Chapter 8: The Strong Forces and Players That Are Really Behind the Market

1. Chapter 8: The Strong Forces and Players That Are Really Behind the Market By: Ricardo L. Carrillo

2. Introduction • It is very important to have a strategy on investing in the stock market, based on small parts of one’s net worth. • Wallet Doctor Survival Rule #14: Focus on retiring debt free – you don’t want to be risking your assets in retirement in the markets except with money that, if you lose it, will not affect your lifestyle. • Bulletproof Stock Investing – investing method developed around tendency of stock shares to migrate from weak investors to strong investors. • It’s vital to your financial health that you understand exactly what the forces and players are that drive the stock market’s price up and down that can make you rich.

3. Introduction (Cont.) • Bottom Buyers: • 1st Group: Experienced investors who know the cyclic rise and fall of the general stock market. • 2nd group: Insiders who must report all of their stock purchases and sales to the SEC. • Long-term technical value investing – study of long-term weekly and monthly price charts to look for price patterns that discourage the inexperienced public into selling to experienced investors. • Visible insiders put additional upward pressure on the company stock price any way they cant. • FACT: Wall Street works hard to make stock investing seem harder than it really is.

4. Inexperienced Public Investors • Worst thing you can do for your financial health is invest in something you know nothing about. • Example - Dutch Tulip Mania: • Imported tulip bulbs from Constantinople created a crazed demand in Holland and Germany. • People who knew nothing about flowers started to speculate on price increases and created high volume of buying and selling to the point where one tulip would cost today’s equivalent of $76,000. • Public laws were developed to control the tulip craze and the inexperienced public investors began to liquidate their tulip holdings. • Tulip prices crashed by 90%, leaving many families bankrupt.

5. Inexperienced Public Investors (Cont.) • The Ponzi Scheme: • Named after the famous con artist Carlo “Charles” Ponzi. • Con artists target people in cities and small communities with Ponzi scheme high-yield investment programs. • Once they take your money, they leave your legal jurisdiction.

6. Irrational Exuberance • Book by Dr. Shiller. • Explains that it is completely rational for inexperienced public investors to behave in the stock market like tulip bulb investors. • People are attracted into a rising stock market or single stock if they have heard of windfall profits of inexperienced relatives. • Very dangerous move at the top when insiders have sold out and no smart money is left to support the market.

7. Experienced Investors • Individuals who have ridden through an extended bull market have an altogether different perspective on the market. • Wise enough from experience to buy stocks low and hold on to them for long multiyear periods of time. • Sell when the signs are obvious that there is too much inexperienced public interest in a stock and insiders are selling out.

8. Corporate Executive Insiders • First class of insider: • Successfully conspires to gain control of the board of directors of a publicly traded corporation. • They do this to obtain large gifts of employee stock options for free when share prices are low and shareholders are desperate.

9. Corporate Executive Insiders (Cont.) • Does everything possible to get the price of the stock to go up over the next few years as their Options vest. • Use news leaked to the media and also use legally (or illegally) misleading financial statements to draw in inexperienced public investors. • Also create misleading financial statements.

10. Hidden Insiders • As a group, buy stock low and then manipulate the stock price up to dump it on an eager, overly-optimistic, inexperienced public. • Operate in teams to buy up (corner) the supply (float) of a company’s stock. • Create investment pools and become notorious as part of the corruption on Wall Street. • Investment pools were renamed mutual funds.

11. Market Corners • Definition: • “A market condition brought about intentionally when virtually all of the purchasable, or floating, supply of a company’s stock is held by an individual or group who are thus able to dictate the price when settlement is called.” • Extreme form of short squeeze, where the buy side of the market has almost complete control of all floating shares. • Several academic articles have found strong evidence that large investors and corporate insiders possess enough market power to manipulate stock prices through a market corner.

12. A Brief History of the Market Corner • The favorite tool of the super-rich stock market manipulator was the bear corner . • Financially powerful men were in a special position to hoodwink unwary investors because they were generally inside corporate officers as well as large stockholders. • Often controlled a huge amount of the common shares of stock. • Dictated the share price the short sellers had to pay. • The amount of wealth controlled by the manipulators was also large compared to the market capitalization of the stock.

13. A Brief History of the Market Corner (Cont.) • Wallet Doctor Survival Rule # 26: • Stocks become targets for cornering when there is bad news about a good company and prices stay low — when nobody you know is paying attention. • Factors that led to market cornering: • Easier for these men to corner the market back then. • A lot easier to take a short position. • Margin requirements were also less restrictive. • Corporations had no financial reporting requirements to stockholders. • The legal system was much more corrupt than it is today and judges could be bribed by manipulators to issue injunctions to restrict the issue of new shares.

14. A Brief History of the Market Corner (Cont.) • Examples of Market Corners: • Hudson River Corner (1851) • The First Harlem Corner (1863) • The Second Harlem Corner (1864) • The Prairie de Chien Corner (1865) • The Michigan Southern Corner (1866) • The Failed Erie Corner (March 1868) • The Erie Corner (November 1868) • The Failed Gold Corner (1869) • The Northwestern Corner (1972) • The Northern Pacific Corner (1901) • Contemporary Corners

15. Contemporary Corners • Stock markets are better regulated today than in the 19th century, but market manipulations by large investors still occur. • May 1991: Bond trader at Salomon Brothers was discovered attempting to corner the market in two-year U.S. Treasury notes. • 2002: China Venture Capital. Seven people were accused of using $700 million and 1,500 brokerage accounts to manipulate the company share upward.

16. Conclusion • There are many more cases that have not even hit the press. • Manipulators do everything possible to stay hidden from the public. • If they restrict their buying and selling to the long-term, they are really hard to detect. • Pump-and-dump schemes: • Slang for stock price cornering manipulations • Also been detected in small markets like Pakistan.