washingtonpost.com
There is going to be an attempt to rig the market in the coming week by Wall Street and the government. I just read a news story that said that the Chairman of the SEC is going to permit illegal market practices by market makers and large firms and companies to attempt to prop up stock prices if the market falls when trading resumes on Monday. He also said that he wants to put a temporary ban on short selling. It is also likely that the Federal Reserve will cut interest rates on Monday and there are rumors being spread that they will do so right after the opening bell. Naturally whoever is spreading the rumors is trying to make people buy on the open or is trying to jam the futures up. There is going to be a deliberate attempt by Wall Street and the government to rig stock prices after the market opens.
You might think it is good if the market goes up for the country. Not if it happens this way. I know that many of you own stocks and fear that the market will drop Monday and you will lose money. In the long run you are better off owning stocks in a market that has not been rigged. Let me explain.
I have several points:
1)I am not some sort of dogmatic free market guy. I do not believe that you can allow a free market to run unfettered. A free market has no morality to it and if it is allowed to run without any checks then it will cause social chaos and harm. That’s why we have drugs outlawed. That’s why child pornography is outlawed. That is also why we American workers have found it necessary to form labor unions throughout our country’s history.
However, when it comes to the stock market a free market is a must. What the SEC Chairman is proposing will give large institutions and companies an opportunity to take an unfair advantage of the individual investor. They will be given advantages that you simply won’t have. If the market bottoms out Monday they will be able to route their orders more effectively than you will. You will be forced to pay higher prices than normal to market makers and you will have great difficulty if you try to sell.
By saying that he wants to ban short selling, Pitt is also blaming short selling for market drops. This is not true. In fact short selling lowers market volatility and provides a cushion for stocks and the broader market when they drop. Short sellers MUST buy stocks and only short them when they are topping out or have reached ridiculious valuations. When the market opens up on Monday short sellers will be buying stocks, not shorting more.
If stocks do drop on Mondy the real culprit will be the Wall Street analysts who talked them up and let them get obscene valuations during the bull market. The market was overvalued when it closed on Monday and would have dropped much further this year without the horrible terrorist attack. The large market declines that have took place this year have been led, not by short sellers, day traders, or individuals with online accounts, but by insider and institutional selling. If Pitt and Greenspan succeed in rigging the market and making it go up for a week and the institutions use it as an opportunity to get out and we watch it fall and make a new low then you’ll have seen one of the most disgusting things in American history. It will mean that some of the most wealthy and powerful people in the country just used the terrorist attack and national war footing as a financial trick.
2)And that is my second point. An attempt to rig the market is extremely dangerous. What if it fails and only creates a larger panic? The goal of the Federal Reserve should not be to bail out large investors or to try to make the market go up or down, but to insure that it can trade smoothly and without any problems when it opens back up. If that means lowering interest rates a little to do that that is fine. However, interest rates should not be lowered in an attempt to make the market go up and I fear, based on what the SEC is proposing, that Greenspan is planning to do just that.
And people on Wall Street are trying to make that happen and make you think it is a good thing by telling you that a market rally will help the country and will be a sign of patriotism. People have been coming on CNBC and telling you it would be patriotic for you to go out and buy stocks.
People are running around and saying that if everyone bought 100 shares of their favorite stock that it would help the economy. This is nonsense. The head editor of one of the largest financial websites on the internet placed a statement on his website saying that if you are a patriot you’ll buy stocks. It is one of the most vile articles I have ever read in my life:
“It's a proven fact that after most national disasters, stock markets have risen over the following year. Everything else happens faster these days, why not this?
If our markets soar on Monday, we will stun the world and prove that we are serious. That message will be very clear: If you want your fortune to be safe, invest it in America and its industry.
Buy stocks. Support every company you believe in.
Execute those trades early and often.
It's as close as you can get to feeling like you are pulling the trigger against our enemies.”
He does not say one word about the tragedy that happened. Not one ounce of sympathy for the victims is in his editorial. All he can think about in this time of tragedy and crisis is the stock market. And unfortunately I’ve heard similar talk on TV and on the internet.
Do not worry about the stock market. If the market goes up it won’t mean much and likewise if it drops it does not mean that the terrorists have won. You buying stocks, or a market rally, will not help our country. It will only be a temporary phenomena and our real focus should be trying to save lives and rebuilding the economy. That is the only thing that will bring a sustainable rally and a bull market anyway. If you want to do something patriotic with your money send it to some aid organizations in New York City. That is what I am doing. And you would feel like a fool not to do it when everyone else across the country is. If everyone in the United States bought 100 shares of stock on Monday it won’t make a damn bit of difference, but if everyone sent AT LEAST $100 to a relief agency it would make a great deal of difference and may even save someone’s life. I’m sorry, I have to call it as I see it. Trying to benefit by playing on people’s fear and patriotism because you want to see your stocks go up, your fund bailed out, or generate some commission revenue is disgusting. And trying to benefit by making a financial transaction just doesn’t cut it. If you want to be a patriot or a worthwhile human being it takes more than buying or selling stocks. This is serious business and is about more than just whether or not stocks will go up or down. This is about what type of life you live and there is more to life than buying and selling stocks and you have a greater responsibility to the people around you and life in general than making financial transactions. One day you are going to be on a death bed and let there be a smile on your face when you know that you accomplished something worthwhile and lived a full life. Anyone who thinks that they are doing their part by buying stocks on Monday isn’t going to make the trip. And saying that it does cheapens the real sacrifices people have made and are making right now.
Do not worry about the stock market. If the market goes up it won’t mean much and likewise if it drops it does not mean that the terrorists have won.
These people are also trying to play on your greed by saying that disasters and death are great buying opportunities. They’ll say when JFK was killed the market went back up. When Pearl Harbor was bombed the DOW was back up in a year. They bend the statistics by leaving out disasters in which gains didn’t follow. Disasters don’t always translate into gains. The DOW fell much more after Pearl Harbor before bottoming out. Other disasters, such as the assassination of Archduke Fernindand, which sparked WWI, were only followed by more losses.
The truth is that disasters do not start bull markets nor do they cause bear markets. Although they create short-term volatility, they do not change the overall trend of the market. Read this article by Gary Smith for the truth.
thestreet.com
What this means is that this attack is not likely to end the bear market. We are likely to get a rally once the initial panic selling subsides and that rally will generate a lot of wild talk. There will be a lot of people who say that it makes a bottom. Some will say that it is symbolic of our patriotism. But institutions and large traders will use any rally as an opportunity to sell. People are not going to just hold on forever, despite the patriotic calls. That is not the way the market works. And this attack is not bullish for the economy or the market.
It seems that crisis like this bring out the best and the worst in people. For every jackal that is trying to profit off the tragedy there are a million people in the US and around the world that are pitching in to help. I commend thestreet.com for their sympathetic and appropriate coverage during the past week.
3)In the end a manufactured rally has the possibility of actually doing more harm than good to the national economy. In 1998 Alan Greenspan lowered interest rates in order to bail out international bankers and hedge fund managers who made bad investment choices. Our broader economy did not need those cuts. Although he succeeded in keeping those people in business, he also imbalanced the economy by creating a stock market bubble, encouraging massive corporate and consumer debt, and busting the trade deficit. Those imbalances are the exact reason why the economy is in a recession right now. His interest rate policy, although it benefited a few wealthy people on Wall Street, was a disaster for the country. Do we want to risk another repeat of those same mistakes again?
It may be appropriate to lower interest rates next week. But if interest rates are lowered too much – or are lowered for the sole purpose of manufacturing a rally – then they will have the effect of causing inflation down the road. That will mean higher interest rates sooner than later and the real economic recovery will be pushed back at the expense of the big money interests.
I know this message is going to make a lot of people angry. A lot of people will see their portfolios drop when the market opens. Remember this is a temporary financial dislocation. Stocks will eventually bottom no matter what the government does. What I am concerned with is the long term health of our national economy. This is also what is most appropriate if you want to see long term stock market gains. It should not be sacrificed in a panic.
Contrary to what others say, buying stocks or creating a rally is not a patriotic action. The stock market is not the country. The stock market does not fuel the economy. The stock market is nothing but a financial market and exchange. Its price fluctuations move according to the health of this country’s economy and the psychology of its investors. Once this country rebuilds its economy and begins to solve this current crisis the bear market will end. Propping up stocks at all costs is not a solution.
I hope I am wrong and that if Greenspan and the SEC rig the market and make it go up it will actually benefit the economy and help us recover quicker. And it will take a good couple of weeks to get a gauge of the full financial consequences of their actions. I am only speculating now. In a month or two we’ll be able to watch the bond, gold, commodity, and stock markets to see what they forecast for next year and get a better feel for what will happen. I just fear that right now people are trying to prey on people’s patriotism and take advantage of this situation in order to manufacture a market rally that they will use as an opportunity to sell. Based on Greenspan’s past history, I have zero trust in his actions. And I will bet you anything that those people who are telling you that it is a patriotic to buy stocks will be selling any rally that comes.
Like I said. Maybe I am wrong about this. And you may disagree. But there are a few things we can say for sure:
The trading next week is going to be very unusual. Market trends tend to be created by psychology. When we had the bull market everyone was optimistic and excited about the economy and potential for technology to make a new order. When that bubble bust most people saw their expectations get crushed. They became pessimistic about investing and about the economy. That trend went till Tuesday.
For the short term – 1 or 2 weeks – a new psychological grip is going to get hold of the market. On one hand people are going to fear more terrorist attacks and look for military intervention. We will see temporary rallies on news of US military action and temporary drops on worries that we won’t eliminate the terrorists or rumors of other attacks. On the other hand they also will be expecting a bail out on the part of the Federal Reserve to make the stock market go up.
What this means is that the regular trading rythms of the market will be interrupted. The market will be heavily influenced by outside forces that simply cannot be predicted. You cannot predict what events will take place in the new war against terrorism. Nor can you predict when Greenspan will cut interest rates. If the market drops on Monday you won’t be able to predict the bottom.
Whatever events happen next week within 5-10 days the confusion will die down and the market will get back into a rhythm. I plan closing my positions on Monday and just watching for a few days until some chart patterns line up. If you feel like you MUST make a trade then I’d go long Monday. If I see a chart pattern line up on the DOW or Nasdaq I’ll go long, but am content to do nothing. The last thing I would do is short.
Let me warn you though, ff the opening hours on Monday begin with a drop you will have an extremely difficult time routing your orders and getting good fills. There will be liquidity problems, with a large ask size and small bid. If you put in a market order to sell you will likely get filled at the dead bottom. Market makers and floor traders are going to prioritize their orders over yours and with the SEC bending the rules to help those with large amounts of money the small player is going to be screwed.
I’m going to close out all of my short positions, except GENI, on Monday and will be content to just watch for a few days. |
