Do you remember Sir Allen Greenspan. Remember him often say... So, great the "RISKS ARE TRANSFERRED"...
Yes my friends. Now you will see how the risk is transferred...
Simple answer... It is going up, because it is going up. Ha? is that sophism or what? No this is as profound as sophism would never get and here is why: For any market to go up there must be buyers coming in and bidding up the prices. Now let us suppose at some initial start up point, for whatever reason ( security/market looked cheap, government threw lot money at it, taxes benefits were given to investors - real estate anybody - , central bankers printed too much money etc), for which I do not ultimately care, the market got going up. Once it starts going up it acquires it's own life and all the mechanisms needed to push it up start working. People tell each other how they make money in the market. Media jumps on it and reports/distorts by playing on the native greed of citizens etc. Ok, now you have a big constituency for this thing , market be it real estate, stocks, gold etc or any combination of those.
OK, the initial investors were not stupid for whatever reason, they saw the value and started the ball rolling and now the ball/market has the life of it's own. Government, banks, financial establishments are all for it. They live off these transactions in the market and more of those more money they make. Everybody starts loving this "thing" until it blows up and then they will find few villains and punish them, but the fat cats would have made billions and a little guy is holding the beg.
Ok , great. So what are the mechanisms of this "thing"? There are many, but there is one that is extremely important for stock market. That is options. When the market starts going up the fat cats or not so fat cats start thinking of protecting their gains. AHA... INSURANCE! Yes, most of what we do in USA today is insurance. So the Wall Street writes insurance ( put options ) and becomes in love with it, cause, if the market does not go down, the insurance lapses and the "writers" make gobs of money, ce bueno!
Ok as the market moves higher and/or does not go down, the volatility diminishes and options become even cheaper, giving more incentive the fat cats or speculators to by put options ( starting to see the circle?). As this goes on "writers" write more options and "support the market", remember these guys can use OPM to do so "other peoples money", meaning they use your money to make money from you ( if you understand this you are genius ). Now, having created this virtues cycle, what could go wrong?...
Well, this entire process is a wealth transfer of unimaginable proportions from a little guy to fact cats. It can not go forever for social reasons or for the fear of being detected and the central bankers must at some point come in to put fear into these "writers". Writers and fat cats know that this day will come sooner or later. Being well connected they start unloading first. When/if that happens the movie seen above start rolling in reverse... The volatility increases, nobody buys stocks ( they go down)... more they go down more people fear and option premiums skyrocket and this cycle goes very fast ( much faster than what was going on on the upside). At some point everybody that could get out of the theater on fire thanks his/her God and those that got clobbered will regret their entire life they ever got into the market. Few openly operating thieves, ED FASTOW,KEN LEY etc go to jail and the government introduces another law ( eventually to be thrown away , but pleasing widows and orphans ) and everything starts a new.
Thanks for being with me this far. I do not know about you but I am rewarded at this point. Now, do not forget that we have 2.5 billion new suckers ( sorry investors ) in the far east to want to know how does this movie play out. This is first time to most of them. Ce Bueno!
That is all she wrote... No, there is one more point. In engineering this process is called the PFL ( positive feedback loop ). Yes my friends markets are PFL except positive is the direction it could be up or down.
Good Trading
17 comments:
Hi Boris,
You said:
As this goes on "writers" write more options and "support the market"
You lost me here. I have no experience with options. Could you elaborate? How does writing put options help support market? You see I told you I need much help.
Danno
Dear Danno,
GOod to hear from you this time of the year. Option writing and supporting market are not necessarily the same action. In some ways it is, because the act of writing a put option creates a put ( granted somebody wanted this option, it is not pushed/directy onto someone), but the writers are the biggest players of the wall street and beleive me they have a thing or to with which they can influence markets not to go down and that is seperately from the act of writing of an option. I am sure you clearly see the interest they have in market not going down. Motive is need in every "crime" dear danno. These guys have motive and money and cluth to make this thing happen.
GOod Trading
Anyone think we are ABCing up to $43.60 QQQQ? Thanks JC
Boris
I hear you loud and clear. Yes I get it now. Like buying car insurance or any other kind of insurance. No accident(crash) means Insurance company gets rich.
Thanks
Dear Danno,
I am so happy, you do not believe. I feel like Jesus, no offence, please, only with respect I can place this name above...
But you can see now and could not before... that is why I liken myself to Jesus, with respect again.
Did you ask yourself, what if the Insurance compnaies force laws about no crash, seatbelts and no hanky panky in the cars?
Yes... that is what Wall street can do in not so many subtle ways. Discussion for another day.
GOod To save you brother.
Dear James I would not surprised with that outcome, I though couple days ago ( i wrote here somwhere ) that ABC could to 43.50 50% retrace or 43.60 62% retrace of the drop past 7 days. Yes, you are thinking right.
Good Trading
I am sorry to see Gerald Ford the President from my home state Michigan passed away. It was no accident that he and President James Carter were freinds. Two decent men that waded through a sea of corruption. They were both laughed at and ridiculed for their decency...Sad JC
Dear James,
Can not agree more with you these guys were really decent man. Unfortunatelly these types get quickly isolated and declared "strange"... Strange world indeed.
Good Trading
Yes Dear Boris and thats why I am afraid if Jesus ever returns to this mean planet he will be treated the same way again.How many chances do we get? JC
Boris
Can you give me synopsis on Encana ECA-T on Toronto exchange. It seems it might be range bound for short term between 62% retracement and 200/50 dma. Looks ready for rebound in New Year. If it's too early for this question then I'll ask next year.
I really like this stock because it is such a nice trader.
Thanks for all your wisdom
James
I totally agree. Rejected by his own first and then the Gentiles second. Only this time he NO turn the other cheek.
Dear Danno,
Eca is a stock I want to put to test. Show me the money, as they say. If ECA has got, let it prove early January, I am afraid at this moment it is in a place I call "looking for home" stocks. It has been rejected from the annual resistance almost twice around 54 and is now down at what could be a FIB support.
Let us put this one to test.
Good Trading Danno.
Boris,
Thank you for taking the time to answer my question. I will need some time to digest what you wrote. I understand that the PF mechanism that you are talking about and the new blood that may be feeding this market.
BUT... in the face of weak retail sales, a negative savings rate, a slowing down of equity extraction from homes, lead me to conclude a weakening of the US economy.
Wouldn't the fat cats be bailing by now or is the game going to continue?
I can't imagine buying into this market at this time despite the run up.
Dear Rent,
Everything you say about the economy is correct and, actually, it is those things you say, in the short run are supporint the market. 1) many people will speculate buying puts, while you obstain. And we know what this will cause. 2) Slowing economy, while the supply of money grows ( reasons some other time) is causing exactly the Stock Market run up. Money has nowhere to go!
Yes Dear Rent the process will end, we do not know when, but we have tools to monitor and be on the right side. That is pretty good state to be in.
Your concerns are ours too, but we do not dwell on them as there are others that cause the market to behave differently ( momentum and good income growth/lately are some of them). It ain't over until it is over as our famous friend Yogi Berra proclaims.
Good Trading
Boris,
Okay, I see your approach. I'll continue to monitor the market and wish you & co. prosperous trades.
Dear boris has invited political comment in the past soooo...I want to make it clear to the world GWB was never MY president from the beginning {2000}. Neither was the invasion of Iraq. Now over 75% of my fellow americans agree {a little late 600,000 Iraqis freed forever}. I guess what I want to say is: If I show up in your country Please dont assume all americans are alike. Peace to all and Happy New Year. JC
Dear James,
It is clear that country is no more behind the war in IRAQ. For whatever reasons, thogh; that was not the case couple years ago and there were thouse that saw the war as a way of pyaback to Islamic Extremists and/or the way to introduce the democracy into Middle East. So, I presume that everybody that supported the war silently or vocally, is now rethinking that support and many of them decided it is not worth to fight in there. I am sure some of these are not so much idologists, but pragmatics asking the questions such as are we achieving what we hoped... Finding a negative answer they have abandoned the support for the war. Nobody likes loser. I am sure James has rejected the war from the begining and that takes courage and principle stand. Others took a "let us see" attitude and many of these saw enough by now. So, one might say that James has right to say I told you so...
Good Trading
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