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Jim Cramer on financial manipulation

by Alexander Wed Mar 21st, 2007 at 02:30:24 PM EST

CounterPunch has a piece today about a ten-minute interview with Jim Cramer, the former hedge fund trader and now host of the CNBC program "Mad Money". Since he isn't speaking on his own show, Cramer is pretty blunt that financial markets are just a casino, in which the successful players know how to manipulate share prices when they are at risk of making heavy losses. Sure it's illegal, but that doesn't matter: the Securities and Exchange Commission (SEC) "don't have a clue".

The video is here. It makes for interesting viewing. For those who don't want to watch it or can't, the CounterPunch article covers the gist of it. The New York Post also has a short story about it today. So the interview, from last December, is beginning to get some buzz since it was posted on YouTube last week.

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
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 ]
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 ]
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 ]
cherry pick much?  care to compare 2000 to 2008?
by HiD on Wed Mar 21st, 2007 at 07:26:17 PM EST
[ Parent ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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 ]
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...

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


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 ]
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 ]
  1.  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.

  2. 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 ]
In my opinion, the IPE was a joke.  Cash settled, thin market, barrow boy rules.  Anybody using it to price large quantities of oil, especially off of settles, was brain dead and got what could be expected and perhaps what they deserved.  Ditto Platts/Argus/OPIS/whoever.

All are fine if you can accept that their daily answer is accurate to no better  than +/-3% and therefore use long averages (minimum a month).  If you are sensitive to the last 10 cts out of $20 on a Brent settle or 1/2%, then you need to grow some balls and sell flat price and quite blaming other people for your situation.  The Scandi's I traded with understood this completely and were just as quick to play the same games while their management bleated like sheep.  No tears from me for Statoil.  

Same for the Mid East lot.  They all want a constant high price off of a formula that absolves them of responsibility.  Which is why I think your IOB will never fly.  They don't really want control because with control comes responsibility and accountability.  They want someone else to set the last few % and still have the lean always go their way.  ho ho ho.

As for GSCI, all I saw from the other perspective was a huge futures position, with rigid rollover rules such that any nimble local or player could front run it to death.  The GS trading desk was struggling to find ways to keep those settles from being consistently shaded against the index investor.  But again, investing in  an index with a structural flaw like GSCI is your own mistake.  I note that now that we've had nearly 2 years of deep contango such that each months rollover is killing the index, GS is selling it off.  Hard to flog an index that returns -20% when the market is flat over a year.

I never saw any overt collusion though I have had it proposed to me by a large Dutch trading house player. Rumors abounded but I never saw hard evidence or witnessed anything with my own eyes/ears. BP were very, very aggressive about pushing around the market.  No surprise that they are getting bad press for their LPG and other books in the US.  I will not be surprised if they are found guilty.  If Europe had any real regulation, many would have gotten in trouble there as well.  Half of ENEL would have been in jail and all of their suppliers prior to about 1992.  I see some Germans are about to get convicted for bribes to ENEL managers in recent times on procurement.  Some things don't change I guess.  

by HiD on Wed Mar 21st, 2007 at 09:32:18 PM EST
Which is why I think your IOB will never fly.

I must say I go along with that view.

But I'm not proposing conventional geared futures contracts for the IOB (which is glacial in progress, to ssay the least). I'm proposing units in a "pool" of crude oil more akin to shares in an ETF.

An "asset-based" contract rather than a deficit-based one.

Paid up front, so no gearing: except of course you are free to borrow to buy the units.

So no monthly expiry dates, roll-overs and all of the costs that go with it.

And I will bet a pound to a penny that the Chinese - to name but one, would buy as much of this "virtual crude" as you could put on the market in preference to holding their reserves in dollars....

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

by ChrisCook (cojockathotmaildotcom) on Thu Mar 22nd, 2007 at 03:21:10 AM EST
[ Parent ]
but I don't see what you are proposing doing anything to address the underlying problem -- The crude owners do not wish to sell fixed price today for delivery down the road.  They want the down-the-road price and they want it to be higher, specifically as high as possible on the day of lifting and no less.  Pre-selling fixed price exposes the decider to questions on the lines of:

You sold 100 million bbls at $60/bbl?  The market is now $100.  We'd like you to go renege on the deal -- we'll get the Indians to prevent an invasion and sell it to them at $90 instead.  Why not.  It worked for the Venz, the Columbian, the Mexicans ....

Oilco/sovereign  management at all levels have no wish to have any system that makes them personally accountable for setting prices.  Their pay is too low to stomach the abuse that follows getting it wrong and their pay does not go up if they get it right. It's a no win equation.  Which is precisely why sovereigns and Oilco types love to do sales at Platts hi + X with a narrow set of dates or purchases at Low - X.  They know the customer will have to bash/ramp Platts on those dates since the material is only worth mean.  They are tacitly complicit in the manipulation that they then turn around and decry.  Only in Lake Wobegon is everyone child above average.

I also rather doubt the Chinese will be too excited to pre-pay in full for future delivery to an Iranian government that is slowly but surely pissing off the populace.  I figure they've got 10 yrs max before there is another revolution.  Iraq won't even have a government in a year.  More likely to be 2 or 3.  The rest of OPEC could not care less about cash up front.  They have plenty of cash of their own.  Buying the oil in the ground at the usual discount (equity ownership in the fields themselves) hoping to keep control using the same techniques the west has been pioneering in shitholes like Angola or Nigeria might work for CNOOC.  But handing over cash with just a promise????  You better get paid up front for your work is all I'd suggest.

As for labeling it "asset based" when in the end the selling party is still only obligated by a promise vs. labeling it "debt based" strikes me as sophistry (though I wishI could come up with a less loaded word.  I believe you to be sincere).  

by HiD on Thu Mar 22nd, 2007 at 05:16:27 AM EST
[ Parent ]
Key to this is the role of a "Custodian" of the "Pool" created.

Possibly the custodian "owns" the tanks and tankers and has operating partners run them.

Sellers sell into the Pool: buyers buy from the Pool. Speculators can buy and sell oil in the Pool but do not participate in the price setting, which is based upon the price of oil going in and out of the pool.

I'm not minimising the legal difficulties of this - I have never seen it as less than a five year project and then only if it works in other markets.

Which is why we are looking at trialling the structure on creating new markets where none exist, or could exist, using conventional structures.

LNG is a candidate for an entirely new "asset-based" approach, as is renewable energy.

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

by ChrisCook (cojockathotmaildotcom) on Thu Mar 22nd, 2007 at 06:45:31 AM EST
[ Parent ]
The large pool of oil you describe is in the ground in a myriad of countries.  No big producer has huge tanks of unsold oil beyond what they need for operational flex. It's too much capital tied up and nowadays would just be a target for Osama (Saudis do sometimes rent in order to take market swings without screwing with the fields too much).

Reliance on the performance of oil nations, many of which are run by criminals is a no hoper.  Good luck.  Maybe you'll prove me wrong.

Markets where the countries already have strong rule of law and players have good credit/performance reputations are doing fine with traditional finance.  Aussie LNG is pre-sold to the Japanese such that financing (often from Japanese banks) is secured.  Seems to me that already matches your re-labeling exercise pretty closely.  The players divvy up the expected profits based on their own projections and a negotiation.  

by HiD on Thu Mar 22nd, 2007 at 07:12:47 AM EST
[ Parent ]
fund guys that have broken the law!!!!  then if their are practises that are unfair but not illegal, change the law so they are illegal.  I'm more pissed of about this than anything I've seen in a long, long time.  This is just crap, and it must be stopped.

I'm not going to be totally rationale with my comments, I'm so upset with this.  When this kind of stuff happens in any area of life, it needs to be addressed, people punished, laws changed.  Cramer's attitude in this film was unacceptable--gloating about cheating, being proud of it!!??  But I'm more upset about what he says he has done, and others have done.

Tomorrow I'll be calmer, but no less determined to find out what this is all about.  First, I should first comment that I don't have direct experience with hedge funds, so I lack deep knowledge in the area.  I think people that know me would say I have in depth knowledge of running companies; of both private and public companies; and of the stock markets as they relate to companies--plus reasonable knowledge of economics and accounting.  Actually in my investing, I have chosen not to invest in hedge funds because I don't really understand what they do--they are referred to in the investor community sometimes as a "black box", because of this lack of knowledge about their methods.  (In fact my one somewhat distant knowledge of a hedge fund situation regarding stocks I follow, is when a hedge fund guy tried to play with the stock price of a small company, illegally, and he's been prosecuted, convicted, and is now serving time.)

Second, this guy Jim Cramer is really a weird guy.  he says that he ran a successful hedge fund (and maybe he did, I haven't even googled it), but in my experience guys that make lots of money in something, don't have a daily one hour TV show, and Cramer's other activities--websites, etc.  Really, why would you do that if you're a successful guy in your profession, that pays a lot of money for success?  

third, he looks like he is wacked out on something on the TV show--admittedly I watched it less than 3 times, so maybe he's better sometimes.  but as I watched the youtube flick, I thought this guy was an ego maniac, and frankly high on something.  I mean he doesn't let the interviewer ask questions--and he just can't wait to show him how "successful and brilliant" he is.  Confident, well balanced people just do not act like this guy, either on his show, or on the youtube flick.  the guy is just a total (please forgive me for this) asshole!!

But all that aside, this needs to be investigated.  <smoke literally coming out of his head>

by wchurchill on Wed Mar 21st, 2007 at 11:08:29 PM EST
I had a friend who wrote PhD on string theory, and then moved to financial industry. He had circulated an email about his job hunting adventures. I hope he does not mind if I reproduce it here. (Otherwise he must be powerful enough to void me, haha.)
So I've sold my soul to the devil, and he promised me loaves and fishes.  I'm not sure I've ever dreamt of that, but if nuggets are a measure of usefulness, at least I'll feel damn useful now.  Just like the mafia boss must feel.  Jeeez, it's only a small step from quantum gravity to moral gravity.

I've now become sort of a "quant" (quantitative analyst, for pedants). These are the fortune tellers in investment banks who foretell the prices of complex derivatives - like the option of buying an ice-cream at half the price given that we're still waiting for the summer and that cows are threatened by BSE.  The crystal ball is called "Monte Carlo" and our secret weapon are partial differential equations - hence the need for physicists.  We all sing the same tune (heard on the Street):
"Sell the highs, buy the lows;
  Take their money, bash their nose."
And what a bashing it will be!  Oh boy, pray I be merciful.

So let me tell you how I got caught up in this.  I've had quite some adventures in job finding - started out almost a year ago and bumped my candid nose against the glassy doors of industry.  I first knocked at all big players in strategy consulting, got invited 8 times for interviews.  Gee what a honeymoon it was! with the muses, that is. I spent more time in all of Germany's museums than solving case studies in boring offices.  And all expenses paid.

Some firms squander 1000 euros just to see your face: first class return flights and Hyatt five stars (awful, all this luxury: couldn't close an eye! next time I'll ask for a bench in the park).  And all this at the outlay of the sophomore consultant who burns the midnight oil - and his brains on the way.

Since they recruit 1 interviewee out of 8, I had to try eight times before giving up.  And indeed the eighth firm showed signs of mercy, promising to hire me after a sheer 9 hrs interviews (w 9 diff people). When I rang next week to sign the contract, they insisted on a tenth interview.  You get no points for guessing the end of the story.

Reasons for rejections were as wild as sex: first not enough structure, then (upon offering structure) not creative; not passionate, too animated, not clever, too brainy,...  The last guy sounded: "Yes, we understand you see the challenge in the nature of the work; yet we doubt about your material ambitions: Don't you dream one day of driving a BMW deluxe ?"

Oh Mammon! (sigh)... how could this happen in Germany ?!  In the country of Goethe, Gauss and Beethoven [!!]  Go tell this Fritz I now manage his bank's wealth and that I've already siphoned off the fuel from his next BMW.  Pray I leave him more than the exhaust.

I also wonder why they need physics PhD's for knowing why plastic bottles are sexier than Tetrapacks (typical case study).  The answer is that they treat themselves by inviting certain profiles; but when it comes to employing in an industry that's been flat for the past five years, you better stick to that sweet graduate from economics and minimize risk.  In the end, it boils down to the confidence your voice betrays.  Oh, and to that label on your suit!

[After] biting the dust, I finally looked at where mathematicians are most wanted: finance!  For the past year, banks have been recruiting massively and are now on their knees to attract PhD's.  So with the wind in the back, I suddenly turned from beggar to chooser: I spent Dec, Jan and Feb reading finance and sprucing up my C++.

Then I went to Mecca for the first rounds - London, that is.  The news agent [already] gave a foretaste. He sells about 100 items: the FT and the WSJ - the rest is porn.  I climbed on all those scary towers that mushroomed recently, symbols of corporate power, epicentre of the world's financial earthquakes, Sodom and Gomorrah of global capitalism. I made sure I thoroughly enjoyed the view before OBL's planes will turn this Babel tower into rubble simply because he doesn't agree with us that evil is good - err, I mean good is evil, no, wait, I'm confused...

Then came [other cities]. I lied my way through interviews (what don't you learn from 40 hrs of failed interviews in consulting!), growing more confident with every single rubbish I cooked up.

At one point, the boss asked me what my shortcomings were.  So I lowered my looks and took on a practised blush (that's where acting comes in handy).  "C'mon, you can tell me, can't ya!" the boss said. "Well, I replied, it's probably...  greed!"  The boss got planet-struck, jumped from his chair, rushed to me and shook my hand: "Mr [X], welcome to the firm! here's your screen, make a million for the fund; if you do more take your crumb, if you do less you're fired."

That's how I ended up with [this] hedge fund for stat arb (statistical arbitrage, or systematic trading).  Hedge funds, ladies and gentlemen, are those vultures managing the wealth of big banks or pension funds.  They stand first in line to milk the cow, and usually consist of traders who're still not happy with their triple bonus from the bank, as well as of a few quants. They use alternative investment methods which ensures to hedge the risk - hence their name.

The most mythical of all hedge funds, Medallion, was set up 20 yrs ago by jim simons, a successful math/phys guru known for the Chern-Simons gauge theory.  This guy's been doing returns of a constant 35% since 1990 with a Sharpe of 4 (reward/risk).  He employs a little family of 60 physics PhD's in New Jersey, who devise clever algorithms to suck the stock market with systematic trades, i.e. their computer buys and sells thousands of times per minute, sometimes holding a position for just a few seconds.  Decisions are made statistically: all you need is to be right 51% of the time.

Now this Croesus owns way more than 5 billions, which is the upper limit above which your trading strategies have too much impact on the market and bite their tail.  So the unfortunate fortunate had no choice but to open a charity and to fund... not dying africans nor abandoned dogs, but the pariahs of the world, the outcasts of society, the intellectual hermits, the scholarly troglodytes, the modern Diogenes,..., also known as: mathematicians!  He funds several institutes [and] academics - otherwise despised by the taxpayers.

It's a thorn in our eyes that this guy remains unchallenged and walks away with the lion's share; so we are set to give him flak. [My fund] is a little family of 15 PhD's [and] 15 IT guys.  [Its] best-performing fund made a sappy 35% last year with a Sharpe of 3.4.  So if you have a spare million, send over your eggs and we'll brood them in our fast breeders (70% with double leverage).  We now sit on 1.8 bn and are soon going to kick out the cuckoos' eggs.  And don't forget: either you're with us or against us.  And if you're against us...  Bashing!

So what's the value to society ?  Well, there are short term pros like adding liquidity and efficiency to the market.  But there's a hidden long term benefit:  You see, it's due to bastards like us that the rich get richer (700 billionnaires today vs. 470 two yrs ago; or a total of 2200 bn today vs. 1400 bn).  So the more the hedge funds compete, the quicker the 35% returns will plummet to a sane 8%.  It's like jumping in the fetid boat to drown it sooner.

The sea is full of mines, though, and an ill-reputed hedge fund has already drowned: LTCM with its capital of 4 bn and leverage of 200 bn. That was back in 1998, and off the two Nobel laureates on its board went playing the second fiddle!  CFM with its stat arb is tempest-proof; its strength lies in its decorrelation from the market, so we don't care if the S&P goes banana.  We spend the day frisking in the mud of data, filtering out signals from a tsunami of noise. That's much like what the guys in particle accelerators do.

The firm's atmosphere is more than relaxed, working like in academia. Since our computers do the trades, we have no traders breathing down our necks, and no pressure; nowhere seen in finance!  At noon it's binge time, and we gradually map out the zoo of restaurants in the area (9. arr.).  What else would I do of these lunch vouchers my boss pays me with ?!  

[The] great thing about industry, is that the week-ends are for you, no matter if the world collapses.  No guilt feelings about this or that paper that you still haven't read, and no wrong computation to haunt your sleep.  On the other hand, the silly [system] doesn't grant me any holidays in the first year.  

[I] hope you appreciate my latest societal observations about the REAL world: since I work in finance, female acquaintances start confiding me their doubts about their current partners at a frightening rate. So I advise them to start a career in finance; perhaps the guys around them will start showing similar doubts.  Tell me more about emancipation! - the freedom to choose your fondest slavery.

by das monde on Wed Mar 21st, 2007 at 11:58:12 PM EST
[ Parent ]
das monde, this was great.  if your friend doesn't make it in the financial world, he should become the next robert ludlum, or whomever, and focus on business rather than spying--bring in sex and power and success,,,,I think it could be a great novel.  and I love his/her writing.

but just in my own humble experience and opinion, I'm not at all bothered by your friends experience.  he/she sounds like a very well educated, hard driving kind of person, that has chosen a very competive track--and can make tons of money,,,IF he can produce.  If he can't he's toast.  To some extent I've been on that track, and have many friends that are as well.  but it's his, your, my choice.

I also have brilliant friends that have said they don't want that track.  some are poets, artists, professors, and priests.  we all have choices,,,,admittedly some start with a silver spoon and maybe have better choices,,,but that's another story.

i'm personally am not upset about people making tons of money (nor going into a monastery).  What I am really upset about is cheating,,,crooks.  Your friend just seems like you and I, figuring his way through life.  Cramer, if you believe what he said, is just a damn crook that should be locked up for a long period of time--and likely a drug addict on top of that.

by wchurchill on Thu Mar 22nd, 2007 at 12:26:33 AM EST
[ Parent ]
had a white powder problem back in the day.  At least Cramer admits he's got feet of clay.  Kudlow is still a white shoed whore for the Republican party and Country Club conservatism.  Just don't look too closely at the shoes.

My guess is at the moment Cramer's high on adulation.  And he admits to being utterly amoral about making money.   He then claims to do the right thing with the money.  Sure.....

I can hardly watch that show because all the locker room boo-ya crap makes me puke.  He's selling hype in the same way as Carlton Sheets and the rest of the get rich quick hucksters.  It feels like I'm watching a boiler room time share operation with bells ringing to get the rats salivating.

by HiD on Thu Mar 22nd, 2007 at 05:44:18 AM EST
[ Parent ]
Brilliant. That was in the "Liar's Poker" class.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Mar 22nd, 2007 at 03:32:57 AM EST
[ Parent ]
I sure hope I'm not the first person to report this to the American Security and Exchange Commission,,,,but I just reported it.
by wchurchill on Wed Mar 21st, 2007 at 11:47:16 PM EST
Cool.  I was getting that feeling like I do sometimes when I watch thugs bludgeon elderly ladies who just want to make it down the sidewalk to the grocery store. In those situations I often find myself not doing anything about and just feeling kind of angry and hopeless--not realizing that there is something I (yes, I) can do about it. Seriously: rather than saying "Where's Elliot Spitzer when you need him?," you actually did something.  That is what this website is all about.  Very cool, even if Bush's SEC will probably do nothing.

P.S.  While I don't often intervene for the elderly when they're up against the hoodlums, I do try to save the little kittens.

by andrethegiant on Thu Mar 22nd, 2007 at 07:17:56 AM EST
[ Parent ]
I do want to make it clear that any sarcasm in the quote above is directed in my own direction because I saw this and thought "hmmm...yup, that's how it is."  wchurchill actually reacted with agency.  Good work.
by andrethegiant on Thu Mar 22nd, 2007 at 07:20:14 AM EST
[ Parent ]
Oh, trust me, wc, you're one of probably hundreds of thousands who have done so by now.  This will probably be a big thing in New York and London, and it will almost undoubtedly arrive in Washington.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Mar 22nd, 2007 at 10:03:33 AM EST
[ Parent ]
How very Michael Douglas of him.  Brownie points for being honest about it, although I'd have kept my mouth shut if I were him, since he's probably got the SEC breathing down his neck at this point.

Financial markets can be a lot like a casino, if you're playing short.  It's simply impossible to keep up with every little bit of news that will impact a stock price, while also trying to figure out how everybody else on the floor will react.  If you're a big boy with connections in the press like Cramer, sure, you can produce a bit of volatility and take advantage.

Day trading is not for the average Joe.  If you want to play long and diversified, as most people should, it's not much of an issue, because the daily ups and downs don't really mean shit when you're looking at thirty years down the road.  You're probably well insulated from guys like him.  Cramer is playing at the margins with large sums.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Mar 22nd, 2007 at 10:01:32 AM EST

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