Wednesday, May 16, 2012

Of Course Markets Are Manipulated, Only a *Moran Would Think Otherwise

The other night I saw a commenter call another commenter a "moran" on Yahoo. I thought this was funny because it couldn't be a typo-the "a" on my keyboard is a long way from the "o." Of course it makes you wonder who the real moran is. Sometimes it's you.

There is a moran moral to this story.

For many years, I had at least one open margin account with which I bought and sold equities or more to my liking- options. You can make a lot more money in options using far less principal. That appeals to the gambler in me. Making gobs of money with very little capital at risk. That is leverage and it seduces everyone that understands it. Controlling hundreds of shares of any given stock while paying a very small premium to do so comes with caveats. Options are time sensitive. If they do not hit your strike price during a short time frame, you lose your investment. I was an all or nothing player. I hated to resell an option when it was clear to me that I had screwed up. At any rate, options are all about leverage.

Banks understand leverage..the more money you have... the more leverage you have available.

You are required to open a margin account in order to sell stocks short. When you open a margin account, you agree to allow the investment bank the right to borrow shares that are held by you in your account and deliver them to other clients. This allows guys like me to borrow shares in some shitty company like Bank of America, sell them short at 15 bucks a share, repurchase them 6 months later at 5 bucks a share and deliver them back to the guy I borrowed from. I pocket the 10 dollar difference minus trading costs and interest.

I loved selling stocks short. There is far more money in that and equities tend to go down fast and furiously. However, short selling is all about timing. Shorting a thinly traded and volatile stock and watching it go straight up is not a sport for the meek or undercapitalized.

That was the scenario for me late in 2006. I had found a company called Fuel Tech. (FTEK) Like everything else in 2006- it was vastly overpriced. Selling at 25 bucks a share, it had been over hyped by it's cheerleading CEO. Fuel Tech's core business was removing particulates from coal fired power plant emissions. Not only was their technology extremely expensive, it didn't work that well. To read their prospectus you'd think that China had a coal fired generator on every street corner and that every one of them would require FTEK filters. I knew this was bullshit. I have also seen government mandated EPA regs lifted in a heartbeat- especially about the time elections are occurring and campaign contribution checks are being written. I knew FTEK's earning were going to miss. And miss big. I felt the stock was worth 5 bucks at most. Realistically, I was hoping that it would trade down to 15. I started shorting the stock and buying put options out of the money and targeted 20 bucks as my strike price. I built a position in front of the earnings release. I had been targeting the earnings release due out the summer of '07. June, if I remember right.

When the earnings report came out- it was a giant miss. I thought I had hit the jackpot. But instead of going down- FTEK stock shot straight up from 25 to 33. I was in absolute disbelief. I had committed a full third of my capital to the FTEK project. To this day, I cannot explain why FTEK shares shot straight up on an earnings report miss of that magnitude. 

Until I read this.

Now to be honest, I am still digesting Taibbi's article and trying to put the pieces into place as they apply to my FTEK trade. Why? Because nothing that happened back in June of '07 makes any sense to me- including the rabid fascination this country had with green stocks back then or a CEO willing to lie and mislead investors about the company's prospects. There is nothing to account for a 30% rise in a stock price that misses its earnings as badly as FTEK did back then.

The only explanation was that there were millions of shares short just as I was and that traders began to panic and cover. (buy and replace borrowed shares) I knew what the float (total shares outstanding) was and I knew how many shares were held short so this explanation did not make any sense either. Why would anyone cover anyway?

Now 5 years later, I read Taibbi's article which gets my juices flowing all over again. What if investment bankers were creating an artificial float- allowing customers to short a stock that they could not get their hands on. The float on FTEK was thin. Perhaps they just pretended to borrow and sell shares on behalf of clients knowing full well that they couldn't get their hands on shares so they simply allowed the trade- knowing that they themselves would have to cover losses.

So instead of just making a simple commission- bankers became the counter parties. So here you are, thinking you can trust your bank while making simple trades, when in fact the bastards are trading against you. Without your knowledge.

Could investment banks cause an artificial ramp up in price by buying shares- and thus shake out all of their looming losses as short side clients were forced to buy and return an equity that the firm never possessed in the first place? Then the bank could front run that trade and sell- knowing the price had to go down?

The possibilities seem endless. And the last place you can go for justice and explanations is the SEC. I didn't even take the time to file a complaint back then. Wasted effort. Like a fart in a hurricane.

The prologue to my story is a good one. After the tragic ramp of FTEK in Jun of 07, I did the only thing that made any sense. I took the rest of my account and shorted and put FTEK at 35. I went all in. I covered months later at 20. I made a few thousand net and closed my account permanently. I have not made one trade since then- and I traded for 25 years. FTEK trades around 4 bucks now. It is probably over priced.

The implications of Taibbi's story are immense. Instead of simply making commissions and interest- bankers who permit naked short selling within their firms- are becoming the counter parties to the trade. They are at risk. Because of their multi billions in capitalization they can manipulate any position to their advantage. Which of course they would do unless some idiot camp somewhere believes banks like to give away their money.

The moral to this story. If you sit in a poker game and look around for the pigeon and can't find one- it's you.

1 comment:

Anonymous said...

The moron/moran thing alludes to a photo awhile ago of some white trash holding a sign with the aforementioned misspelled word.