Tag Archives: Investments

Required Reading for All Investors

President Obama just finished speaking about the economy from Nellis Air Force Base in Las Vegas, NV. Very positive, uplifting, well-laid speech – something we can finally say about our President again. If you don’t know how the markets have been responding to our President, then you probably don’t know what’s been going on in the markets in general. This post would be a novel if i tried to go over just what’s happened this week, and Monday was a Holiday. So, thankfully here’s an article that kind of sums everything up nicely and in such a simple manner, my 10 year old little brother might be able to beat the average investment manager after seeing this. I like how the article was published kind of in tandem with The President’s speech today. Enjoy!

Oh, just in case you didn’t know, the 20-day simple moving average on the Nasdaq crossed over the 200 yesterday. Let’s see if that GDP number on Friday can help the Dow and S&P catch up. Happy Trading.

Great pic from The Huffington Post

Great pic from The Huffington Post

“This is Big Business. This is the American Way!”

I got a list of people...If Im going down, Im taking a whole lot of people with me!

"...I got a list of people! If I'm going down, I'm taking a whole lot of people with me!"

Ken Lewis just can’t seem to get his act together. At least Vikram Pandit, head of Citigroup (NYSE: C) – which is arguably in similar to worse position as Bank of America (NYSE: BAC) – has had the sense to stay out of the newspapers for a while, keep his head down, and at least keep up the appearance that he’s trying to grind it out and do things right this time. Lewis on the other hand, from his standoffish demeanor during the most recent hearings in front of the Finance Committee, to his initial claims of pure ignorance regarding the Merrill Lynch bonuses and balance sheet situations, to the current controversy, where his new defense about Merrill is “the Government made me do it and made me keep it ‘hush hush.'” (Get the Full Story here as reported by The Wall Street Journal Online.)

To quote Jack McCoy in cross-examination in one episode (or one hundred episodes) of Law & Order, “Were you lying then, or are you lying now?!?”

I think it’s safe to say that many are “skeptical” about the absolute truth of Lewis’ statements, but it’s not hard to believe that Paulson and Bernanke at the Treasury and the Fed may have had a hand in how things played out, and certainly are responsible for the way some of this information has come out, which is sloppily, and non-desirable-press inducing. At the very least, Lewis has deflected some of the spotlight for the moment, and has thrown two of the most prominent figures in this entire “recovery” process directly under the wheels of the Political “Straight-Talk Express.”

Regardless of whether you think it was a good or a bad move on his part, this scenario is very similar to what those from “the inner city” or “the hood” might call “snitching.” That being the case, I would think that many from “the hood” would consider what Ken Lewis has just done as being a “bitch-ass-move.” I tend to agree with that, but feel it’s also noteworthy to point out that corporate rules are obviously different from “hood” rules. No matter what, usually when there’s a crime to be sorted out with multiple suspects, the one that talks first usually gets the best deal. From that perspective, Lewis’ move is a smart one, and Paulson and Bernanke would be idiots for not revealing this information themselves, before Lewis, especially since they’re government officials which would potentially have shielded them from the prospect of “wrongdoing” on their parts being that they would have been the ones doing their jobs by reporting it. Add to that, the fact that Paulson (before) and Bernanke (now) can be considered the “cops” of the TARP/TALF/PPIP framing and administration, and it can be argued that although Lewis was snitching, he was snitching  on cops, so for that, he would get a pass from the orginal bitch-ass nature of his snitching actions.

At the end of the day, I’m not too moved by the story itself. Bernanke’s already been on record as having been against the Merrill-Bank of America deal, but not feeling as though there was much of an alternative if Lehman is any indication of what could have happened. Paulson was always a shady looking character in my eyes from the beginning, and he’s part of the Wall Street wrecking crew anyway, so I wouldn’t be surprised if Paulson,  after setting up the deal and seeing that there would be these types of problems, told Lewis to blame it all on him. Think about it. John McCain had already made his “economy is fundamentally sound” comment in the face of the Lehman collapse, so Paulson had a pretty damn good indication right there that he probably wasn’t going to be Treasury Secretary for much longer. If that’s the case, he could be pretty safe telling Lewis “hey, blame this bonus and balance sheet stuff on me if things get really tough. It won’t be me that has to give that speech. I won’t even have to say anything about it at all. That’ll be on the new guy.”

Now I’m not suggesting that Bernanke is completely innocent in all this. He’s at least partly responsible for the ugly, sloppy way this information and the details of these deals have come to light, and that may be being generous as well. Ultimately though, Bernanke has come across as being more up front and forthcoming, therefore more credible than either of the other two characters involved in this headline grabber. Net net, this is a losing situation for Lewis. He reveals more of his own character flaws (another euphemism) in this scenario than anything. More and more, as the story unfolded yesterday afternoon, the whole thing reminded me of a scene in a fairly old movie – many from “the hood” would consider it a hood-classic – New Jack City.

Nino Brown (Wesley Snipes) runs the murderously bloody CMB, a drug-dealing organization, holding a Central Harlem Housing Project and its resident’s hostage as its base of operations. After being caught by rogue cops, and witnesses of the organizations dealings step forward, the following court scene occurs. (*Spoiler Alert*)The magic of this clip comes when Nino himself takes the stand, explains his reasoning, and then pulls a move that proceeds to turn the trial into a media circus. Sound familiar? I’ve  transcribed my own Ken Lewis translation below the clip. Once the judge calls for “order in the court,” that’s a good point to stop the video and read the translation. Then continue to watch the end…if of course you don’t mind spoiling it and somehow haven’t seen this instant classic already.

Ken Lewis:

“This thing is bigger than Ken Lewis. This is Big Business. This is the American Way!…I wanted to get out [of the deal with Merrill Lynch]. They threatened to [take my job.]”

NY A.G. Andrew Cuomo:

“Who are you talking about [Mr. Lewis]? What They?”

Ken Lewis:

They!Look at [them! Hank Paulson and Ben Bernanke!] That’s right, the educated brother[s] from the bank[s! They’re] the real heads of [BAC], the brains behind the whole thing! I told you, this thing is bigger than [Ken Lewis], and I got a list of people! If I’m going down, I’m taking a whole lot of people with me!”

 

If the end of the movie is any indication of what could happen to Ken Lewis, I’d say the days in his current position at the helm of Bank of America are numbered.

Campos vs. Asensio: More on Short-Selling and The Uptick Rule

This past Tuesday afternoon, April 7, Bloomberg News featured two prominent figures in the world of finance to discuss and debate the SEC’s proposed reinstatement of the traditional uptick rule, or the imposition of a modified version. It sure was a showdown in the world of market regulation. Here’s the recap and analysis…

 

In the Blue Corner arguing in favor of the uptick rule, we have Roel “Jor-El” Campos -Former SEC Commissioner, and advocate of more regulation in the area of naked short-selling.

In the Red Corner arguing against the uptick rule (and, it turns out, any and all short-selling restrictions of any kind) we have Manuel “Lex Luthor” Asensio – Managing Director of New York based Hedge fund, Millrock, (and best Lex Luthor look alike I’ve ever seen!)

 

Slightly resembles Campos, No?

Slightly resembles Campos, No?

Campos does a great job of actually explaining what the uptick rule is and, later in the interview, the difference between legal short-selling and illegal “naked” short-selling. In case you missed it, the uptick rule or uptick “test” would mean “that a short sale [order] cannot be executed [in the market] unless there is some evidence…[by either] a price test or a bid test…as to whether the stock is rising.” Essentially, this means that stocks can only be shorted when they are actually going up at the moment you place the short sale order. He also explains that the uptick rule is a bit of “Chicken soup,” meaning it’ll make the activists and congressional members that have pressured the SEC about it feel a little bit better about the prospect of abusive short-selling being less prevalent in the markets. However, with the markets as computerized as they are today, and with more advancements on the way, it’s still very easy for savvy, sophisticated, investors to “manipulate the tape” – create the appearance that a stock is experiencing buying or selling pressure by placing strategic large orders on the order book – and still get away with the type of dubious activity that the uptick rule is essentially looking to at least hinder. So, Campos actually even concedes to what he also believes as fact, that even restoring the uptick rule or something like it really won’t do much in the way of stopping illegal short-selling activity.

In response, however, Asensio starts off throwing wild accusations at Campos. He references a letter Campos wrote supporting the regulation of short-selling by imposing the uptick rule or some modified version, which was supported by many “main street companies.” Asensio says these companies that Campos represents are “very questionable companies…that should be the targets of the investigations themselves.” He then calls for more deregulation of the markets in regard to short-selling, stating “there is no economic reason why America should cause and force short-sellers to borrow stock.” He tries to make all short-sellers look like they are all some kind of investment superheroes that short stocks purely for the purposes of stopping price manipulation on the upside and to discover true price parity, or the true value of a stock. He even advocates for the legislation of whistleblower protection for members of public companies that are sued by those companies for blowing the whistle, and tries the old guilt-by-association tactic of trying to say Campos “represents” these types of companies. This guy is some piece of work, but if you keep an eye out for the signs and read between the lines, it’s very easy to see the wolf in sheep’s clothing.

Asensios a dead ringer!

Asensio's a dead ringer!

First of all, I’ve been searching for this supposed letter by Campos, which is supported by these “questionable companies,” and I haven’t been able to come up with much. The two that are fairly recent and deal most directly with the issue at hand that I did locate, can be found by clicking the links in this sentence. But neither really mentions nor is endorsed by any public companies…unless Asensio was talking about the companies through which the letters were published? That doesn’t make much sense either though. So, what underhanded, “questionable” organizations is he talking about? To be honest, I don’t even think he knows what companies he’s trying to implicate by saying that. His entire performance is nothing more than the typical cloak and dagger tactics you would expect from a perfidious, villainous, Lex Luthor-ian salesman, especially now, and especially in the finance industry. Is it really a wonder why we are in the mess we are in right now with guys like this running hedge funds?

Secondly, the calmly arrogant demeanor that Asensio maintains throughout the interview is simply an extension of this surreptitiously evil mind trying to maintain this bogus façade of nobility and humility, trying to lure the viewer into seeing it his way, or at least see that he is perhaps much more credible than he obviously is in reality. Saying that short-sellers shouldn’t have to borrow any stock at all and should be able to sell shares at will with absolutely no regard for the downside and the possibility of that trade going against them, is just like saying buyers shouldn’t be forced to actually pay for the stock they buy, and should be able to buy at will. If this were truly allowed to happen, the current economic recession would feel like utopia compared to the economic situation we would be in as a nation if Joe the Plumber and his band of brothers could actually participate in the market without having to actually pay for any trades that went against them. The market would have dropped to 0 if these were the rules for investing, because once the market started to drop from 14,000+ in October 2007, no one would have paid for their trades! Anyone that pretty much bought stock from then through November 20th 2008 – some until March 9th of this year – has been losing money on that trade every day since they bought it! Why the fuck would you pay a trade they were down in by 2, 5, or 10% by settlement, especially if they didn’t have to? NOBODY!

Finally, it’s obvious that borrowing is what got not just us but the entire globe into this trouble in the first place. The fact that on many stocks, mostly very volatile ones, the extent to which you have to “borrow” (to cover for settlement) is as high as 75-80%, is a means of keeping that same type of out of control leverage that was prevalent in other markets and helped get us into this, away from these markets. All trades are based on ifs, and if that trade goes against you, you’ll be glad that the higher requirements saved you from getting crushed on the entire position, because you “were forced to protect” 75-80% of that highly speculative position. Now you’re only getting crushed on 20-25% of it, but at least you’re still in business. It’s tragic when going the wrong way on one trade in Volkswagen could cause a short-seller to take his life, so I’d say this type of protection is critical on all investments, but especially on ones that are tremendously high in speculation.

The uptick rule is like warning labels on cigarette boxes. Shorting, like smoking, is the other side of a 2 sided coin. Buyer’s, like non-smoker’s, and proponents of selling (smoking) restrictions. Non-smoker’s recognize the health risks that smoking poses to the overall community, as buyers recognize that deflating prices, by shorting stocks, brings the overall economy down thereby threatening the economic health of the overall community,  along with the markets. Regardless, shorter’s are gonna short, and smokers and gonna smoke. The uptick rule, like a warning label, simply makes it a little less attractive to do it, and has been proven to have the overall effect of discouraging an action (naked short-selling and smoking) that has proven to at least inject more potential for unhealthy activity.

At the end of the day, it is clear that this was a very poor attempt by Manuel Asensio at trying to maintain the shroud of secrecy around what short-selling actually is and the market manipulation that can and does occur due to abusive naked short-selling. He does great job looking like one of the most diabolically evil genius’ of all comic book history, but is too transparent with his chicanery to truly pull off the full impersonation. In my eyes, Gene Hackman will always be the best Lex Luthor!

The one and only...

The one and only...

A General Explanation of Short Selling, Naked Short Selling, and Illegal Naked Short Selling

What does it mean to sell short?

Selling a stock short is the exact opposite of buying a stock. When you buy stock, it is typically because you think the stock is rising and you will therefore be able to sell that stock at a later date and at a higher price, profiting from the difference between your low purchase price and subsequent high sale price. When selling a stock short, you still profit in this same way, accept the “order of operations” is reversed. Instead of achieving the low purchase price first, by buying, you “open” or begin a short sale transaction by achieving your high sale price first. You do this by selling shares of a stock that you do not actually own. Why would you sell shares of a stock you don’t own? Well instead of believing that this particular stock is going up, you believe the stock is going to go down.

Strictly as a hypothetical: maybe Google (NYSE:GOOG) at $400 per share is too high a price in your eyes. At that point, you would want to sell shares of GOOG while it’s trading at or around $400. If you are correct, and the overall investment community agrees that $400 is a high price for Google, the stock will be sold off, and go down. In order to “close” or end your short sale transaction with profits, you would have to buy shares of GOOG at the lower price, say when Google is at $320 per share, making your profit (the difference between your high sale price and subsequent low purchase price) $80 per share or roughly 20%. (This example reflects no personal bias on the share price of Google now or at $400 per share, and is purely for argument’s sake.)

Image from the Washington Post

Image from the Washington Post

Many people argue that short selling as a whole should be illegal, because in essence you are betting on a stock falling, which of course is never a good sign for the people working at that company and the prospect of their continued progress. As such, making money from a drop in that stock is akin to benefitting from the suffering of other people. Despite the social and moral implications of this view, there’s nothing illegal about it, and at the end of the day, that is how life goes. People profit from the misery of others all the time. Charles Darwin isn’t heralded for being a nice guy that was interested in science. “Survival of the Fittest” plays out in all environments no matter how large or small. Short-selling is simply the opposite side of a two headed coin. At some point, all stocks trade at a market price that is higher than the company’s true valuation. Short-selling is a function of the markets that helps in achieving parity between these two prices when sentiment around a stock and its share price might be inflated or unjustified.

Settlement

The problem with short-selling, lies within the timeframe allotted for settling a short sale transaction, and failure to do so. When buying equities, the average timeframe between the actual date of your purchase, (Trade Date) and the actual settlement of that purchase transaction, (Settlement Date) is 3 business days. This is denoted as T+3. (*This timeframe can fluctuate depending on the markets in which the equities are purchased or the type of equities in question. Money market mutual funds and options on equities settle T+1) So, when you buy stock, you have 3 days to settle the trade and put the money in your trading account if it’s not already there.

However, when shorting stock, you need to deliver the shares, not cash, to the buyer on the other end of your sale, in order to settle the transaction. Since a short-seller doesn’t own the shares being sold, they need to borrow those shares from a third party, which I will get to very shortly. The borrowed shares will go to the buyer on the other end of the short sale transaction on Settlement Date, (T+3). Although this will settle the short sale, it doesn’t “close,” or end, the short-sellers obligations in this transaction. At a later date, hopefully after the stock has dropped, the short-seller can buy the shares at the lower price, and replace the previously borrowed shares thereby covering or closing the trade, with the short-seller pocketing the difference and having no other obligations.

Borrowing

Because borrowing is inherently involved with any short transaction, all shorting is done using “Margin“, which is a whole other beast in itself. Basically, using “margin” is borrowing – usually from the brokerage firm where your account is held – an amount of money that is up to the equivalent of what you deposited in the account. So, if you have $10,000 cash in an account, you could use margin, and leverage that money 100% to give yourself $20,000 worth of buying power – $10,000 borrowed from the brokerage firm against your $10,000 in collateral.

As an aside, let me just say that in my opinion, no individual investor should ever use margin, ever! It’s the equivalent of buying stock with your credit card, or with a bookie the way you place sports bets, and that’s certainly high on the list of the dumbest things anyone could ever do.

However, since short sellers are using margin, they don’t always have to borrow 100% of the amount of shares they sold short in order to settle, or deliver, on the short sale transaction. 50% could be backed by the investors’ money (and shares that the bank bought backed by that money), while the other 50% could be backed by margin (shares the bank bought with their own money, but lent to you on margin). For example, if you have a total short position of $10,000 worth of stock, $5000 worth of shares must have either already been borrowed, or the cash to make that purchase must be sitting and ready in your account, while the other $5000 worth is paid for with margin against your $5000. This satisfies the average margin requirements, and gives you the full amount of shares being sold short which goes to the buyer on the other end of the transaction, for settlement. However, you still owe the bank “replacement shares” for the shares they borrowed on your behalf to settle the short sale. The time frame you have to essentially “replace” those borrowed shares with the bank is known as the “Days to Cover.”

Covering and Closing

Buyers have 3 days, on average, to come up with the cash as collateral for their purchases. Short-sellers have the same amount of time to deliver borrowed shares as collateral for their sales. How long does a short seller have to replace those borrowed shares that were used as collateral for their short sales? More complications: The timeframe for “covering,” or closing, a short-sale is determined by dividing the average daily volume of a stock, by the amount of short interest on that stock. For example, if there are 20,000,000 shares of XYZ Inc. being sold short, and the average daily volume of XYZ Inc. is 1,000,000, then a short-seller has 20 “days to cover,” (20,000,000/1,000,000.) This is just an example, as short interest and average daily volume can vary dramatically on all stocks, so some stocks afford 40 days to cover, while others only afford 5. It is more important to understand the relationship between the three values. The lower average volume is in comparison to short interest, the more days you will have to cover a short sale. But the more time you have to cover, the more time the stock has to run against you, which would cause a “short squeeze.” So, short-sellers seek to short companies that allow fewer days to cover rather than more.

Naked Short Selling

When an investor sells shares short without borrowing the shares first, it is a “naked” short sale. The seller does not have the collateral, (the shares,) to satisfy the sale, nor does he have any guarantee that the shares will be available by settlement date, and is therefore “naked.” Sometimes there are not a lot of shares available for borrowing, which can happen with illiquid stocks. Other times, there aren’t too many “lenders,” or lending institutions from which you (or more likely your brokerage firm on behalf of you) can borrow the shares. If the shares are not borrowed, or your short sale is not “covered” by settlement date, this would cause a “failure to deliver” (FTD). Failures to deliver occur all the time, on both the buy-side and the sell-side, but aren’t extremely prevalent as a whole. Maybe, in an illiquid market, it took a few more days to locate all of the shares to borrow in order to satisfy your entire position. Maybe it took a little more time overall to locate an institution where borrowing was even available. (*It should also be mentioned that there are various extensions that both buyers and sellers can receive if they do not have sufficient collateral by settlement date. But just like being late with your credit card payments, it is a “red flag” against you if you take an extension, and there is a limited number you are allowed to take before you are “cut off,” and restricted in some way.)

Just because an FTD occurs doesn’t mean that it was due to illegal naked short selling, it doesn’t even mean it was due to selling at all. But, FTD’s can be a sign that there could be a “problem”, a manipulation going on in some way, and yet, aside from it being electronically generated in a “failure to deliver” report that some intern at the SEC most likely glances over or completely overlooks, nothing really happens. The short position remains open and legitimate, as if it actually had been settled, until the time that the short seller actually decides to deliver the shares, or covers the transaction by buying the shares in the market.

So, if I was an underhanded individual looking to profit from illegal naked short-selling, the mindset would be: “What are the chances of this stock dropping, and my being able to cover this short sale without ever borrowing the shares? What if the stock keeps dropping and I keep adding to my short position, thereby increasing short interest, and continually extending the amount of time I have to ‘cover,’ all the while forgetting about ‘delivery on settlement’ altogether? Well then as long as I continue to maintain a good, large-sized short position, and the stock keeps dropping, I can potentially forget about ever having to borrow shares for settlement, and just focus on covering when the stock actually begins to show some sign of life and real upward momentum. The SEC doesn’t even really do anything about FTD’s anyway.”

“Illegal” or “Abusive” Naked Short Selling

Thinking in the manner described above is what leads to the type of naked short-selling that is illegal, where the seller has no intention of ever delivering the shares to the buyer at the time of settlement. The fear is that short-sellers – specifically institutions like hedge funds that specialize in shorting stocks and have enough cash behind them to manipulate, say a low-priced, low volume stock – could continually short a company, no matter how good or even flat the stock may be performing, inundating the tape with sell orders, and driving the stock price down hard and fast. When short sellers fail to deliver, it creates a set of “phantom shares” that are hypothetically being sold, but of course these phantom shares won’t be really sold short until “the money changes hands,” or in this case until the shares change hands, and those transactions actually settle. Until then, the shares being sold short, that haven’t actually been delivered upon settlement, are in a type of market-purgatory where they are neither sold nor bought. (Think of the train station Neo is trapped in at the beginning of the movie, Matrix Revolutions. That is where these shares are.)

Nonetheless, the real perception, which you could get by simply reading the tape of course, or paying attention to the increases you would see in short-interest, is that these phantom shares, are actually being sold! “Sell” orders are going off! That puts real selling pressure on the stock, dropping the price like a text book falling from the Empire State Building. If buyers come in with heavy volume and the stock should happen to rise, bucking the short-selling trend, abusive short-sellers will only add and add to their short positions, and put more selling pressure on the stock, exponentially engorging the lot of phantom shares, with no regard for settlement whatsoever!

 

The SEC’s dilemma comes in the form of regulating this type of illegal naked short-selling without hindering or penalizing those short-sellers that follow the rules, settle on time, cover on time, and are not abusive. Even if an investor or investment firm had one or two FTD’s on their record, if these infractions were spread throughout a reasonable amount of time, it could be reasonably overlooked with nothing more than a warning. In the technologically advanced world we live in, compared to when these rules were originally conceived, matching an actual short-sale to an actual buyer to then record an actual failure to deliver is very hard, thus conducting this activity illegally while slipping under the radar is much easier. Electronically recording failures to deliver is probably pretty easy, but it still requires human intelligence, desire, and expertise, aside from time and manpower, to comb through that information to see which FTD’s actually came from naked short-selling, and then continue to track, follow up and report progress on, or penalize them as they occur, until the time they all finally settle.

The uptick rule and various other proposals being discussed by Congress and other Financial Authorities right now are the market tools with which we as a society are most familiar with using in the dissuasion of illegal naked short selling. Regardless of what critics of the uptick rule might say, the mechanism can at least temper the downward pressure a stock can experience when being bombarded with heavy short interest. Even with the uptick rule in place, the old adage that stocks “sure drop a lot faster than they rise,” still rings true, so short-sellers should still be able to prosper with some sort of uptick rule or circuit breaker in place, as they did during the 70 years prior to 2007 when the uptick rule was abolished. I would hope that regardless of one’s personal position on the provisions recently adopted by the SEC regarding the uptick rule, that it is easy to see that without such a mechanism in place, acting as sort of a filter for legitimate market activity on the short side, bad practices would be harder to punish and even differentiate from best practices, or just okay practices that follow the rules by the bare minimum.

The Power of A Dollar

What a ride it’s been for the past couple of weeks. There have been a number of measures taken by the Fed, the Treasury, the Administration, and Congress to prop up our nation’s economy. There has been even more criticism from all angles. I myself am even skeptical of many of the recent moves made by our Government in response to this crisis. Despite that, the big picture for investors is this: more money being pumped into this market to stabilize it, along with a few “better-than-expected” economic indicators showing that at the very least the decline is subsiding, certainly creates a nice environment for making some solid profits!

Here are the numbers:

On Monday March 9th, the low on the Dow Jones was 6440 according to yahoo.finance.

A little over two weeks later, on Thursday March 26th, the Dow hit a high of 7969.

That’s a move of 23.7% from trough to peak, in just over a payment cycle!

Hypothetically, if you invested $100 in a stock that moved directly in-line with the market, that $100 was worth $123.70…on Thursday, March 26th…at the peak of the day.

Of course, unless you sold at that very moment, it would now be worth less, but still roughly $116 today, with the market around 7500. Not bad.

Now, here’s the kicker. I bet there are a lot of investors that were sitting on some nice profits this past Friday, when a slew of reports hit the news regarding negative sentiment for upcoming earnings and economic indicators for the first quarter of ’09, along with some very public “infighting” at AIG, all stirred the pot of selling pressure. I took profits on some of my investments, but I bet there is an extremely large number of investors out there that didn’t. Even with today’s blood-letting of 254 points on the Dow, there are still a ton of investors that are still up 16% on investments made within the last few weeks, but still will not sell anytime soon. They would rather let those profits disappear in the hope or belief that given time, the investment will give them another opportunity to net an even higher return.

My philosophy is, if you believe the stock will not only go up again (after it moves lower from where it is now), but that it will rise higher than this previous peak on the next go round, why not book the profits you have, (16%) and then buy back in when you think this current downward move is coming to an end? Following my philosophy and still using the $100 hypothetical from earlier, you would have $116 after selling your investment today. If over the next 2 weeks, the market went back to 6500-6440 (to test the “bottom”) and you got back into your hypothetical investment (which in our example moves directly in-line with the market), now you’d be reinvesting $116 instead of just holding the original $100. If, following that re-investment, the market and your stock proceeded to make the same move upward, (another 23.7%,) back to these past highs, well then at that point, your original $100 that you booked profits on and reinvested at $116, is now worth about $143…so far! The guy that held on the whole time and never sold for the re-buy on the dip, he’s back to his original $100 being worth $123.70…if he sells tomorrow.

Some might say that this philosophy would be akin to trying to “time the market” and “no one can accurately time the market over the short term.” This is a statement I wholeheartedly disagree with. On a very basic level, if this were true, then a logical conclusion might also be that no one could accurately make money in the market since doing so directly involves timing. No matter what direction the general market is moving, all good situations have bad times. If you get in at a bad time, you’re done. Therefore, timing is the most important thing when it comes to making any investment. The intent behind any and all research done and reports read about investments is to determine whether or not it is the right time to buy, sell, or continuing holding the asset. To say you can’t “time” the market accurately demonstrates a defeatist attitude, which typically leads to the self-fulfilling prophecy of most investors not making money with their market ventures despite their best efforts, but if it were true, it would also mean that any and all research done on investments is all for naught since it won’t help anyone “time the market accurately.” Obviously, this is not true, so the former must not be true either.

In order to be a successful investor, especially now, you need to know, understand, and believe that not only is it possible to “time the market” over the short-term, it is fairly easy. Let me say that again, because it goes against everything that the perceived “Wall Street wizards” want you to believe and have told you since the markets were created. It is easy to time the market over the short-term! Money managers have lied to us from the beginning of finance and commerce about this fact for a simple reason. If society and therefore the investment community actually knew how easy it was to track, follow, and predict the movements of your investments, they wouldn’t need investment advisors and those guys wouldn’t make any money. They wouldn’t even have jobs. We need to believe that it is hard to make money in the markets in order for us to believe that we will not be able to do it without their help. That way, they can charge us just for talking to them, no matter how good or bad their advice!

What do you actually pay your investment advisor for? Being a former registered representative, I know exactly what it is, and what your advisor wants you to believe it is, and let me tell you, those are two very different things. He wants you to believe you pay him mainly for his speed and availability of financial information, and for the resources his organization may boast having access to, such as analysis, which he wants you to believe you certainly cannot do on your own without the “training,” “experience,” and “expertise” he or his colleagues may possess. Well, if the current state of our economy is the result of their “training, experience, and expertise,” I think it’s fairly safe to say we certainly could have lost our own money – and probably would have had a lot more fun doing it our way at that.

No, what you actually pay a broker for is simply to gain access to the markets. Your broker is in direct competition with TD Ameritrade (my personal choice,) Etrade, and all the other onlinebrokerage companies, because with online firms, you pay a low flat-rate commission per transaction, and have general access to the same information your broker holds over your head as “unattainable, unless you’re on Wall Street.” There are also extra informational services offered through most online trading firms that can be earned through consistent trading, or you can pay for it. Regardless, the only real way for you to get your money from your bank account and into shares of a company that trades on the market is by going through an investment or brokerage firm. Either you make your own trades, or you pay someone else at the firm to manage your portfolio, and do all the work that goes along with it, for you. It should be obvious now that since brokers get paid by charging you a commission, whether you make money or not, they have an inherent incentive in not doing all the work that goes along with managing your money.

First, let me preface this by stating that in order to be confident on your own ability to do anything, you must educate yourself  as much as humanly possible in the intricacies of that arena. In order to be confident in your own ability to time the market and make investment decisions without the direct, commission-generating assistance of a broker, you first need to know what makes the market move. Economic indicators, like GDP or monthly unemployment stats, legislative action from the Government, such as Healthcare reform, or tax changes, Interest rate changes from the Federal Reserve, all of these events can have a serious impact on the market. If the news is, or the numbers are in line with what most investors are expecting, the impact is usually positive, and if things happen unexpectedly, the move usually goes whichever way the unexpected news favors. Over time, watching and observing the markets, and watching closely during these times and around these events -among many, many others – you should notice certain patterns begin to emerge. Once you are able to recognize a pattern, making a prediction becomes a lot easier.

The next thing you need to know is how the overall moves in the market can affect the moves experienced in your investments. Do your investments tend to move with the market or against it? Once you know if your assets move with or against the market, you need to determine if they move more, less, or as dramatic as the market moves. (In stocks and finance, this relationship is quantified as the “beta value,” and measures a stock’s volatility in relation to the overall market. A thorough understanding of the underlying information that lies within this single number is essential to being able to accurately predict the short-term or long-term direction of your investments.)

Now once you know what moves the market, and how those moves in the overall market will impact the moves of your investments, you need to know what events that are not specific to the overall market will also have the affect of moving your stocks in any one direction. Earnings announcements, contracts, buyouts, law suits and litigation, all of these and more are big events that are stock-specific, and can have a dramatic impact on where your investments are headed. Not only that, there is an inherent pattern of movement within each stock that is directly linked to the frequency of these events. That pattern can be seen by looking at the stocks chart. Each reversal in movement, every time the stock turns upward after moving down, and vice versa, can pretty much be attributed to either a single occurrence of some event, or a cumulative result from the combination of a few. Good earnings send a flat or down stock upward. Law suits tend to be like cinder blocks wrapped around the ankles of previously rising stocks. A company receives a large unexpected contract, the stock is going up, especially during the next earnings announcement, because that’s when that large unexpected income should hit the balance sheets.

These are just a few small examples of events that occur within stocks, (stock -specific events) that will either send the price significantly higher or lower. Since the legitimacy of that statement for each individual will depend on their definition of the phrase “significantly higher or lower,” I would consider it to be $1 or 2.5% or more in any direction, whichever is greater. A move of $1 is equal to 100% to 2.5% on anything trading between $1 and $40 per share. It’s exactly 2% or less on investments of $50 or more. (That’s the power of a dollar!)

Now that you know what moves the market, what moves your stocks, and you’ve been watching for patterns of how deep the impact on your investments can be based on the occurrence of these events, you need to know how predictions about the market are made in the first place. Tracking various indicators on the chart of a particular investment – volume, moving averages, relative strength, etc. – is the science known as Technical Analysis, and is one way financial “professionals” try to make predictions about the overall markets as well as specific investments. Looking at a company’s balance sheet and analyzing their debt situation, growth numbers over the past and projections for the future, operating and profit margins, etc. and using this company finance data to predict how a company will perform in the overall market is known as Fundamental Analysis. Many people think that these two disciplines clash, and choose to utilize mainly one or the other. I think that’s the hugest, most costly mistake many investors and investment managers make.

In order to successfully make money with your investments, you must maintain excellent awareness of both the technicals and fundamentals, and the changes that occur therein, of any and all investments you make. Why dismiss an entire discipline of information that may certainly prove itself to be valuable when it comes to making money? Knowing and tracking the events that give you an indication of the fundamentals of our economy, combined with the knowledge of those same events and indicators within the specific company’s you are looking at for investments, you will be much more confident and able to analyze information quickly and accurately as it is received, and much more confident in your ability to fire your broker and do this on your own, if you haven’t already. Stay on top of the news, watch the charts, you can even utilize virtual stock trading websites online to test your predictions and trade with fake money to see what would happen without actually risking your own liquidity. Keep learning about the various events and occurrences that can significantly move the markets and your stocks. There are millions of them, so discern which are most important and why. Constantly seek out information that will help you find out how this behemoth system of market finance operates, and always keep building your financial knowledge database. It may sound like a lot of information and may seem daunting to digest it all, but really, how hard is reading and watching? If investors were much more involved in informing themselves, and took more control of their own market-education, a crisis like this, (perhaps even Bernie Madoff), might have been avoided, or at least could have been more mild. Information is Power.

*This post is aimed at investors and anyone that already has funds committed to market investments. Investing in financial products should not be done without thorough research of the markets and products in which you are interested in investing, and at least the consultation of a true professional that you know and trust. As a rule of thumb, take everything you hear or read about the markets or investing with a grain of salt, as most statements about making money in finance will be material conditionals.

Buy The Dips, Sell The Rallies: What’s in Store For Markets This Week?

See the video at CBSNews.com

See the interview at CBSNews.com

The markets have certainly had a pretty nice run over the last week, and looked as if they wanted to go higher. With the G-20 Meeting this past weekend, a precursor to the Meeting on April 2, culminating in a statement dedicated to “decisive, coordinated and comprehensive action…whatever action is necessary until growth is restored,” I’d say that governments around the world are a lot more focused on attacking the crisis, instead of standing still like a deer in head lights.

Chairman of the Federal Reserve Ben Bernanke, in his inteview on 60 Minutes this weekend, gave us much more insight than usual into his perspective on the Federal Reserve’s response to the crisis so far, as well as his outlook on the economy moving forward. Right off the bat, Bernanke adds exponentially to the positive sentiment dominating the markets right now when he says that he thinks “we’ll see the recession coming to an end prob’ly this year, we’ll see recovery beginning next year, and it’ll pick up steam over time.”

Even though the market took a little break today from the gains posted the previous 4 sessions, things certainly seem poised for a nice little rally, whether it be a “Bear market rally” or not. However, the question remains, as always, how far will it go, and how long will it last? To answer that, first it’s important to know what’s coming up this week

Indeed, aside from the reading on the Consumer Price Index this Wednesday, and a few important economic indicators on Thursday, there does not seem to be anything too significant on the horizon until roughly the end of March/beginning of April. The House Financial Services Subcommittee Hearing today regarding the suspension of mark-to-market accounting rules could certainly be the positive catalyst the banking sector needs in order to continue its move to the upside, and right now whatever’s good for the banks, is good for the market. We’ve even gotten to the point where flat quarterly numbers, or flat monthly retail sales, are positive enough to lead to few more green days, simply because flat isn’t down, and that’s great right now.

Still, the slightest hint of negativity could send the Dow right back down to the 6500 level, and I don’t see anything equally positive enough to push the Dow sustainably back to or beyond 8000. I highly doubt we’ll even get that high before retesting the recent lows. As such, it is important for all investors to understand that if you didn’t get positioned for this “rally” by now, you might be in danger of “buying at the top.” Wait for the next dip. Another shoe could drop, and another bank could need another loan at any moment. The market will always provide an opportunity to get in on a rally somewhere. Those that were able to get favorably postitioned last week or prior, and are currently sitting on some profits, my suggestion would be to take those profits off the table at the first sign of selling pressure. Now, again, I’m no guru, I’m no “expert,” and nothing on this site constitutes a recommendation to buy or sell anything nor to take any action in the financial markets whatsoever. However, as a former stockbroker with the responsibility of making money for over 100 high net worth clients at one time, I am 100% certain that those investors with profits to take will not be happy seeing those profits evaporate if something, anything, causes the market to tumble farther than it did today. As one cliche I constantly heard as a broker goes, “A bird in the hand beats two in the bush!”

Jon Stewart Conducts the Modern Day “Frost/Nixon” Interview!

Yesterday was truly an amazing day for American history!

First off, Bernie Madoff went to court and tried to play “Let’s Make a Deal” with his sob story of a guilty plea, but the judge wasn’t having it! More on that later.

Last night, Jon Stewart exposed not just Jim Cramer for the Krustonian Clown that he really is, but also CNBC as the Stanford Group/Madoff Securities of the “Financial News” media that they truly are, all in one interview!

Jim Cramer Wants to Make You Money? Yeah Right!

Jim Cramer Wants You for Cramerica!

The scene of Stewart “training all day” for the interview is personally reminiscent of my own time studying for the Series 7 some time ago, so I particularly enjoyed that. Then we see how Doughboy Cramer prepared for the interview – by baking with Martha Stewart and pounding dough with a rolling pin in true Neanderthal fashion, after Martha suggests he think of the dough as Jon Stewart. Stewart responds with the comment, “Mr. Cramer, don’t you destroy enough dough on your own show?”

 

Once Jim Cramer stepped out onto that stage though, it wasn’t exactly war immediately, as Stewart let Jim know that none of his previous comments about CNBC and its coverage of financial news had ever been aimed directly at Jim Cramer. He in fact later informs Cramer that he feels bad that Cramer has become sort of the face of what Jon Stewart has been vehemently and very precisely attacking. Cramer certainly accepted that he understood Stewart’s point and agreed that in the current environment, CNBC and he himself, was “fair game” for criticism. Once all those “courtesies” were taken care of, it was certainly “ON!” and all the fun and games stopped, as Jon Stewart conducted the interview like Jack McCoy trying to squeeze a dirty witness into a deal for more information on the “Big Fish.” And Stewart was out to reel in CNBC and its reputation as a credible financial news media outlet. The war was on!

Stewart hits him with the evidence: clips from a December 22, 2006 interview that was obviously never meant for TV, as Jim Cramer clearly states in the interview that he is making statements and revealing things about his own activity as a former Hedge Fund Manager that he cannot say on television!

 

The Statements: I can’t even say that Cramer all but admit to futures trading manipulation – which is just as simple and illegal as manipulating the trading of a low-volume stock (see the movie Boiler Room) – but that’s exactly what he admitted to doing. That’s why he can’t say it on TV! “Welcome to Mad Money. The show where I tell you what will make you do what we CEO’s need you to do in order for stocks to move in the direction we want it to move in, and yes sometimes that direction is down.” That just wouldn’t work as a marketing scheme, and Cramer, stumbling and stammering like a lion on ice skates, readily tried to use marketing as an excuse for why he acts the way he does and does the “crazy Bull(Bleep)  I see [him] do every night” as Jon Stewart so rightfully and eloquently put it.

 

 

The Meeting (And the Proverbial “Nail in the Coffin: Stewart had Cramer so off-guard from the beginning of the interview with those video clips, that it was a side of Jim Cramer that I’m sure too many Americans were not used to seeing, and were probably pretty worried to see –and we should all be worried! Jim was stuttering and stammering like Jimmy, from South Park, trying to defend himself and his Network, CNBC,  just like the guys on Law & Order that try to hold out on McCoy – like we don’t know they’re gonna get broken down to where they end up revealing every element of the crime. Feeling the heat from Stewart’s poignant, targeted, incriminating questions, Cramer readily admit that he as well as others could have all done a “better job” – spotting the oncoming crisis, calling out the mistakes that were made, and doing their own due diligence on the information they received from corporations (and they frequently receive “insider information”– “Absolutely, I truly wish we had done more.”

Then he goes into this spiel about how he tries to be “truthful” on his show, and expose “these guys” as much as possible, still oblivious to the fact that he admitted to being one of “these guys” during those clips at the beginning of the interview.

 

But then he surprised me and everyone else with enough financial knowledge to know that there’s a reason why you don’t say certain things on TV or anywhere that you can be recorded saying it for that matter. It’s the same reason why you take the 5th on the stand. But Cramer – I guess because he, like Madoff and most other people who have been running scam-like enterprises, got drunk off the illusionary power that enterprise (his show) created, that he felt as if he was a made of Teflon – didn’t plead the 5th! He continued trying to play this investor advocate role, talking about how he readily bad-mouths CEO’s and companies that make mistakes and don’t do well for their investors, as he proceeds to implicate himself in a grand scheme of manipulation of insider information using his show as a vehicle!

 

Thinking he’s in line for the Academy Award for this performance, he opens up and goes into a story about a meeting he had with one such CEO, whom he had previously admonished on his show. Without going into the details of the meeting, Cramer – in true Blagojevich fashion – tells a lot more than he probably should have and seems to be realizing it as he’s telling Jon Stewart how this meeting basically compelled him to refrain from talking down that CEO on subsequent shows. Now you don’t need to be a lawyer, a DA, or a Law & Order fanatic like myself to know that Jim Cramer must have gotten something to have readily gone against his own previous rebuke of a stock or CEO. Obviously, Cramer wouldn’t want you to think he received money in exchange for his silence and cooperation, and he’s probably smart enough not to accept any “money” so as not to leave himself open to easy interrogation. So, Cramer’s implication, what he wants you to believe, is that the CEO of that company gave him some “information” about the company that put him “at ease” about whatever it is that caused him to rant negatively in the first place. And therein lies the rub, because chances are, it wasn’t information, it was “money,” or “gifts,” or “favors,” whatever you want to call it.

 

Let’s say it was information though. Most likely, that “information” was inside information, which is info that only company officers, directors, and other high level employees or partners would be privy to, as it is non-public information. If that is the case, then my belief is that a strong case can be made against Cramer, and possibly CNBC, for stock manipulation and a form of insider trading, at least manipulation of insider information. Jim Cramer already provided all of the evidence!

 

If I was meeting with CEO’s and buying stock in their companies, and a good majority of investors out there watched my show, hell yeah I’d use it to manipulate perceptions as much as I could to my benefit, the same way I’d take a bag of money out of an open unguarded safe.  What Jim Cramer does however, is equivalent to putting on a guard’s uniform and telling people that the open safe is secure because he’s guarding it for you, more people come and put their money in the safe, and when it’s packed nice and tight, he slams the door shut and makes off with the money, in search of another area or arena where he will be able to pull off the same scheme over and over and over again. It’s criminal how he’s able to get away with it, and he and all that help these “shadow government” wheels go ‘round should be held responsible for their actions.

 

Now I know most likely, that this will not happen, and that’s because the Wall Street “Back Room” that Jon Stewart alludes to is real and is in power, running this whole game. The American Financial markets (and the Healthcare and Social Security Systems for that matter) is nothing but a nationwide Ponzi scheme authorized and run from the highest levels. We invest our hard earned money in these companies, whether we want to or not. Just working at a company that trades publicly means that your 401K is invested in the market through them, on your behalf. Individual and Online Investors, can only purchase a handful of all financial products. The rest, especially the “sophisticated” ones, you have to buy or sell through a financial institution aka a brokerage firm. Then, with our 401K, IRA, and pension accounts financing the whole show, these institutions trade with each other as much as possible, constantly turning over (churning and burning) our accounts – which now combine to be lump sums of billions, even trillions of dollars – for them to take bets as risky as possible, and then manipulate and control the markets so that those ridiculously risky (no risk, no reward!), overleveraged bets actually do end up working out through their own magical “invisible hands,” – thier hands in our accounts/pockets! Then you have CNBC and guys like Cramer, Kudlow, and the whole CNBC crew, who all think of themselves as modern day Ruggedo‘s, feeding us the information that fuels the very rumors these company CEO’s and Directors want to use to perpetuate this “Oz-ian Fantasy Land,” where we can all make “Fast Money,” to manipulate any and everyone involved if it will lead to more profits.

This type of manipulation of the American public is 100% legal. It’s the American Way!

 

*Watch the uncensored version of the interview here.

 

The only good thing that may have come about as a result of the Bush Administration is that he and his posse made the abuses perpetrated on the poor and middle class by the American Upper class so blatant, flagrant, and out in the open that he may just end up being the straw that breaks the camel’s back. As more and more information about what went on during his “Animal House” of an administration, hopefully we as Americans will continue to wake up from our greed/profit-induced slumber, and will continue to awaken to the presence of the modern-day financial “matrix” where the few control the behavior of the masses. Just like our current banking system, we are the living dead, afforded just enough to keep trucking along in this zombie-like state, as our pensions, 401K’s, and nest eggs are raped and pilaged, traded hundreds of times over for sport. Just like Morpheus says in The Matrix, it is hard to tell how people will react to finding out that the world that have become used to is nothing like what it seems. No one enjoys finding out that they are being manipulated, taken advantage of, and ultimately “you are a slave.” Jon Stewart should be commended for his targeted, well publicized assassination of Jim Cramer “the financial guru”, and for revealing Cramer as a bozo-the-clown like, wild and crazy financial version of Pee-Wee Herman that he is – going nuts in his “Cramerican Play House” during the day, while meeting with shady characters to conduct underhanded, devilish, back-alley deals behind the scenes. Cramer, your hands are just as dirty as those of Dick Fuld, Henry Paulson, and all these brokers and managers at these financial institutions that when they knew their assets weren’t worth anything, used the guise of international investments to spread this garbage around the globe. To pretend as if you are an advocate of the “ordinary American” is not just “disingenuous,” it is criminal, and one way or another, your chickens will hopefully come back to roost. Only time will tell.