12/9/05 News, Views and Notes

Big Bullies Taking Our Lunch Money...
...While waiting at the doctor's office yesterday, I read through the September 2005 issue of Kiplinger's magazine. Their managing editor in his piece at the front of the magazine was basically recounting some recent sins of some big market insiders and how they profited at the expense of us little guys.
...Among the things he mentioned were several big mutual fund companies allowing other institutional traders to purchase shares of their funds hours after the market close, at the closing price for the day, after those investors checked out how other markets were performing. In other words, they were giving them an edge intentionally, something that they would not do for you.
...Another issue he raised was the practice of some brokerage houses not recommending a stock for purchase unless they were paid to do so. How's that for an honest opinion?
...And last, but certainly not least if you are a trader, is the practice of some market specialists of violating their fiduciary duties in handling orders. Some of them actually front run their customers orders. Imagine that! One example of how they do this: Say a stock is trading at $29.90 bid and $30.00 ask. The specialist receives market orders from a buyer and a seller. Instead of matching them up, he fills the buy order at $30.00, and the sell order at $29.90 and pockets the dime on each transaction. Doesn't seem like much, but it adds up.
...According to the article, these crooks made off with about $19 million dollars over the past few years at their customers expense via this practice. That number sounds low to me. The article wondered how this could be going on. Isn't there someone out there watching out for us?
...He laments that the solution of the overseers seems to be to videotape some of the specialists some of the time in order to keep them on the up and up. His solution: Get rid of the specialist system and use electronic trading to match up all buy and sell orders. Sounds logical to me, although I'm sure somebody can come up with a good argument for keeping specialists. One would be that they are supposed to be buyers and sellers of last resort - at least when they are doing what they are supposed to do - I seem to recall that a lot of them didn't answer their phones on the fateful crash day in 1987.
...I can see that being a buyer or seller of last resort would be a lousy deal on a particularly bad market day, but look at what a sweet deal it is the other 99%+ of the time. The specialist sees all orders out there. He can see when there is buying or selling coming into a stock. And he or she is allowed to trade for their own account. How would you like to be trading with that edge? He can see where all the stops are placed, and has the ability (so I hear) to run the prices in one direction to clean out all the stops just before allowing the market to run back the other direction.
...He can even take one side or the other in a trade, all the while seeing all the information available while his opponent in the trade doesn't. How sweet is that? Here's an example I read in a daytrading book years ago. Suppose the marketmaker (MM) has a 100,000 shares of market buy orders and 40,000 shares of market sell orders that came in overnight. Remember, he gets to pick the price at which the stock will open for the day. Now he can adjust the opening price to a point where he sees that there are sufficient sell orders out there at higher prices to basically match the buy and sell orders.
...Or, he could set the price at a place where there will be a total of 80,000 sell orders matched up against the 100,000 buys. And he could then go short out of his own account the other 20,000 shares. If he does that, would you feel safe in betting that the stock is going to be opened at a higher price than it closed, and then is going to sell off after the open? Think about it. He gets to pick the opening price. He is going to go short 20,000 shares at whatever price he decides to open the stock. Do you think the stock is going up or down after the open? What would you do if you were the MM? That's right, and it's legal. Does that explain at lot of the severe up and down intra-day spikes you see day after day in the stocks you follow?
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Define 'is'....Nice article on MarketWatch today by Mark Hulbert. The gist of the article is that some of the information we receive is sleight of hand when it comes to P/E ratios. Hulbert points out that "...some advisers are playing fast and loose with the historical data to make it appear as though the stock market's price-earnings ratio isn't as above-average as it really is."
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Gold rush?...
Gold has been making quite a move recently for whatever reason. There's a lot of opinions out there. And the gold bugs have been slobbering all over themselves on the bulletin boards. I read an article today in the mainstream press about gold being a possible alternative currency. I have a hard time believing that, but we'll see.
...I used to be something of a gold bug years ago, but became disillusioned after getting whacked on gold trades on a too regular basis. I came to the conclusion that gold is one of the more manipulated markets out there. IMO, gold is never going to be officially recognized as currency by most of the world's economic powers. It would be disastrous for them. When the U.S. officially cut its last ties to the gold standard in 1971, that changed things forever.
...IMO, the central banks of the world have a vested interest in making sure that gold is not considered currency. Take our example here in the U.S. We use fiat money. Our notes are currency because our government says it is. And our masters at the Federal Reserve can expand or contract the money supply as they wish, since there is nothing as restrictive as a gold standard to compel them to do otherwise. So when you go long gold as a fundamental investment in the belief that gold is going to be money again, you are betting against the central banks of the world. You are betting against unbelievable power and money. There are better odds elsewhere.
...I will say, though, that there appears to be something going on out there this time. But I am still betting on the real world powers to squash it at some point. They have been able to do that every time for over twenty years, and I'm thinking they will again.
...What might be out there that would be different this time? Not sure. Some folks think that it might be the Iranian oil bourse next year. From what I understand, they will not be using the U.S. dollar as the unit of exchange for oil transactions. And from what I hear, that is a very big deal to us. Here's an opinion (not mine) on that, presented just to give you another side of a potentially big story that doesn't seem to get much mention in the mainstream press. And here's another.
...I also hear that there is increased Chinese demand. Here is just one article on that. And IMO the Chinese are the whale in any pond they enter.
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...Winter here in the frozen north. Be careful. It's slippery out there.