Jim Cramer on financial manipulation | 45 comments (45 topical, editorial, 0 hidden)

bit hyped (none / 1)

the financial markets are not just a casino. What these guys do is create volatility where there might not be any or spoof a stock up/down by a few % for a while. It's a bit more like poker where the guys with the big stacks can bluff the little guys.

But if you are a longer term investor this foolishness doesn't affect you much. If a company like Apple creates a new, great product like the Ipod, its shares go from $15-->$80. That's not a casino.

Try holding down GE when there's good news on their operations. This crap can be done in the high tech stocks pretty easily because the companies are small, their value is ephemeral often (the next guys killer ap can make yours worthless overnight), and the valuations are only realistic if fantastic growth rates continue. Any hint of trouble can cause a big move because the stocks are high risk in the first place.

There's a reason Warren Buffett never invested in high tech. Meanwhile, his stock has been a steady, above market performer for 4 decades. Hardly casino-ish.

If you are merely getting in to day trade, better be able to run with the big boys or get ready to lose money. That said, the activity he describes as "fomenting" is clearly illegal. It's just damn hard to catch/prove. The kind of manipulation the Enron sorts pulled in the commod markets are far worse, and once caught weren't so hard to prove so a bunch of those a-holes are in the clink.

by HiD on Wed Mar 21st, 2007 at 03:57:34 PM EST

Re: bit hyped (none / 1)

All right. It was I that was doing the hyping, not Cramer. Thanks for your very helpful clarifications.

Yes, I think the moral of the story is that unless you've got quite a few millions of dollars to play with, stay out of the day trade. In that respect it is a bit like a casino, in that the market, as far as speculative investing goes, is loaded against the small investor.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Wed Mar 21st, 2007 at 04:35:53 PM EST
[ Parent ]

agree almost 100% (none / 1)

Small day traders do not have the info or the market weight that the big boys do. If you step in that shark pool you better be very tough, fast and smart. And you may still lose.

But by definition, if you are day trading, you are not an investor. You are a speculator and therefore can't expect much sympathy.

by HiD on Wed Mar 21st, 2007 at 09:44:43 PM EST
[ Parent ]

Re: bit hyped (none / 1)

What do you mean by "consistently" beating the market?

From 1995 to 2000:

Berkshire Hathaway Inc. spot 24 to 56 : multiply by 2.3
NASDAQ composite spot 755 to 4069 : multiply by 5.3

Doesn't look like beating to me :)

by Laurent GUERBY on Wed Mar 21st, 2007 at 05:12:51 PM EST
[ Parent ]

Re: bit hyped (none / 0)

cherry pick much? care to compare 2000 to 2008?

by HiD on Wed Mar 21st, 2007 at 07:26:17 PM EST
[ Parent ]

Re: bit hyped (none / 0)

Well, you chose to write "consistently" allowing me to cherry pick :). Remove "consistently" and it's fine with me.

"sometimes" beat the market would be more appropriate.

1 out of 1000 "random monkey" speculators will beat the market for 10 consecutive 5 years period. There are many speculators around :).

by Laurent GUERBY on Thu Mar 22nd, 2007 at 08:05:27 AM EST
[ Parent ]

fair enough (none / 0)

but I think you knew what I meant in the first place. B. Hathaway has been a steady earner for ages without having to resort to bubble stocks/ponzi schemes/hype/evil manipulation of the market.

And I rather doubt your random monkey can actually beat the mkt by the amount Buffet beat the market. check out the graph below. Looks worse for qqq. Note that's a log scale. change it to linear if you want to really see a delta.

there may be some dividend differences (total return) but I don't know how to factor that in but S&P yield ha s only been 2-3%/year so over 15 years thats roughly another 1.6 multiplier on the bottom line.

http://finance.yahoo.com/charts#chart2:symbol=brk-a;range=my;compare=spy;indicator=volume;charttype= line;crosshair=on;logscale=on;source=undefined

by HiD on Thu Mar 22nd, 2007 at 07:10:27 PM EST
[ Parent ]

Re: bit hyped (4.00 / 2)

What these guys do is create volatility where there might not be any

Pretty much sums up the oil market to me...

Now if I had a really dirty mind and worked at (say) BP I'd think:

"Well: I'm structurally short about 30,000 Brent contracts: where can I find someone who trades alongside someone structurally long cos they run a fund - you know, like J Aron alongside Goldman Sachs".

Then when there's not a great deal going on, or there's some pricing to be done against settlements, or we're rolling the fund over month to month, or whatever; then I could march the market to the top of the hill and back down again and my friends who are alongside the fund could reimburse my losses from their profits OTC (off-exchange) in some way.

And we could both make profits from those naive fools hedging on the markets who actually thought the market prices reflected supply and demand.

But of course something like that could never happen because of our robust compliance department.

Our chairman would never allow it: hang on a minute, isn't he Goldman's chairman as well?

I'm confused.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Mar 21st, 2007 at 06:29:56 PM EST
[ Parent ]

Re: bit hyped (none / 1)

There is real meat in the markets. But when the operative mood of many market players (especially newcommers) is "Just buy something, it all goes up", there is plenty room to set "professional" insider games.

People like to make easy moey, especially now. We are at a top point of the cycle of greed - "everyone" acts asif believing that maney can be made easily perpetually. (Yeah, there is no free lunch - if government assists. But otherwise, prosperity can grow ever more continuously.)

The most effective way to make easy money is a Ponzi scheme (or similarly, a pyramide scheme). They work especially well when there are many people seeking easy money, like it was in Russia and Easter Europe in the 1990's. The most smart blocks can profit handily from massive eagerness. (Poker works the same way, largely.)

Ponzi and pyramid schemes are illegal, of course - too many people inescapably suffer. But a Ponzi scheme does not have to be crystal clear or rigidly designed. Just throw in some ingredients - a steadily growing market, "assuredly" increasing asset value, a flow of newcommers, extra stimulation of demand - and experienced traders already recognize that they don't have to follow the value of their hands, they just have to get timing of Ponzi-lite trading right.

Hyman Minsky build a theory how unstable Ponzi financing patterns emerge from a prosperous or innovative economy phase.

Most disturbingly, the Bush administration was consistently bringing in Ponzi ingredients with its tax policies. That was a pretty sure way to deliver a booming economy - hardly anything can match a Ponzi boom. At worst, their insider ring might have had a hidden Ponzi idea from the outset...

by das monde on Wed Mar 21st, 2007 at 10:36:37 PM EST
[ Parent ]

the Ponzi model is very weak (none / 1)

for describing the current situation. Ponzi just recyled the later money to pay off the early investors and ran away when the tanks were found to be empty. That is hardly the case with real estate and the stock market. The assets do exist.

What we have at the moment is a world with a rapidly growing population, with rapidly increasing productivity leading to a lot more work value sloshing around. That's causing some asset bubbles as interest rates are probably too low and leverage is being offered too easily. Simply just too much money chasing too few assets. So maybe the assets are currently over valued and we will get a pull back.

But I don't buy your Great Depression argument (90% drop in the DOW in 3 years and 25%+ unemployment). 20-30 % pullback like 2000 -- maybe. But I'm getting awfully jaded with the Cassandra forecasts that would need a 30% pullback on the S&P just to get down to the point where the doom was first predicted.

by HiD on Thu Mar 22nd, 2007 at 05:54:13 AM EST
[ Parent ]

Re: the Ponzi model is very weak (none / 1)

too much money chasing too few assets - so it becames a game of piling money into pyramides??

Existence of assests does not exclude emergent Ponzi financing. As you say, there might be too few assets for too much money. In effect, the market "recycles" money of later entrants to give profit margins to astute insiders. The tanks are not left completely empty, but there remains just a meager bottom of aa volumous bubble.

by das monde on Thu Mar 22nd, 2007 at 09:08:24 PM EST
[ Parent ]

Re: bit hyped (none / 0)

HiD, your comments are excellent, and much calmer than mine which you will see below. Perhaps you are making a good point, that maybe i missed,,,,Cramer's techniques are focused on the short term trader, and I guess that is a market that I don't know. I'm certainly not a day trader, and I guess pretty naive in that area. And when you are involved in the management of a publicly traded company, you don't worry too much about day to day fluctuations. I don't think Cramer's techniques would hurt me, or others, who invest in companies and their medium to long term prospects. But still, it seems like market manipulation,,,,and I think transparency and trust in markets is critical--so shouldn't we hang the SOB? and others of his ilk?

by wchurchill on Thu Mar 22nd, 2007 at 12:43:34 AM EST
[ Parent ]

here's another point or 2 to consider (none / 1)

People minute-to minute-speculating (day traders, hedge fund types etc) spend a ton of time trying to figure out what the BSDs are up to. Which is why you have momentum indicators and the like. People try to read more into the tape than just the price action. Knowing who, how fast, size etc may (repeat may) mean something.

So if you are a big boy, people just seeing the broker you use buying heavy can be enough to start a rumor that big fund X is a buyer. They then jump in and try to front run you. So as a big player, you spend half your time trying to disguise your moves -- spoofing the others, lying to them etc. These things I'd consider grey -- necessary evils because it is not a game of old maid and the rest of the market is not prevented from acting based on info they infer from other public info.

Lying to a journalist to spook a market? Getting pretty close to black but just how do you prosecute someone for saying "I hear on the 'vine that XYZ corp's new product will crush the IPod" vs saying "I believe Apple is due for a correction because of stiffening competition from XYX corp". Try to actually convict. NFW. A seems dirty to me, but B is a rational reason for taking a position as a speculator.

What the Enron boys did was clearly illegal (happened a bit in Europe in my day as well). They specifically reported fake deals or lied about the price or did a deal which was later unwound in secret later in order to move the market marker services such as Platts in order to make a profit on some derivative instrument pricing off of the marker.

However, merely doing a series of deals in order to make the market move doesn't strike me as illegal. If I wish to sell more than the market will take at say 100, then the market isn't 100. It's where ever the next bid shows up. If I only have to sell 100 in order to drop the price on 1000 I am buying elsewhere off of the market quotes have I broken any laws? Or have I just pissed off the lords of fair play and the management of gutless operations that are only willing to trade off quotes determined by 22 year old journalism majors with 2 months experience reading market tea leaves or half assed futures exchange settles?

by HiD on Thu Mar 22nd, 2007 at 05:38:10 AM EST
[ Parent ]

Re: here's another point or 2 to consider (none / 0)

However, merely doing a series of deals in order to make the market move doesn't strike me as illegal. If I wish to sell more than the market will take at say 100, then the market isn't 100. It's where ever the next bid shows up. If I only have to sell 100 in order to drop the price on 1000 I am buying elsewhere off of the market quotes have I broken any laws?

Interesting comments, and I guess my comments simply show my perspective,,,from the viewpoint of running a company,,,or as a guy who invests with a longer term perspective, having run a company. Perhaps I have a view of fairness that is not quite appropriate in this traders's market. But I didn't run my company based on day to day stock prices, and I don't invest based upon day to day results. So maybe I shouldn't be so pissed off with Cramer's comments.

But my gut reaction to that clip is rage, and feeling he is a total a'hole. (Some of my financial friends have told me that the operating guys, like me, are naive.)

by wchurchill on Thu Mar 22nd, 2007 at 06:23:05 AM EST
[ Parent ]

Short term speculation is a board game (none / 1)

there are rules, and there are cheaters. No reason not to be pissed off at cheaters. the trick is catching them. I got $10 bucks says Cramer knows the statute of limitations to the minute...

But if you are truly an investor, the price of XYZ corp gyrating around the line fundamentals would generate doesn't matter a whit. This is just one set of aholes ripping off others. In the meantime they provide liquidity you might need and narrow the trading spread.

Now if you have money invested in a hedge fund and these dicks are spoofing their report cards to generate larger bonus payments than reality would give, you are being robbed. But if you are a hedge fund investor, then you should know the people you are dealing with are probably dicks and factor that into your decision to invest money with them. And this is why to get into a hedge fund you have to prove you are a sophisticated investor.

You can't cheat an honest man very easily. Reaching for well above market returns is a sure sign of greed. Risk/Reward. there are no free lunches.

by HiD on Thu Mar 22nd, 2007 at 06:56:34 AM EST
[ Parent ]

Re: Short term speculation is a board game (none / 0)

I am an investor, so I have not been damaged by the manipulation.

Aren't you pissed off by watching Cramer on the You tube clip. I am.

Personally it does not undermine my confidence in the markets--but i just don't like the image it gives to others. It's a market confidence thing , isn't it.?

by wchurchill on Thu Mar 22nd, 2007 at 07:11:34 AM EST
[ Parent ]

only at how matter of fact he is (none / 0)

about it. I worked on Wall Street in the commods area which makes equity trading look like a tea party.

Google Vitol, Trafigura, Marc Rich, Clarendon, Vanol and see the kind of crap these people are accused of around the world. These were my counterparties.

by HiD on Thu Mar 22nd, 2007 at 07:15:06 AM EST
[ Parent ]

Re: only at how matter of fact he is (none / 0)

well I'm a CEO type, and I'm really pissed off at this. Big time pissed off.

by wchurchill on Thu Mar 22nd, 2007 at 07:52:43 AM EST
[ Parent ]

Re: only at how matter of fact he is (none / 1)

wc, maybe you were not around at the time, but there have been various diaries about stuff like this which you did not comment on...

Acceptable Market Manipulation by ChrisCook on November 9th, 2006
Pulling Keynes' teeth by Migeru on September 10th, 2006

"It's the statue, man, The Statue."

by Carrie (migeru at eurotrib dot com) on Thu Mar 22nd, 2007 at 07:58:40 AM EST
[ Parent ]

Re: Short term speculation is a board game (none / 1)

Why is it that every kind of player in the financial markets thinks that the other kinds are either assholes or suckers? That makes me think of the milieu of scam artists, where everyone thinks nobody else is trustworthy but they pretend to trust each other so they can scam others and hopefully scam each other at the end.

"It's the statue, man, The Statue."

by Carrie (migeru at eurotrib dot com) on Thu Mar 22nd, 2007 at 07:23:52 AM EST
[ Parent ]

Re: Short term speculation is a board game (none / 1)

It seems like these people are in a constant state of insecurity and that they are overcompensating. I know that's cliché, but this is all about bluster and bluffing and lying to get what you want. Money! Yes! Power! I'm a real man!

by andrethegiant on Thu Mar 22nd, 2007 at 08:11:29 AM EST
[ Parent ]

the bluffing is part of the game (none / 0)

old trader saw:

"never let them see you sweat"

and it's true. If the others smell weakness they gain the confidence needed to perhaps break you. No single player is bigger than the markets as the Hunts found out.

by HiD on Thu Mar 22nd, 2007 at 08:35:35 AM EST
[ Parent ]

Re: the bluffing is part of the game (none / 1)

Another saw:

Bulls make money, bears make money, pigs get slaughtered.

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Thu Mar 22nd, 2007 at 07:02:42 PM EST
[ Parent ]

Hmm (none / 1)

First does every kind of player actually think all the others are suckers or assholes? I rather doubt it. Bit of a strawman to feed into the value judgement that follows.

If you have ever had to be around the real Cramer type speculators you'll find that most of the truly successful ones will gamble on anything, are utterly amoral about how they make money and really don't much care if others get hurt. That's my experience.

I admit I've never dealt with people at pure quant shops -- since they don't deal with people and let the models do the talking. The truly successful ones there just keep their mouths shut and hope no one notices their actions and succeeds in reverse engineering their models. The best geek on our desk was one of the nicest humans you could ever meet. Incredibly smart and grounded. Made partner and therefore got extremely rich. Well deserved compared to some of his peers.

As for long term investors, they are neither suckers nor aholes. Just folks put some assets at risk in hopes of a return.

Day traders who think they can beat the system operating from home? 80%+ suckers. And these are Cramer's Cramerica.

by HiD on Thu Mar 22nd, 2007 at 08:33:41 AM EST
[ Parent ]

Re: Hmm (none / 0)

Well put. I should have been more restrictive in my comments. I was referring to the residents of Cramerica, the day-trader types who combine sociopathic social skills with knowledge of the markets. The more scientific types might sometimes be sociopathic, but they do not rely merely on that asset to get them by.

by andrethegiant on Thu Mar 22nd, 2007 at 10:33:20 AM EST
[ Parent ]

Re: bit hyped (4.00 / 2)

But how much of that $80 isn't casino value?

If the casino is bubbling, the bubble component and the realistic value component become impossible to distinguish.

You could eliminate the bubble component by eliminating speculation and making it impossible to sell shares within - say - a year of purchase. That would turn casino transactions into more thoughtful and measured investment transactions.

Of course that's not going to happen, because no one in the casino wants to have their toys taken away. And also because a lot of 'growth' is generated by imaginary casino value artificially inflating expectations.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 22nd, 2007 at 06:41:30 AM EST
[ Parent ]

nope (none / 1)

Can't agree. Much of this is just an emotional reaction IMO.

All valuation has a degree of subjectivity as price really is set by buying pressure vs. selling pressure. However if you are looking at Apple, larger profits and a new, growing market should mean the company truly is worth significantly more. Is some of the $80 hype? maybe. But is that just a random bet that can move in either direction by a random amount based on unknown and unpredictable forces -- NFW? This entire analogy of a casino strikes me as lame.

We already have strong incentives to hold shares 1 year or more. Capital gains taxes are much lower than regular income from short term speculation.

by HiD on Thu Mar 22nd, 2007 at 07:02:49 AM EST
[ Parent ]

Re: nope (none / 1)

All valuation has a degree of subjectivity as price really is set by buying pressure vs. selling pressure.

Yep.

And that's where you're missing my point.

I'm not talking about the specific value of a share in isolation, but the fact that the Ponzi effect distorts values across the entire market - which is mainly what drives the creation of bubbles and the apparent creation of value out of thin air.

We're really talking about different feedback loops. At the first level you have 'rational' investment, based on an expectation of return defined purely in terms of the business itself. E.g. if I know that I have X amount of something valuable but I need $Y dollars to bring it to a saleable state, it's easy for me to estimate whether or not an investment is worthwhile.

When those expectations can themselves be traded as abstract entities, you add another feedback loop which is divorced from the 'rational' value. At this point you're dealing in fictions, and it becomes a case of what you can get away with or (literally) persuade others to buy.

This where the Ponzi effect starts driving a bubble. Book values become a combination of 'rational' values, inflated faith-based values, and semi-random volatility created by trading momentum and market-making plays by those who want to cream off a few extra %, just because they can.

In reality-based terms we're now a long way from rational values, and deep into a place where rooms full of people with servers make shit up. Book values are an act of faith and exist only as long as people are willing to keep that faith in a future return. This becomes defined by market momentum, and not so much because of a specific business case.

Once that faith disappears the bubble pops, and values return to something that might pass for a rational assessment.

A company like Apple can catch the wave of sentiment that drives a bubble and ride it to the top of the optimism curve. But the rational element of share value can easily be swamped by pseudo-value created by Ponzi-like trading.

(Did we learn nothing from the Internet bust?)

As for taxes preventing volatility - considering the almost mythological volumes of trading on the markets, these taxes don't seem to do much to dampen enthusiasm for speculation.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 22nd, 2007 at 09:16:39 AM EST
[ Parent ]

Re: nope (none / 0)

Taxes would damp volatility if transactions were taxed. The Tobin tax applied to all financial markets, basically.

"It's the statue, man, The Statue."

by Carrie (migeru at eurotrib dot com) on Thu Mar 22nd, 2007 at 09:21:46 AM EST
[ Parent ]

still don't agree (none / 0)

What Mig said. Taxes are on profits, not trades. The tax on trades is just commissions which are virtually nothing these days on computer executed blocks. Plus the bid/ask losses.
your contention that the entire market is a bubble at the moment is not supported by the facts as I see them.

The average P/E of the S&P 500 is only 16 X if the Yahoo financial page is accurate. That implies a 6% profit across the big companies that are probably 80% of the market value. It's been lower when interest rates are much higher but this is hardly Ponzi leverage. You are grossly overgeneralizing.

You are comparing the apples of Enron/CMGI/Lucent with the oranges of Coca Cola, Merck, etc.

by HiD on Thu Mar 22nd, 2007 at 06:57:20 PM EST
[ Parent ]

Jim Cramer on financial manipulation | 45 comments (45 topical, 0 editorial, 0 hidden)

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