Dodge These Market Schemes

Dave Gonigam – March 26, 2012

  • While Jon Corzine remains free… and HFT artists make a mockery of price discovery… you can still even the score
  • Five in a row? Abe Cofnas lays out this week’s “mock trade”… Plus, your chance to trade for real
  • Chris Mayer on how to invest in the emerging world’s desire to drive (and it’s not automakers or oil companies)
  • “Peak helium” crisis grows worse… Readers reopen the Tea Party-Occupy wounds… Into the ditch on the way home from Rancho Santana… and more!

   “Where’s the indictment? I want to see handcuffs. Now!”

The financial blogosphere erupted after the close on Friday, when Bloomberg got its hands on some internal emails from MF Global. That’s the company former Goldman Sachs honcho and New Jersey politico Jon Corzine turned from a stodgy commodities trader… into a go-go derivatives outfit… and finally into the eighth-largest bankruptcy in U.S. history.

Five months after its initial filing, MF’s customers are still out $1.6 billion. The emails reveal Corzine issued “direct instructions” to tap customer funds to meet an overdraft in a brokerage account MF held with J.P. Morgan Chase.

Not only is such a practice “the third rail of the brokerage industry,” as we cited at the time… this revelation also um, contradicts Corzine’s testimony to Congress. Hence, a torrent of online outrage.

We’re not holding our breath for a perjury indictment now… any more than we held our breath for an embezzlement indictment when this sorry saga started.

Getting mad is easy. Doesn’t accomplish much, though.

Getting even? That’s actually easier, as you’ll discover today…

   “You just can’t make this stuff up,” writes our own Jonas Elmerraji of the BATS fiasco on Friday — pointing out another fin becoming visible in the markets’ shark-infested waters.

BATS is the third-largest trading platform, after the NYSE and the Nasdaq — specializing in the high-frequency trading (HFT) that’s the province of the biggest banks and brokerage firms, running prices up and down in nanoseconds.

The exchange went public on Friday. Or it tried to. “Things went sour,” says Jonas, “when a glitch in the exchange’s own computers caused an issue when the system tried to open the ‘BATS’ trading symbol.”

“The BATS glitch,” adds our small-cap specialist Greg Guenthner, “triggered a mini flash crash — an event that even caused Apple to halt trading for a few moments.”

BATS withdrew the IPO and proceeded to refund the botched trades. “In this case,” Greg explains, “the exchange error was a safety net for eager investors who bought BATS early Friday. The glitch allowed them to recoup their money. They can walk away clean.”

   “But when it comes to other questionable IPOs floating around on this market’s rising tide,” Greg cautions, “investors might not be as fortunate.”

“So far in 2012, 32 companies have gone public. Of the IPOs that have been on the market for more than a week, only six are currently trading lower than their opening day price. Twelve are up at least double digits. In short, it’s next to impossible to find any value in these names right now. Buyer beware.”

   Then there’s the peculiar action on Friday in SLV, the big silver ETF — as revealed by the real-time data feed company Nanex.

At 1:22 p.m. SLV was forced down by rapid-fire machine-generated quotes — more than 75,000 per second. “Before you start to think that this was merely a bunch of people hitting the sell button all at once,” writes Cris Sheridan at Financial Sense, “consider this: They were all launched within the space of 25 milliseconds — 10 times faster than you and I can blink!”

Here’s a chart of the action, from 1:14 through 1:31 p.m. The volume spike at 1:22:33 is highlighted and enlarged…

And in less than 1/100th of a second, the price slipped from $31.18 to $30.91. “While that may not seem like much,” writes Chuck Gibson of the money-management firm Financial Perspectives, “if you were short tens of millions of shares (there were over 200 million shares that traded hands this day) or, in fact, wanted to buy SLV, either way, a drop in price of 27 cents could make you millions of dollars.”

If you were on the inside, that is. Outrages abound…

   “These sorts of events happen routinely,” Mr. Gibson adds. He’s been reviewing an academic study called “Financial Black Swans Driven by Ultrafast Machine Ecology.”

It examined 600 markets around the world. “Over the most recent five years of market data analyzed, 18,520 crashes and spikes occurred at a speed far exceeding human origin.”

   So what’s it to you? “Institutional traders,” writes Mr. Gibson, “armed with a view of every open order (and with help from some very smart mathematicians and programmers) have figured out a way to make money off human emotion by triggering sell-stops.”

“As it turns out, millions of investors around the world reveal their emotional tolerance for how far a stock can vary before automatically buying or selling at a set price. With access to such highly valuable information and some very fast computers, one could make a killing by simply preying on the emotional levels of human greed and fear revealed by investors tipping their hand to the market.”

You might feel this is unjust. You might wish, in the words of The Daily Reckoning’s Eric Fry, to write a strongly worded letter. You might wish to lodge a complaint with the SEC or the CFTC. But to draw on the example of silver, dozens of smart people have raised holy hell with the CFTC for more than two years now… and have gotten precisely nowhere.

   What chance do you, dear reader, have against these institutional traders backed up by mathematicians, computer programmers and other assorted geeks? Quite a lot, actually… as long as you don’t take them on directly.

What you do instead is take advantage of the same “emotional levels of human greed and fear” the pros do… and play a completely different market. A market that’s not subject to the manipulations of high-frequency trading or outright theft. It’s a little-known, but fast-rising market followed by our in-house monitor of market sentiment, Abe Cofnas.

As we haven’t tired of reminding you for the last month, Abe has been recommending a “mock trade” every Monday… with the outcome always known by Friday. Out of four recommendations, he’s delivered four winners. Let’s recap them to date…

  • Week of Feb. 27: Abe expected the Dow to close the week either above 12,925 or below 12,825. It indeed held above 12,925… and that was good for a 24% gain
  • Week of March 5: Abe saw fear over a Chinese slowdown as a drag on oil… but greed over the situation in Iran propping oil up. Oil did just what he thought it would, staying in a range between $103.75-108.75. His mock trade paid out 19.5%
  • Week of March 12: Abe saw fear about a Chinese slowdown competing with greed over central bank money printing. He figured greed would win out, keeping the copper price above $3.745 a pound. It did… and that was good for a 21% gain
  • Week of March 19: Abe played the Dow again, seeing bullish sentiment keeping it above 12,975. That delivered a 19% gain.

That brings us to this week’s trade.

   The Japanese yen trades this morning at 82.89 yen to US$1. “The yen’s been much weaker recently,” says Abe. “It reached levels near 84 and cascaded back down last week.” So now it’s moving back up, relative to the dollar.

Examining the market that Abe follows alone among North American newsletter editors, he sees only 13% of traders expecting the yen to move to the 84.25 level. The other 87% believe it will stay below that. “I recommend going with the crowd,” Abe recommends.

If this trade works out — remember, he’s 4 for 4 so far — this will mean a 26% gain come Friday.

You’ve seen the power of Abe’s method in action. Now’s your chance to put it to work in your portfolio. It’s your opportunity to get even with the pros and the crooks. As long as fear and greed move the market, you can make money. And in four days or less.

We opened up Abe’s trading service to new readers on March 10. We will close it on March 29. That’s this Thursday night at midnight. Move on it before then and you can secure access at half off the regular fee. Full details on this extraordinary offer are at this link.

   U.S. stocks are in rally mode as the week begins. The Dow and the S&P are up nearly 1%. The Nasdaq and the Russell 2000 are up even more.

Major financial media attribute this rise to a speech by Federal Reserve chief Ben Bernanke. “Further significant improvements in the unemployment rate,” he said, “will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”

We’re not sure how you read “QE3’s just around the corner!” between the lines of that turgid prose… but there you go.

   If Bernanke’s speech is supposed to be goosing stocks, then you could argue it’s doing the same for precious metals.

Gold’s up nearly 1.5%, to $1,686. Silver’s up even stronger, to $32.85.

   “Wherever I go in my travels, I can’t help but notice how many cars are on the road,” says Chris Mayer, forever on the lookout for opportunity.

“In the last 12 months, I’ve been to South Africa, Colombia, Vietnam, Thailand, Cambodia and now Chile. Buying a car is one of those basic things nearly everyone does when they can afford it.” And the number of cars on the world’s roads will no doubt keep growing as emerging markets close the gap with the Western world — a theme Chris explores in his new book.

The Chinese, for instance, bought 8 million cars in 2007. They’ll buy 20 million in 2013. “Generally,” says Chris, “investors like to go where the growth is. You have that in the automotive world. Growth of production just based on the platforms in place and current expansion plans should be strong out to 2015 in emerging markets, as the chart below shows.”

“The problem with growth,” says Chris, “is that you usually have to pay for it.” In other words, skip the automakers.

Go instead with the auto parts suppliers. “They are all pretty cheap on earnings and cash flow.” Chris has a favorite he believes “will be a sweet spot in the global economy over the next several years.”

Last week during the Rancho Santana Sessions, Chris shared a wide variety of global investing ideas gleaned from his travels. This briefing, limited to 30 Reserve members, also featured experts on moving your assets overseas safely and legally.

You can still get your hands on the recordings of these sessions; our technical team is mastering them this week. The MP3 files should be ready for delivery to your email inbox by Friday. And if you order before midnight tomorrow, you secure the best-available price.

[Ed. Note: Chris will deliver still more insights about how to invest globally when he’s Lauren Lyster’s guest on RT’s Capital Account tomorrow at 4:30 p.m. EDT. RT America’s live stream is here.]

   The world’s least-heralded resource crisis has come to this: Scientists have begun canceling scheduled experiments because of a helium shortage.

“It makes me really angry,” says Oleg Kirichek of Great Britain’s Rutherford Appleton Laboratory. “It costs £30,000 a day to operate our neutron beams, but for three days, we had no helium to run our experiments on those beams,” he explains. “In other words, we wasted £90,000 because we couldn’t get any helium.”

The shortage, as with many crises, is a failure of government. The United States stockpiled helium for much of the 20th century as a “strategic” asset. After the Cold War, it started to be sold off — haphazardly, plunging the price. “Now the stockpile is used up, prices are rising and we are realizing how stupid we have been,” Kirichek says.

When we first chronicled the helium shortage in August 2010, professor Robert Richardson from Cornell estimated the market value of a typical helium balloon was $99.36. It’s now up to $119.51.

“I will not be happy if I cannot have a medical scan in my 70s,” says British researcher David Ward, “because we wasted helium on party balloons while I was in my 30s.”

   “How unbelievably wrong you are to compare the Tea Party and the Occupy movement as similar,” writes a reader reviving an argument we mistakenly believed we’d settled amicably.

“The ‘T’ people are law-abiding; the ‘O’ people are not. The ‘T’ people want less government. The ‘O’ people want the government to take over all student debt and on and on and on.”

“I deeply resent,” adds another, “your drawing any analogy between the Tea Party and Occupy Wall Street. Hitler loved children; most people love children. So let’s draw an analogy between Hitler and most people.”

“Please don’t make such foolish statements in your letters,” a third threatens, “or I shall have to unsubscribe.”

The 5: Maybe a Venn diagram will explain it better. A few have been going around since last fall: This one comes from lawyer and blogger James Sinclair (not the mining investor/gold trader)…

You know what else they have in common? They stand apart from — and in opposition to — the power elite that allows people like Jon Corzine to walk free.

Not that it’s worth getting mad about. Better to get even.


Dave Gonigam
The 5 Min. Forecast

P.S. Addison is making his way back from Rancho Santana on this day… but not without incident. “Backed into a tree on one occasion,” he says via email, “into a ditch on another.”

Before he can board a flight back home, there will be claims to file and other assorted messiness. But he’s read some of the reader mail inspired by the fellow who groused about the “gated community” on Friday. Look for Addison’s take tomorrow…

P.P.S. “Nearly three-quarters of the world markets are ‘frontier markets,’” writes colleague Samantha Buker. “But only a smart hunter knows which are worth the effort to unlock.”

Doug Clayton is such a hunter. Addison and I first met up with him in Colombia a year ago, when he told us about the stunning opportunities he uncovers investing in places like Cambodia and Haiti.

Then he spoke to our Symposium in Vancouver last July. And last week, he delivered a confidential briefing to 30 Reserve members during the Rancho Santana Sessions.

He named the 12 frontier markets he likes best… and the 10 factors that go into his selection. You can listen in to his entire session only a few days from now with the MP3 files of the Rancho Santana Sessions. You’ll also hear from several other experts… including Bill Bonner’s personal estate-planning lawyer, who spelled out essential steps to take before the rules change on Dec. 31, 2012.

Only 36 hours remain in which to secure your recordings at the best-available price.


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