I’m still working through some articles on the bank ruling, but should have something put together for tomorrow. Another conversation with the trader certain raised some eyebrows, and should enlighten readers even further.
It may be that you have a good broker that genuinely takes care of you. We’ve seen from recent revelations about many of them that they’re simply in it for themselves. If the customer makes money in the process, that’s just a bonus. As a friend of mine says, “They don’t call them ‘broker’ for nothing. Use one and you’re likely to just get broker.”
When it comes right down to it, nobody is looking after you as well as you should be. In the end, you have to live with whatever happens to your finances. So, take control, know what you’re doing and why, then do it and take responsibility for it.
In helping readers understand what they’re up against, we post this second article from a trading friend who’s been around a bit. Read with discernment and forgive the grammar. This wasn’t originally intended to be an article; just some traders sharing what they’ve learned.
… there’s something very different about the market today than in ’08. I don’t know how closely many of you have followed the things over the last few years, but I have and there is something very different that might not setup this big decline. Sure, 100 to 300 points on the SPX is no biggy in the bigger scheme of things. But not 600 to 1000 like some have called for. The reason is actually quite simple. ‘They’ aint gonna let it.
I’ve never told this story before – in summer of ’08 I was on the phone with my buddy who works at Goldman and we were talking about the market direction. Because after all, who cares which way the market goes, you just want to be in THAT direction, right? So he tells me that word at his end is that LEH was in trouble behind the scenes. This I think was right after Dick Fuld, LEH CEO, testified that everything was hunky dory to congress. [My friend] says that guys he knew at his firm were ‘on the side’ buying heavy blocks of puts on it. Now he’s an inside analyst and has no trading authority with the firm and I think can’t trade anyway for conflict reasons. He’s just paid to do homework and offer up reports as to the direction of a bunch of semi stocks. But we go way back and he was just giving me a head’s up on what he was hearing from some trader buddies of his. Rumors were flying rampant back then.
I think it was a week later or so I was watching Fast Money on CNBC when Dillan Ratagan was still hosting and John Najarian mentioned that they were seeing MONSTER blocks of I think it was Nov (July or Aug at the time) $5 puts being bought straight out. Not even hedged as a spread. The stock was around $30 at the time. Hundreds of thousands of dollars being put at risk of total loss with just a few months of expiration left. Now that’s a lotto ticket! That is unless you knew something.
Now I didn’t have the balls to do that trade because I was brainwashed into thinking how strong those investment banks were – or had been. What brought down Bear Stearns was the couple of hedge funds they bought that were totally invested in subprime MBS’s that blew up. LEH had the same problem and just a few weeks later ended up blowing up themselves.
What made the market back then fall off the cliff was forced liquidation. Most hedge funds are just simple trading firms that trade just like us who have direct access brokers. I use IB, some of you have similar types. Scottrade or Fidelity or ETrade are NOT direct access brokers – they are retail brokers and you’re getting screwed if you use them for trading. TradeStation is another direct access broker similar to IB, but I think IB is better for speed and execution and price. Although TradeStation has better trading platforms. Many of these hedge funds (larger ones) won’t use an IB or Tradestation for the simple reason that they want better ‘on the street’ access. By using a large institutional firm like a LEH you not only get status, you get an open door to the Street. It’s all BS, but in the end, making money in the market on a big scale is all about networking. Like Gordon Gecko said, ‘The most important commodity I know is information.’ The only way you get it is to know people who have it. You open an account with LEH as the clearing broker with millions of dollars and you get invited to some very cool parties in New York, if you know what I mean. You’re your own little Bud Fox and you start to get those calls about who Blue Horseshoe loves. Know what I mean?
But what happens if you, along with say 150 other large hedge funds wake up on Monday morning to find that LEH has been forced into BK and your accounts are locked up? Add to it you have sitting open positions that are levered up 30 to 40 times that have expirations coming due? SCREWED!
Those that were around in late ’08 trading probably remember the late day 500 point selloffs? Day after day? Literally in the last 10 min of nearly every day for about a month? Add to it the removal of the uptick rule and all the quant algos get to pile in on the shorts on top of liquidation? You have the making of chaos squared. No one in government understood this. It was so hip to say, ‘let LEH go BK – it’s capitalism.’ Yeah, but what about if all the banks then have runs? We all wake up and our credit cards, ATM card, and checks no longer work?
We all live in a real life ‘Matrix’, like the movie. Stability in your life is a state of mind and your government is trying its damned to keep it that way, all the while sweating bullets behind the scenes to prevent what’s really going on from getting out of control. What’s worse? Chaos or inflation? Who really cares of gold is $5000 or $10000 an ounce? Oil matters, but they can control that. Stock prices going through the roof only help everyone, not hurt. It’s just paper monopoly money anyway. Screw you bond holders – rich SOB’s. Buy stocks! That’s why Bernanke is buying bonds – make the returns so low you can’t invest in anything else but stocks.
Did you know that CALPERS, the California Public Pension fund is the largest pension fund I think in the world? They are underfunded by some 40% I think it’s actually more. That means if everyone who’s promised their retirement payments begins retirement now, they ain’t got the money, folks! I read in Investors Business Daily recently that the DOW would have to be around 25k just for them to be at par! That’s why ‘they’ need the market to keep going up. They want to force wealthy people – or anyone with discretionary investable income – to only buy stocks. Why? So you can run up the prices so THEY CAN SELL TO YOU! It’s a backdoor way of making the wealthy pay for this stuff since they can’t just blatantly raise taxes.
Who’s getting screwed the most here? Seniors on fixed income who are living off their bond investments. Why any of them will vote for Obama is beyond me which proves they don’t understand how this works. The answer to all these problems is the same that Reagan did with Art Laffer in 1980 – you grow your way out, not tax it. But that’s another story for another day.
But it’s for these reasons I just can’t imagine the market being ‘allowed’ to decline like some of these dire predictions. We live in the Matrix, not the real world. In ’08 it was forced liquidation due to hedge fund’s funds being locked up. The government didn’t grasp the size of that. Now they do. I think they do more than you realize. It’s also why they are fighting these constant calls for audits of the Fed. No way. If you knew what your money was being used for, every single one of these guys up on the hill would be out for blood.
But funny thing is, the other side of that is, ‘Oh yeah, what then would you do?’
One of the ways we often encourage readers to invest is in physical metals. It shouldn’t be your only investment. But it should be one that you’ve seriously researched and made a sound decision on. What trading platform you use and how Wall Street works are irrelevant I this case. It’s simply your way of taking a position that assures you’ll have some value no matter what.
The study on the banks and their limited liability to their customers should add to what we’ve been reading the last couple of days. Hopefully it’ll be out tomorrow, though there’s a chance we’ll need to defer until next week. Either way, we’ll do what we can to help you make informed decisions.
For your prosperity,
J. Keith Johnson
The Gold Informant