouting louder against QE.
Realistically, the only way to pay the debts is to either increase taxes, which is already happening but won't produce more money as unemployment rises, OR devalue the $. The only way to quickly do this, would be to offer to buy public gold for a premium price and then re-link the dollar to gold......If gold is $1000 now....$3000 would be a reasonable offer...... OUCH in capitals, Hmmm perhaps unlikely, but a short sharp hit like this would solve a LOT of the longer term US ills.....so probably worth a few $$ of the stuff just in case?

4. The increasing use of technology (as it has since the industrial revolution) is meaning less and less people are needed in employ. Cybernetics have never moved so fast as in the last 10 years and this intense period of "slimming the workforce" has certainly aided that task. Spend 150K on IT and save 1.5 million in wages.... The jobs on production lines and in farming for example are disappearing faster than you can say Model T and I genuinely fear won't be returning.

Sooooooo AM I Bearstard or Bull-tard - Hmmmmmm

I reckon if I had stocks that currently show profit I would sell them right now and to hell with another possible 50% rise. Then I would wait till December before jumping in again if there has been a correction"

If I had stocks at a loss I would hold them :)

....and if I had cash to burn now, I would buy gold (SGX) and bullion, silver (HL), salmon (MHG), Biotech (KOOL), Nat Gas (PBT), L.E.D lighting (PHIA) and a penny share like DDN or PTR on the off-chance....I would not commit anymore than 50% of my cash now though as I would want to wait until December and March to make further investments depending on the next few months moves by the FED and China especially.

So I guess that makes me a bullbearstard :)
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