WSJ Piece Today Can't Figure Out Why There's a Rush To Leave The US Markets
Location: Blogs Bob O'Brien's Sanity Check Blog
Posted by: bobo 11/1/2006 9:09 AM
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WSJ Piece Today Can't Figure Out Why There's a Rush To Leave The US Markets
Location: Blogs Bob O'Brien's Sanity Check Blog
Posted by: bobo 11/1/2006 9:09 AM
Why is the US market losing IPOs faster than the administration is losing poll points?
According to two inveterate New York authorities, the problem is four-fold. Here's how Schumer and Bloomberg put it in the WSJ:
"Based on the work completed so far, there are four factors that bear close attention: globalization of the capital markets, overregulation, frivolous litigation and incompatible accounting standards."
My reaction?
Pure bullshit. Of the highest order. Self-serving, Wall Street-driven bull.
The reason that Hong Kong is getting all the IPO action is because the markets are efficient, and NY's stranglehold on IPOs has been broken, allowing companies to go to favorable climates and evade the criminal cesspool that is the US system.
Consider this: Hong Kong has vastly superior transparency, and reports short interest twice a day, and also has safeguards against naked short selling, as well as restrictions on abusive short selling. They include:
Shorting is limited to liquid stocks, objectively defined by market capitalization and turnover ratio;
Positions are subject to disclosure for those who have at least a 1% short stake and who are also long at least 5%;
A stringent borrow requirement is in place - short sellers must have "to provide documentary assurance (which may be in the form of written document, electronic document, tape recording etc.) to the broker-dealer, and the broker-dealer to obtain confirmation from the short seller, that the lender has the security available to lend to him before the broker-dealer can transmit the short selling order to the exchange for execution.
This was all in Bloomberg a while ago, thus it is incomprehensible to me that Mayor Bloomberg can't put two and two together here.
IPOs in the US have gone the way of the buggy whip because the entire system is now one big cheat/con job.
There. I've said it.
I've run the numbers before, and I'll do it one more time, just so you can see what I mean.
The US system has been perverted from an auction market for items of value (stock) to a giant con game, wherein real dollars are exchanged for derivatives wholly lacking in underlying value. The cheat here is that the system lies to those whose real dollars - which were generated by labor, or innovation, or manufacturing - go into the system. It assures them that they are receiving shares of stock, and yet a percentage of all the trading is in fact not stock at all, but rather electronic ticks with no underlying value whatsoever.
That's the con game.
Because at the end of the day, all the money that is taken out of the system every year, in the form of huge bonuses, and profits, and fees, by all the brokers, not to mention the trillion dollar hedge fund industry, are real dollars.
Every year the real dollar exodus is genuine - leaving the worthless derivatives sitting in the system instead.
The numbers are pretty easy to get to once you understand the complete picture - and that picture is of a system so dependent upon stealing (that's what it actually is) a percentage of the GDP every year, that it cannot be fixed without destroying the system. What do I mean? An entire industry produces nothing, generates nothing, but the trading of these derivatives and the underlying stock - thus every dollar it generates in profit has to come out of a cut from the real dollars that pour into it. Ditto for hedge funds.
More and more of the profits for Wall Street come from stock lending and from profiting from reductions in asset values than ever before. All of this is an elaborate mechanism to take an ever larger cut of the real dollars that go into the system. The market is zero sum, in the sense that someone has to put money into the system in order for there to be money for the brokers and the hedge funds to pull out as fees and bonuses every year - many many many billions of fees and bonuses.
Where is all that money coming from?
My hunch? Much is from naked short selling, and its various permutations.
As discussed previously, about $100 billion per day of stock trades and clears.
Per the DTCC, $2 billion of those trades fail per day - $1 billion is handled by the Stock Borrow Program, leaving the other $1 billion to add to the pile of FTDs we see when we get FOIA reports.
The real magic of the con and the theft is in the netting.
Netting, both pre-netting (where brokers or their clearing houses net the day's buys and sells against each other) as well as CNS netting (where the NSCC nets liabilities and assets arising from stock trades - either pluses or minuses - against each other), is the key to understanding how large the con is, and how dangerously dependent upon sustaining the con the system is.
What do I mean?
Hold onto the $100 billion daily trade number, and the $2 billion fails number.
We know from the DTCC that 96% of all trades "net." That means that $96 billion per day is handled in the netting.
This works in two general ways. At the broker/clearing house level, if a buyer buys 1000 shares of OSTK, and a naked short seller sells 1200 shares of OSTK via the same broker or clearing house, then the pre-netting "nets" those transactions: 1000 buys offset 1200 FTDs, leaving a total of 200 FTDs.
These 200 FTDs then go into the CNS netting, which looks at all the shares held long by the broker on behalf of their customers in the fungible bulk held in the system. If that broker has 10,000 long shares, the 200 FTDs are netted against those, leaving 9800 long shares.
The system simply sees pluses and minuses.
So, for an FTD to show up at the FOIA data level, all the buys and sells have to net, and then all the FTDs have to be netted against all the shares held long, before the first one hits the system.
Now do you see how big this is?
Back to the $100 billion with $2 billion daily fails.
$96 billion nets, leaving $4 billion after netting.
Of which 50% fails.
50%.
Half of the $4 billion. $2 billion.
Now, that 50% is beyond frightening. Because the logical question is, "What percentage of the netted trades are failing, but are hidden from view by the netting process?"
50%? Less? Why less? Just to keep the number manageable, let's assume it is less by half - 25% instead of 50%.
That would have roughly $25 billion real dollars being paid into the system per day, in exchange for no-value derivatives falsely represented as shares.
That would be about $5 trillion per year. Give or take.
Now, the real con comes from the commissions generated from making these trades, as well as from playing the angle of depreciation of stocks targeted for destruction.
As we have discussed a million times, the system allows a hedge fund that naked short sells OSTK for $60 and $50 to pull out most of the difference between the price the sale was done at - say an average of $40 share price - and today's market price - say $20.
In just OSTK, if one fund has sold 10 million shares and failed to deliver them, that difference would be $200 million real dollars it can access, while still having never delivered squat.
And that, my friends, is one of the ways that real dollars flow out of the system into the pockets of Wall Street moguls who need new hockey rings, leaving the system holding nothing but markers. The commissions and fees go to the billion dollar bonuses for the brokers, the cash from the difference in sale and current price goes to the hedge funds.
Translating into a percentage of that $5 trillion annual failure guesstimate that is pulled out of the system as a tax on the real economy, by an economy that has convinced us all to put our real money into the system in exchange for their markers.
How much of the $5 trillion sticks to billionaire hedge fund managers who earn hundreds of millions or billions in bonuses per year? A good piece. How many tens of billions stick to the brokers who trade alongside them, and charge to "lend" them stock, and to process their trades? Many tens of billions. How much of that $5 trillion is responsible for the amazing growth in the value of many hedge funds? A lot.
But the money pulled out never returns to the system, year after year after year, as it produces nothing, invents nothing, but rather targets an increasing number of companies for the entropy scrapheap so that delta between $40 and $20 can be reaped.
Mayor Bloomberg, Senator Schumer, wake up and pour yourselves a nice hot cup of, "What a F-ing Disaster" and figure this out.
The system is so beholden to this organized stealing that it would collapse if you stopped it. And the miscreants who have created this nightmare understand that the only option is to continue sucking in new money, new rubes, so they can steal their 20 or 30 or 40% cut every year.
Think this is overstated, or not that big a deal? What is the total GDP?
How long can we as a nation remain viable with a decent percentage of our GDP being confiscated every year, exchanged for an empty bag of nothing? How much more of the baby boomers' retirements will have to be confiscated to keep this ponzi scheme going?
And that, my friends, is why smart money and virtually all IPO activity is going to HK, and places where the system can't steal tens of percentage points of the total market cap every year.
It's not accounting, or too much regulation, or any of the rest of that happy horsesh#t.
The truth is that if I can figure it out, so can many folks considering where to invest, or take their company public. And they are leaving. For good.
While the thieves continue to be allowed to steal our net worth.
Figure it out.
Copyright ©2006 Bob O'Brien
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