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Reply #49: Market manipulation and its effects [View All]

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54anickel Donating Member (1000+ posts) Send PM | Profile | Ignore Mon May-10-04 10:58 AM
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49. Market manipulation and its effects
http://www.gold-eagle.com/gold_digest_04/droke042804.ht...

Now to show you what a manipulated market looks like, pick out a chart of any actively traded stock or commodity -- it can be IBM, Barrick Gold, corn futures, or whatever. I'm not trying to single out any one stock or commodity because any one of them worth trading is being manipulated at the present time. This is not to cast aspersion on these stocks or commodities; indeed, the presence of organized manipulation is actually desirable up to a point. You see, the whole cycle of bull market followed by bear market is nothing but a continuously repeating pattern of manipulation. Bull markets in stocks and commodities happen because shrewd and well-monied groups of insiders decide that a certain asset (say for instance shares of XYZ Corp.) are depressed and have declined too low. Moreover, this coterie decides that XYZ is worth accumulating at the current low prices because the outlook for this company is promising and the group believes that XYZ shares can sell for much higher prices at some point in the future. So an attempt at absorbing all the excess shares of XYZ begins and the campaign of market manipulation is underway. After a long period of quietly picking up shares of XYZ, a new bull market campaign commences with the insiders advertising XYZ to the general public in various ways, which causes the public to demand shares of XYZ. A bidding war ensues with the public grabbing the bait laid forth by the manipulators and a new uptrend in the price of XYZ gets underway. Eventually, the shares of XYZ reach unsustainable levels and by that time the manipulators have long since sold all their shares to the public. So a bear market cycle follows and XYZ declines in price again. That, in a nutshell, is the cycle of manipulation.

Would the price of XYZ shares ever start a sustained uptrend and make higher highs without the presence of organized market operations (read manipulation)? Likely not. It takes organization from behind the scenes by professional manipulators to build bull markets, which in turn give way to bear markets - these things could never happen if trading in stocks and commodities was left to the unorganized public alone. So manipulation, far from being undesirable, is actually a necessary element to the smooth functioning of the financial markets. Without manipulation, there could be no following of the trends (since there would be no trends). Moving averages wouldn't work since price movement would be extremely erratic (see the above chart example). Chart patterns would be unreadable since by definition there would be no recognizable price patterns. Even fundamentals would be of little use if none of the well-heeled, behind-the-scenes manipulators felt that a given asset wasn't worth operating in.

Liquid markets that are under the influence of organized manipulation (which would include virtually all tradeable commodities and most listed stocks) have what is known as "market makers." Every stock of a well-capitalized company whose shares are heavily traded by the public employs someone to make sure the market for its shares is in relatively good working order. That means that whenever things look shaky this paid professional will step in and support the market at critical price levels to prevent an all-out break in prices. Or, to give another example, when an accumulation campaign is underway near the bottom of a bear market, this professional will make sure that no undue attention will be attracted to the stock of said company (in order to keep the general public away from the stock until the appointed time). This might properly be said to be another form of manipulation, but a very necessary one from the standpoint of the company and of the stock market as a whole. After all, if the public was allowed to madly rush into the market of any given stock at the same time, it would create a huge spike in the share price that would quickly be followed by a completely retracement right back to where the price was before the public entered the fray. (We've all seen this happen time and again with the penny junior mining stocks in years past when there was no professional support for a given stock. A "hot tip" from the Internet would cause thousands of traders to all buy the said stock at the same time, resulting in a massive rally in one or two days, which inevitably failed and left the stock right back where it started. This is what happens when there is no organized manipulation).

(Note: For further reading on the subject of the presence and desirability of manipulation in the stock market I suggest reading the classic 1933 work "The Business of Trading in Stocks" by John Durand and A.T. Miller (Fraser Publishing, Burlington, VT). The authors devote two in-depth chapters to the discussion of manipulation and describe in detail a complete manipulation campaign from start to finish).

Now I realize there is another form of manipulation which is particularly odious to even well-meaning market observers, which is mistakenly called "manipulation" by many. Actually, the correct term to use for this form of market operation would be "intervention." This is typically carried out by large entities such as the government. For instance, many traders speak of "manipulation of interest rates" or the manipulation of the dollar by the U.S. government. What they really mean is that at certain times (or perhaps at all times) there is an ongoing effort by the feds at keeping the value of the dollar low or high relative to other currencies. Or in the case of interest rates, that there is an active attempt by the Fed at keeping rates extremely low in order to keep the economy stable. Be this as it may, does the presence of the Federal Reserve or the Treasury Department mean that we have no way of trading the markets without always coming out on the losing end? Does government manipulation of the markets render price patterns meaningless and technical analysis of no value?

snip>

There are limits to human intervention in the natural realm and this applies especially to the commodities market. That's the lesson of history with regard to manipulation. True, manipulation will always exist as long as there are stocks and commodities to trade. To a degree, manipulation is even desirable. But even when taken to undesirable extremes, the natural forces of supply and demand ultimately keep the manipulators in check.

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