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How Wall Street has killed the Golden Goose

|Includes: DIA, QQQ, SPDR S&P 500 Trust ETF (SPY)

First of all -- consider this article to have been written "while being in a very Cynical mood". You have been forewarned! 

For the longest time, I have felt the name of the game on Wall Street has been to try to figure out how to steal money from hard-working buy and hold retail (i.e., part-time) investors (OK -- you can see where his article is going -- so you can stop now if you do not share my cynical mood). Even Goldman Sachs went to the extent in their testimony that they prefer "buy-and-hold" investors to the "smart/sophisticated hedge funds" for other side of their trades.

Add to the mix the regulators (who are typically trying to protect wall-street firms), media (who are typically fed "news" as designed/defined by wall-street), the politicians (who of course rely on wall-street firms to get re-elected) and you have a perfect mechanism that creates an illusion of fair/free/transparent/efficient (you pick the adjective) market -- which is perfect place for retailers to park their retirement money.

The way this game works is that you have keep the "retailers" interested enough and let them make money now and then (Just like a Casino - but maybe with worse odds). You have to create an illusion of "logic" and let retailers believe that they fully understand what is going on (it is, after all that confidence which makes them hold on to their losses and also eventually blame themselves for the losses).

And then comes the crash to 6000's in Dow. Most retailers didn't know what to do. But the market after the crash goes up systematically (while government stimulus is in full force). Pretty soon, we are at 11000. Except, it is all on low volume. The kind of market created by one wall-street firm selling to another wall-street firm without creating too much commitment but every firm making money at the same time. However, for this strategy to work out perfectly, they have to pass on the stocks to "retailers" at the end! If the retailer does not show up, they have to just push the market higher -- eventually the retailer is bound to show up and they can hand-off a bag full of stock to the retailers and then start the ride in other direction.

Except this time, the retailer was missing every step of the way. So they kept pushing it higher and higher; finally it seemed like retailer was coming back to pick up the stock at the peak (as it was designed to be). And BAM! There comes the Goldman Sachs lawsuit and all details related to it. And the retailers were scratching their heads thinking -- "hmm - I did not know all this lying and manipulation was going on". This essentially killed any opportunity for a successful hand-off to retailers by these wall-street firms.

And then if that was not enough; there comes the almost a 1000 point drop in a few minutes. This drop was not an error. It was simply that no one was there to buy the stocks anymore - and even the market makers decided they did not want to put a bid as they did not want to be the one holding the stocks as they went down. As systematic as the push up was, it was paramount that either a successful "hand-off" occurs OR the first one to get out would be the winner. So when everyone wants to be the "first one" to exit, we have a 1000 point drop! Plain and simple.

So now if you are a retail investor on the sidelines (or in this case, busy at work while wall-street is busy stealing your savings) - and you come back and see that Dow can drop 1000 point in a few seconds; you are going to say -- Ah, I am better on the sidelines! 

This is exactly what is going to happen. With what happened today, wall-street may have killed the Golden goose (i.e., retail stock investors) for a long time to come. It is going to take years and years (along with regulatory overhaul and corruption exposure/convictions) before retailer will come back to this market. Greed will not be enough this time! 

Disclosure: Long SDS and FAZ. Short SDS, SRS and FAZ puts.