Hi David; This I guess should be called part Two, to my kicking
the derivative idea down the road. It may have made more sense had
it been part one.
To pull out a part of the equation and make it simple enough to
spark a further interest in it is the best I can hope to
do. I'm sure there are sharper brains than mine that once they
get a starting point can take this a lot further and explain it
better than I can.
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With out over loading the reader with a bunch of numbers and opening
up the question of their reliability I think I can give the general
physics of what I would like to see more people focus on , as it
is a serious fault in the capitalistic system, already it causes
a huge problem that will continue to get worse if attention to it is ignored, the end result of that problem being a concentration of
huge amounts of capital in a area were it doesn't do the economy
any good. In fact the capital gets so concentrated in areas it
creates diminishing returns and makes the so called free market
very inefficient.
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The idea here is to look both ways, but like pulling out in
traffic you look left , right then left again, right now
I want to call more attention not to the way a stock effects
an INDEX , but how Indexes effect the stock. They are not exclusive
from one another but thanks to derivatives an index can effect
the stock to a much greater degree than most people have considered
possible. It can undermine the very reason for having a so called
free market & it causes analyst and earnings estimators
to be pressured into ever increasing unrealistic forecasts in order
to justify what's happening.
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To pull out and stretch a small part of the equation big enough to
understand and still not get involved with the numbers, I'll
take MSFT. Now that MSFT has become the largest company in the
world as far as capital investment goes. One might wonder how
she over took GE,? or XON and BP put together,? or most of the
major Banks such as ( NB,TRV,CCI,FNM,BAC,CMB all put together) ?
Something like this goes well beyond the standard pablem
that investors did this. This gets into highly
leverage Arbitrage trading in the options and futures pits,
where the manipulation of a smaller lever can create spreads
the more sophisticated program traders can scalp. This
huge flow or transfer of capital doesn't do anything for the
overall economy, nor does it always make the parties involved
a lot richer, the scalping may not leave a lot of profit,
but it does force capital to get concentrated.
Meanwhile many analyst are bewildered but while they prefer not
to give any consideration to the strategist, they go on to make
their curves fit what's looks to be, and must be happening.
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Back to MSFT, in regards to answering the question marks above
MSFT is in four major Indexes all of which have derivatives
not counting her own options. MSFT is in the Spoos, the SPX
and the NDX , and the nasdaq ,
and she holds the top position in each of these
indexes ( weight wise ) a full 25% of the NDX is nothing but
MSFT, so if your playing the NDX you know that MSFT can be
a powerful lever, enough that a 1pt move in her can offset
a total of 95, 1pt moves in the lesser capitalized stocks.
Every thing can be going to hell in the NDX100, but a big
player can hit the MSFT lever and turn the whole index around,
or the other way around.
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Some time ago I heard the question raised of why didn't MSFT move
to the NYSE ..ah ha it's coming to me..she would lose her position
in both the NDX100 and the Nasdaq index and the some big players
want her in those indexes.
Now picture MSFT tied to derivatives in four indexes , plus her
own options, and if she moves down what it does to the indexes
& that can cause havoc not just in the derivative market, but when
arbitrage trading comes in hundreds of companies not even in the same
sector at all can wind up being sold off, to adjust to the index
and this has not got anything to do with FA value, this is an
effect that is "forced" on the market by the physics of it all.
MSFT is not in the DOW..but don't think for one minute she does
not effect the DOW index, as every stock in the DOW also belongs
in the S&P500, and many of them in the S&P100, and MSFT dominates
both of them, so the linkage is there, and it's real, and this
linkage has nothing to do with how people VOTE with dollars
for or aginst a stock, it's a forced adjustment.
Politics aside, the indexing as now set up, along with arbitrage
trading is communistic in it's very nature, & I don't think we
can blame the Russians in any way for this.
Jim
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