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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: saveslivesbyday who wrote (76813)	9/9/2007 3:34:56 AM
From: Real Man	Read Replies (2) \| Respond to of 94695

When someone buys index futures, he buys them from a market maker, who then enters a futures short position and a long position in the cash market (buys actual shares of SP500 stocks) to offset the short for a neutral position. Market arbitrage is completely automatic, so robots do that and cause big 1-min spikes that have occurred frequently during the past 3-4 years. Many bears claim this is a single entity (990N), such as a Fed money center bank (JPM?), which then has direct access to unlimited money supply from the Fed. A more natural explanation would be that LTCM-type programs have become extremely popular on Wall Street in recent years, so a lot of hedge funds and WS firms are selling delta-hedged options for income. The fact that so many are using the same programs leads to fast spikes in the indexes, as there are the quick and the dead in the bunch. Now, this stuff is really somewhat tweaked programs that LTCM used. The early version was portfolio insurance in 1987. This stuff really causes market crashes when liquidity dries up. Thus, the Fed must ensure it does not, and they do. That's the game in a nutshell, but I feel the game may have grown much bigger than the Fed, which, in turn, would mean the Fed can't stop the crash that would occur most naturally if those games were played without the Fed. While stocks appear important, most of these games are being played in currencies (the carry trade), so whenever you see Yen rally, stocks start crashing. You have to see the moral hazard part of the game - since the Fed always provides liquidity at critical times, the game has become "risk free". Money for nothing, chicks for free. Just lever up your positions and earn 30-50% per year in "income" selling options on stocks and currencies. No more LTCM crashes or 1987. The fear is that the game grew to be a lot bigger than the Fed in recent years, so the Fed can do nothing to stop the natural crashing tendencies it exhibits. At some point a crash has to be the guaranteed outcome of the mess.