By Pam Martens and Russ Martens: September 2, 2014
Figuring out how to write ever creative versions of headlines that say the market is hitting a new high is commanding a lot of energy in newsrooms these days. What should be commanding more energy in the newsrooms is writing about the market structure that is underpinning this “bull”.
On Friday, TheStreet.com went with the headline “S&P Books Best August Since 2000.” Bringing up the year 2000 is a bit like bringing up the Hindenburg during an air show. The year 2000 marked the peak in Wall Street’s dot.com bubble, whose bust erased 78 percent of the Nasdaq stock market over the next two and one-half years.
Wiped-out Nasdaq investors were eventually to learn that much of this so-called bull market was a highly orchestrated fraud by some of the biggest firms on Wall Street. The fraud worked like this:
Research analysts at marquee firms like Salomon Smith Barney and Merrill Lynch issued knowingly false research reports urging small investors to buy young, unproven companies while calling the same stocks “crap” or a “pig” in private emails. When new tech or dot.com companies went public, favored big clients at Wall Street firms were instructed when to buy on the opening day of trading at rising prices to make the stock appear to be in high demand. This fraud on the market is called laddering.
To allow Wall Street’s most important clients to benefit by selling out at the doubled or tripled prices, stockbrokers for the little investors were incentivized to keep their clients in the stocks by their firms imposing a system called a “penalty bid” where the stockbrokers’ commissions would be removed if their clients sold into the run-up in price.
From Nasdaq’s peak in March 2000 to its trough in October 2002, approximately $4 trillion was transferred from those who did not know the market was a fraud to those who did.
TheStreet.com’s article last Friday posits this theory for the current market’s advance: “The S&P 500 hit a new closing high. A continued flow of good economic data and speculation about European Central Bank stimulus both played bolstering roles in the markets relentless advance.”
The “flow of good economic data” is certainly a subjective point of view. Earlier in August, the Federal Reserve released a study finding that 52 percent of Americans would not be able to raise $400 in an emergency by tapping their checking, savings or borrowing on a credit card, which they would be able to pay off when the next statement arrived.
But the part of the article that really caught our eye was this quote from the senior index analyst for S&P Dow Jones’ Indices, Howard Silverblatt, who says: “It’s amazing that with all the geopolitical tension in the world, the U.S. market was able to post its strongest August in 13 years, while the other 25 developed markets as a group were in the red. Speaks to the relative strength and stability of the U.S. system.”
As far as the geopolitical tension is concerned, it doesn’t hurt that there is an ocean between the U.S. and the multiple conflicts or that the U.S. has a larger military budget than the next ten biggest spenders combined. In 2012, according to the Office of Management and Budget, the U.S. spent $682 billion on its defense budget. The next ten largest spenders collectively spent $652 billion. Those countries were, in order of spending, China, Russia, U.K., Japan, France, Saudi Arabia, India, Germany, Italy and Brazil.
There is no question, none whatsoever, that the sophisticated manner in which today’s stock market is rigged makes the market manipulators of 2000 look like a bunch of pikers. The question is, do the various prosecutors examining the frauds have the courage to prosecute it, thus taking away the punch bowl.
We certainly know that Alan Greenspan, Chairman of the Federal Reserve Board during the dot.com frauds, didn’t have the courage to speak out. Greenspan told Congress that the market was efficient; that stock prices were being set by the judgment of millions of “highly knowledgeable” investors. But small investors did not know what crooked stock analysts were saying about their stock picks in private emails; they did not know about laddering or penalty bids.
Today, thanks to author Michael Lewis appearing on 60 Minutes on March 30 and his latest book, Flash Boys, becoming a bestseller, the public has been told in the most dramatic way that the stock market is rigged against them.
Class action lawsuits from Chicago to New York are not just saying the same thing but describing in exquisite detail exactly how the markets are rigged and why they can’t be trusted. Moving a market to new highs can be easily facilitated when regulators are tolerating illegal manipulations like wash trades and spoofing.
A wash trade involves the same party conducting or authorizing simultaneous buying and selling of a stock or futures trade. To move a market higher, the trades are simply done at orchestrated rising prices.
Spoofing involves the rapid fire placing of orders with corresponding cancellations, often at the open or close of the stock market, in order to manipulate the price of a stock, stock index or commodity.
So the question today is whether hapless stock investors will be seduced once again or dig deeper into the research that has been put painstakingly before them. Frothy, rigged markets have a way of getting much frothier before they collapse under the weight of their own corruption. They get frothier with the help of headline writers.