The Oil Stock Pyramid Scheme

[BadgerKid]

May 20, 2008
By Jamie Dlugosch, Editor, InvestorPlace

...

In the early 1900s, the stock market had plenty of its own pyramid schemes. Sellers of companies with no assets or prospects easily preyed on the unsuspecting investor by offering stock that had the potential to grow in value. If a buyer wanted to exit in the early stages of the scam, the ringleader would usually find a buyer willing to step in. When the scheme was really hot, the price of the stock went up, up and up. It was all so perfect until the music stopped. And stop it did in 1929 with those left literally holding the bag of worthless paper.

Fast-forward to today, and another pyramid scheme is working its scurrilous magic. This time, the action is in the oil pits. There, speculators are chasing after contracts that allow for the delivery of crude at some point in the future. With the convenient use of massive amounts of leverage, traders can take very large positions with very little capital required. Since most of these so-called investors have zero intention of taking delivery on the contract, the hope is that they can find a buyer who will gladly pay higher price down the road.

...

Hedge funds dominate the trade currently, but mutual funds led by the all powerful oil exchange-traded funds are buyers as well. Fast on their heels are the individual investors who are dreaming of easy money. There is no such thing, and this dream will come crashing down at some point. My best guess is that the end will draw near sometime after the election.

For now, an Iranian surprise or some other going out with a bang Bush led Middle East excursion could push oil prices beyond the $150 mark. At a minimum, there are more suckers out there that will be the buyers for those at the top of the pyramid. My advice: Don’t get suckered into this losing bet.

http://www.investorplace.com/experts/james_dlugosch/articles/the-oil-stock-pyramid-scheme051908.html

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It's just one bubble after another... stocks, housing, energy, food, ...

[lakeguy]

1. they dont mention shorting a contract...

i wonder how the shorts compare to longs in the futures market right now.

[sam sarrha]

2. that is what happens when you have the White House controled by a Mafia Family, Bu$hitCo unlimited