Friday's Turnaround: Raid on the Shorts

by: Bill Cara February 23, 2008 | about stocks: ABK / MBI    

Bill Cara

About this author: By this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

From a DJIA low at 3:15pm of about 12,160, the index started moving a little higher for seven or eight minutes, and then literally exploded to the upside, moving up +225 Dow points (about +1.85 pct) in 30 minutes.

The question is, should the SEC post an observer in the CNBC television studio? Should a so-called TV "personality"€ or financial reporter be permitted to start rumor and innuendo within the last hour of a trading session, particularly on Friday? Should reporters be required to report the news? Should on-air "€œpersonalities"€ who can move markets to extremes be required to provide SEC investigators access to their phone and e-mail records?

Nobody wants to live in a controlled society - certainly not traders of the capital markets -“ but frankly, these markets are not transparent and the acts of deceit and manipulation that routinely go on necessitate some greater monitoring than happens today.

What's at stake is the credibility of the government, the agencies of government that are involved in the capital markets, the central banks, banking institutions, and so on.

What happened Friday in the last hour of trading was a raid on the shorts, pure and simple. It might have been orchestrated. For certain, there were parties acting in concert if even by common motivation.

I continue to say this: capital markets are losing the interest of the average person because they no longer represent a value pricing mechanism. For a world that needs liquidity to grow and prosper, that's a dangerous precedent. If liquidity contracts to the extreme, the world is facing recession, and perhaps depression.

What happened in the final trading hour of the week was just another warning shot over the bow of a floundering ship. If these incidents continue, uncontrolled, it could be that the next shot is fatal.

Related Articles

This article has 49 comments:

  •  
    Feb 23 01:25 PM
    I was on the lucky side, sounds maybe like you weren't. I was happy, but I see your point. It appears, though, that the rumor is true, which sure makes your accusation a little less weighty.
    Reply | Link to Comment
  •  
    Feb 23 04:05 PM
    I can't believe the violent swings. overraction all over... I am happy with my long positions though and wish I was watching when the market rallied...
    Reply | Link to Comment
  •  
    Feb 23 04:23 PM
    Sorry Bill, sounds like sour grapes to me! Speculation and reports based on hearsay are commonplace among investment pundits, and the market moves, both to the up and downside, as a result of these reports every day. Dare I say, I'm sure you've also benefitted from the speculative "hype" in the past as well. To their credit, CNBC did disclose several times that their sources said that timeline was not definitive and the proposed deal could also fall through in the 11th hour. Caveat emptor, my friend!
    Reply | Link to Comment
  •  
    Feb 23 04:26 PM
    Bill, you didn't say what the CNBC rumor was. For those of us who missed it, a recap would be helpful.
    Reply | Link to Comment
  •  
    Feb 23 04:32 PM
    Rumors have always played a part in the market. Nowadays they just get around much faster. I do agree there's a lot of manipulation going on, starting with the Fed on down, stopping just before it gets to the individual investor who becomes aware of it just after his chance to profit from it has left the room.
    Reply | Link to Comment
  •  
    Feb 23 04:56 PM
    I found a summary on this site; thanks:

    seekingalpha.com/artic...
    Reply | Link to Comment
  •  
    Feb 23 04:57 PM
    lisa,
    i think it was the rumor that ambac was going to be bailed out...charlie gasparino reported it on friday afternoon...

    scott w
    growthportfolio.ning.c...
    "the facebook of technology and investing"
    Reply | Link to Comment
  •  
    Feb 23 06:04 PM
    my thoughts were the same as that was happening..I saw my SPY level 2 exploding
    like there was some orchestrated buy or massive short covering..I've never seen anything like that move..how could we as investors get any clarity on what really happened..?..this was just so strange..had nothing to do with ABK or MBI...thats a smoke screen on the push higher..
    Reply | Link to Comment
  •  
    Feb 23 06:36 PM
    Bill, it looks like you WANT the market to go down. If the final hour's rumor had caused the market to tank, would you still have written this article? Would you recommend that an SEC observer be posted to pull the hook on NEGATIVE rumors?
    There seems to be a lot of people around like Bill Ackman, Meredith Whitney, Prasant Bhatia and others who are determined to make a name for themselves by talking the market down. In particular, Ackman comes off like he's not going to be happy unless Ambac goes out of business or he's in charge of the company himself. You seem to be among that crowd.
    If all of you are right, then the short side of the market is definitely where we want to be, and we should be thanking you for handing out the advice.
    On the other hand, if there's one thing we've learned from trading for a while, it's that NO ONE is right in the markets all the time. You may be right for a while, even for a long time, but then along comes the day when you are wrong. And vice versa.
    Even though the short side of the market has been paying off for quite a while, no matter where the market is, there's always going to be someone who's saying we're headed for a steep fall and there's always going to be someone who's saying we'll be at all-time highs before the year is out. That is not the question.
    The question is:

    Which is the path of least resistance?

    From the tape, I see a lot of folks who are either very scared or are determined to push the market down - all on RUMORS. If they go on shorting and being scared and no one sees any value in lots of companies that are historically underpriced and still functioning without problems, then we've got another 20% down move coming very soon.
    However, I also see a lot of guys waiting around with money burning a hole in their pockets, looking for any excuse to buy. If in 2008 the great credit scare of 2007 turns out to be not quite so scary after all, the latter are definitely going to take over for a while. All that will require is that someone with cash gets a handle on what all the CDO's out there are actually worth and begins to snap them up. After all, the Real Estate market goes up and down, but it doesn't go down forever until we don't need land and houses anymore. Do you see that happening sometime soon?
    Reply | Link to Comment
  •  
    Feb 23 07:07 PM
    A little attack on the shorts. All depends, do they have a rescue plan?
    Who is going to pay? AMB is so far underwater.
    Paulson sliped last week, when he said, "The banks should come clean."

    Anyone should understand, more write downs are in the works. No one wants to admit to a banking crises. This is not a Saving and Loan crises, it is a Banking Crises.

    Now is a good time to scare the shorts with a tempting rally, before the next leg down.

    Thank you, Mr Greenspan, for the current credit bubble.
    Reply | Link to Comment
  •  
    Feb 23 11:55 PM
    Covering on a 200 point rally is just shamefull. Can't these shorts show a little conviction. Come on, stop trading and start shorting for the long run. The market doesn't go down in a straght line! Just buy a basket of double inverse ETF's and stop worrying. Rebalance once a year or twice at the most. Trying to time the market is a fools game. Nothing to see here, move along.
    Reply | Link to Comment
  •  
    Feb 24 12:32 AM
    I agree with Bill. CNBC is joke. They always try to put a positive spin on everything. Sure AMBAC and MBIA are the most heavily shorted stocks and maybe they were trying to spur a reaction from hedge funds that were short these stocks by reporting rumours of a bailout. The fact of the matter is that we are going into a recession (which seemed far fetched 3 months ago) and maybe into a stagflationary environment (which may seem a long way off now). The subprime situation is not over and the housing crisis has not bottomed. I watch CNBC and they are always trying to play the positive angle on everything, suggesting people should buy bombed out stocks now for the long-term. The stocks may or may not eventually go back up but can the ordinary investor stomach a 50% or more decline in his portfolio in the meantime? Even Paulson and Bernanke seem to have their head in the sand telling Congress the US will skirt a recession. I know they are probably trying to avert a panic but they should acknowledge the severity of the current situation rather than shrug it off. I'm concerned by the fact that are this hope and optimism about 2H 2008 recovery has meant that the stock market has held up relatively well. Once we see reality set in with a less than bright 2H 2008, the Dow may fall another 2000pts. I dont want to be a pessimist or seem to be un-American but we have a big problem not seen for the last 20 years and my confidence in the current team (Bernanke et al) is severely lacking.

    PS. I agree with the last post..trying to time the market is futile. We are in a bear market and stocks will most likely go down from here. Just make sure you don't get shaken out by the bear rallies.
    Reply | Link to Comment
  •  
    Feb 24 02:01 AM
    The markets will go down, no matter who intervenes.
    Reply | Link to Comment
  •  
    Feb 24 02:05 AM
    Bill, I've been thinking more about your article. I'm not sure that short-term trading is every predictable, and I personally don't blame journalists for reporting rumors as long as they label them as such.

    For me, the message of this episode is that most investors should invest for the long term, in which the short-term noise cancels out and the fundamentals dictate prices.
    Reply | Link to Comment
  •  
    Feb 24 02:10 AM
    If you want to see illegal trading in the market place just look at the intra-day chart of DNA on Friday before they announced they were fast tracked by the FDA for Avastin's approval. There was a significant wave of buying about an hour before the actual announcement. Do you think someone had some insider knowledge? Absolutely. Same goes for the buy-in to CFC by BAC last year. There was huge call buying right before the announcement was made official. Not only that but there was huge call selling at the next higher strike than the offer from BAC. Do you think someone had insider knowledge? Absolutely. Has there been any prosecution in that case? Absolutely not.

    Unfortunately market manipulation is prevalent in the market place as it stands today. There's manipulation like analysts talking their books, people starting rumors with no factual basis, Fed manipulation, PPT manipulation, and even Ackman coming out with a "plan" to save the monolines is probably based in some scheme. I would be willing to bet he will make a ton of money with some hedge against his monoline short position and the tip of the iceberg surfaced on Friday. In fact, the rumor might have come from him or his staff.

    At the end of the day there are three things to remember: don't fight the system, the trend is your friend, and the enemy of my enemy is my friend. Fighting the system is pointless and a lost cause as evidence by the lack of substantive prosecution for the insider trading that plainly goes on. Learn to read the trends through technical analysis. No matter what someone is doing to the market they can't hide their actions in the volume and the price - that always tells the true tale. Finally, the market will always dole out the most pain possible to the greatest number. The weak shorts are going to get boot stomped here so your enemy (the market) will be your friend when you recognize that overall sentiment is extreme (in this case bearish) and you take the other side of it. That is if you are trading this market. If you are just investing, put your money in your mattress for now.

    I believe that the overall trend is down but this will be a good opportunity to trade to the long side for some quick dough. Just don't forget that overall trend unless you want some market inflicted pain.
    Reply | Link to Comment
  •  
    Feb 24 06:41 AM
    I have to disagree. The story broke up 30 minutes before the closing and the story in the responsible journalism world MUST be reported as soon as it happens. I am sure some shorts are thankful for the story, the shorts who didn't open the position in the last 30 minutes just to see gap up opening on Monday.

    If AMBAC declares bankruptcy instead, than I will fully agree with the author.
    Reply | Link to Comment
  •  
    Feb 24 07:15 AM
    Well I've been saying this for months. It's about time you guys finally see some of the truth. While a 'raid' on shorts is not a bad thing in my opinion (fair disclosure - I have no short positons or puts anywhere), the issues are deeper then a 'reporter' a.k.a. 'analyst' who doesn't reveal soruces reports like he did. Hey, I didn't hear anything from you guys when this same reporter was making these exact same type of reports BUT for short side of the argument. Where were you then???
    Reply | Link to Comment
  •  
    Feb 24 08:30 AM
    The fed is easing aggressively and any surprise news is going to drive the macro traders to move. They are short housing and financials now and long the commodities/energy sectors. What angered me is that I bought 3 points from the low in the s&p and then put in a vwap order to exit. The market moved almost 2x the percentage gain on my fill price on the 30 minute vwap order in the last few minutes of the huge move. Someone was gaming the algos.
    Reply | Link to Comment
  •  
    Feb 24 08:50 AM
    One of the reason's I've stopped reading Bill's blog is his predictable whining when the market acts differently than he expects, especially on a daily basis, causing him to point fingers at the usual suspects. He embraces the Relative Strength Index (RSI) as if it's a true mathematical calculation of extreme market sentiment, rather than just another after-the-fact way of historically charting oversold and overbought conditions--"Gee Whiz, look at this chart, if I'd only bought when everybody hated this stock, and sold it when everyone loved it...I'd...I'd...I'd be RI..I..I..CH!!". When you lean too hard on a crutch, it can sometimes break.

    That being said, Charlie Gasparino, a muscle-bound, macho man of a financial journalist, who claims access to the inner sanctums of Wall Street (ie The Boardroom), has been allowed for weeks to scream "Fire in the theatre!, the monolines are heading to a quick and painful bankruptcy; my 'sources' tell me so". He reiterated one of these rants of imminent demise on CNBC as late as Friday morning! Then, with a 1/2 hour left in a short trading week, he broadcasts that a "bail out" for Ambac is a certainty, and banks X,Y& Z are lined up to help.

    Action/Reaction....sho... squeeze into the close.

    On Monday some Power Pundit will reiterate the Financial Meltdown argument, the markets will plunge, and Bill Cara will say "you see, I told so...".

    Yawn!
    Reply | Link to Comment
  •  
    Feb 24 09:04 AM
    I am short the march 1333 S&P Calls. I left the positions intact, because I was unable to focus on the mkt immediately. having other concerns for an hour. I will probably continue to do so (although I may day trade hedge them), because this "rally" had all the markings of a bucket shop run.

    All the smug gloaters who were able to scalp a few tics on this run should be commended for their short term prowess (I used to be a pit trader myself), but you are missing the point of what he is saying.

    When the market is subject to irresponsible manipulation by a few brokers of information, market efficiency and reliability dies, taking trust with it, and all you have left are scalpers.

    Have you ever been in a market where liquidity has dried up because no one wants in? I traded for a short time in the Kansas City Wheat Pit. It was like a neighborhood poker game in those days. Money went from one guy to another, but at the end of the year, most guys were flat. We had to look to bonds, currencies and SPZ to make our money (of course, this is no longer the case in this, or any other ag market).

    Congrats to the longs who made money. I would have bot the underlyings myself for the afternoon had I been in front of the computer. But you need to hear what he is saying.
    Reply | Link to Comment
  •  
    Feb 24 09:20 AM
    The move on Friday was so fast that I was paralyzed at my terminal. My position of 400 shares of SKF, the UltraShort 200% inverse ETF of the fanacial sector went from $16.86 to $7.75 in seconds. I'm down nearly $3,500 in that short time span. Can I get some insurance from AMBAC after the fact to cover my indiscretion? In truth, I think I will be back in the money by the end of next week, hoping for some "inappropriate&qu... rumours from CNBC.
    Reply | Link to Comment
  •  
    Feb 24 09:37 AM
    Wake up folks, there are basically 6 parties that control the access of information which we consume voraciously on a daily basis (and they're the most powerful lobby in DC) and there is no such thing as judicious oversight to protect the commoner; it was thrown out with the bathwater. Friday was simply an augury of things to come.

    You asked for it, and you got it. Welcome to Mundania.
    Reply | Link to Comment
  •  
    Feb 24 09:48 AM
    This last hour big move happened several times 2 weeks ago.
    What is proves is that it is a bear market and bulls are rushing back and forth before heading down a cliff. They needs more bulls on the back to push everyone down. Like the bulls we have in the last hour.
    One thing about America is the government is broke and people are broke. That is worse than the 70s and I see very dark clouds ahead.
    Reply | Link to Comment
  •  
    Feb 24 10:48 AM
    Markets are a circus becuse the SEC is blind to the prowess of capitalism gone wild, hedge funds. Together, the top few funds can easily lead the market in any direction while an amazed public gets lured into "fast money" from such violence. It's casino time with up and down replacing red and black. The market has become a war zone for the titans to squeeze the also rans out of business.
    Reply | Link to Comment
  •  
    Feb 24 10:49 AM
    There have been instances when false rumors caused the market to tank - just like that. Perhaps, the author has selective amnesia.

    If you want to clean it up, then go for the whole thing. Dont whine when the market goes up, just because you are on the wrong side of the fence, or vice versa. Talk of reform - then SEC should bring back the uptick rule; shorting should be banned - how can you sell something that you dont have, even if you are buying it later?? Powerful and rich folks in the market can manipulate so that they can buy back cheap to cover the shorts. I dont need to elaborate with examples - companies have been runied due to one such problem, and there are myriad problems. Can you compensate for the loss to investors ?? Dont tell me you will put the crooks in jail, for it does not get the duped investors their money back. Enron's villians did it, got some jail term and one of them died too - but did the cheated investors get their money back ?? Kick the SEC out for inaction on so many fronts. Stop CNBC/Reuters etc. from reporting any false propaganda.. stop Ackman from repeatedly coming out with 'Dire' news on a day to day basis at the 'right' timing ...

    You want a clean slate? then level the playing field and watch as the skeletons fall off the cupboard.

    Simple as that.
    Reply | Link to Comment
  •  
    Feb 24 11:37 AM
    Lack of liquidity equals insolvency. Nuff Said!!!
    Reply | Link to Comment
  •  
    Feb 24 11:38 AM
    fair and equal playing field====roflmao sec==roflmao
    Reply | Link to Comment
  •  
    Feb 24 11:39 AM
    YES, I agree about the problem developing with credibility in the market of the average investor (as in Me). I think this LOBBY that had the SEC remove the UPTICK in the short selling has added a lot of large PUT/ SHORT selling by the BIG OPERATORS. THEY can now sell large blocks upon large blocks and make their own market. I think HEDGE Funds are the biggest offenders of this. I am retired and have been in the market since the mid-eighties so I have a bit of experience. I am slowly pulling out and going into less speculative investing. This market is turning MORE speculative by the BIG OPERATORS.
    THANKS
    JIM
    Reply | Link to Comment
  •  
    Feb 24 11:59 AM
    "There have been instances when false rumors caused the market to tank - just like that."

    Really? I think I know what you're talking about:

    When rumors circulated that Buffet was going to buy Hovnanian ...
    oops that caused the builders to rise.

    Let's try again ...

    When rumors circulated that Buffet was going to buy CountryWide ... oops, darn it, that caused the financials to rally.

    Ok, this is harder than I thought ....


    Reply | Link to Comment
  •  
    Feb 24 12:28 PM
    You are a joke. CNBC is a total tool for Ackman and the shorts on mbia and abk. They consistently have spun the story on the monolines in a negative direction; led by Cramer and to a lesser extent Gasparino. Yet they now report a TRUE story that is bullish and you whine like a pathetic school girl? Grow some balls please....
    Reply | Link to Comment
  •  
    Feb 24 12:37 PM
    I've been convinced for more than 50 years with the markets that there probably are 8 guys who call each other the night before to determine how much money they want to make the next day and then agree on who buys or sells and which stocks. Friday's closing hour confirms a string of such instances through the years at times when the markets are most vulnerable to sly manipulation by a few to take advantage of the many. Sorros almost ate an entire country's financial structure for lunch some years ago. Who can believe that a concerted effort by similarly well-positioned "professionals&qu... isn't happening today?
    Reply | Link to Comment
  •  
    Feb 24 01:01 PM
    "What happened Friday in the last hour of trading was a raid on the shorts, pure and simple. It might have been orchestrated. For certain, there were parties acting in concert if even by common motivation."

    Are you kidding me? This "crap" happens weekly on Wall St. GS probably finished covering their shorts on the day before. Cramer moves the market slightly with his nickel and dime investing viewers. GS moves 100's of billions through their network of brokers and hedge funds.
    Yes my friend, it was orchestrated.
    Reply | Link to Comment