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I heard quite a bit of chatter today about this article and video discussing Jim Cramer describing some of the techniques he used while at his hedge fund. I first saw this video a couple months ago when it was still just on TheStreet.com and my initial reaction was that I found the actual details of the techniques he describes very interesting but I was not surprised or shocked at the overall content of the video and did not really give it a second thought.
Fast-foward to today when the DrudgeReport linked to the article in the NY Post and someone uploaded it to Youtube. Suddenly I’m seeing links on numerous blogs, there are over 100 comments on Youtube and we were even discussing it in our chat room. Based on what I have read so far, my reaction appears to be in the minority. I have seen far more comments along the line of this quote from Clear Stocks - “But before I go, take a look at this YouTube video with Jim Cramer. It gives a rather appalling yet candid glimpse of what we (the little investor/trader) are up against. Makes me want to heave my charts and fundamentals right out the window.”
Now I don’t personally know the author of Clear Stocks nor do I have an opinion of him but I do strongly disagree with statements like the one above as well as the “Cramer should be in jail” crowd on multiple levels.
Level 1: “How can the little guy compete?”
The market is a game. An extremely large and complex game with numerous players. Like any complex game, there are different types of players with different advantages and disadvantages. When Cramer speaks of allocating $5 or $10 million in capital to move the futures one way or the other, that’s obviously an advantage a hedge fund has that an individual does not, the ability to move a market. However, if using a relatively small amount of your capital will move the market, what happens when you have a large position and want to get out now? Short answer is, you can’t, at least not without moving the market against your position. The extreme case of this is the large mutual funds that take days or weeks to establish or liquidate a position. Think of all the intraday equity strategies posted on websites that are based on buying a X minute bar breakout and setting the stop at the low of the bar. Do you think even a small institution with $100 million in capital could employ that strategy? Being able to fill and liquidate a single position with only a few cents of slippage? Of course not. That’s why it’s important to remember that this is a game, and as a player you should be aware of your strengths and weaknesses and use them to maximize your gains. I don’t recall anyone feeling sorry for Amaranth when everyone knew they were stuck in those Natural Gas futures and other traders kept shorting them, knowing that any Amaranth selling would only drive down prices more.
Level 2: “But he’s manipulating the market!?!?”
Is he? Is buying some futures premarket when you know you want to establish a short 10x the size after the open really “manipulation”? If so how? Aren’t you allowed to buy/sell when you like? What if you were a discretionary trader and opened a small long position premarket, then the market “felt like it was going to turn” so you immediately reversed to a larger short position. Is that manipulation? What is the difference?
He then goes on to talk about shorting individual stocks, spreading some rumors around, buying lots of puts and making sure the story gets onto CNBC. Who exactly is the loser is this situation? Cramer’s keeping a stock like Apple from climbing by risking his own capital on the short, using some more to buy some puts and feeding the hype machine that already exists around big name companies like AAPL/RIMM. Are any serious investors willing to admit that they’re going to sell a position because a reporter on CNBC reported that someone bought a large number of puts? Or that they heard a “rumor” that Verizon wasn’t interested in the iPhone? Of course the “rumors” aren’t true, because if they were, it would potentially be insider trading. People are upset that when they try to trade on news they beleive is not public knowledge and are losing money? The cheaters are being cheated? Are we being serious here? If rumors and stories from CNBC are making that big of impact on your trading decisions, I highly recommend investigating mutual funds. Which brings me to the final level…
Level 3: “Cramer caused me to get stopped out”
I’m sure many of the people who responded negatively to the video have felt at one time or another that their stop was targeted by this type of “manipulation” right before the stock turned around and ran in their favor, thus costing them money. However, one thing to remember is that these institutions have the ability to move an individual stock or market both ways. What this means is that their influence on the market has probably helped you as many times as it hurt you. Remember that long position you took that just immediately took off, crushing shorts in it’s path to be a huge winner? Odds are there may have been a large institution participating in just the kind of behavior Cramer was discussing. I doubt you were upset with them then.
What this all comes down to is accepting personal responsibility for all your investment decisions and outcomes. Yes, you are most likely a very small fish in a very big pond. Yes, there are big fish that can significantly impact the market. Yes, they will often disguise their true intentions as that is part of the game. So instead of seeing that video and getting upset or frustrated, treat it as a lesson. Think of what strategies you can use to profit from these type of actions. The next time you see a market leader stock not moving much after a blowout quarter? Instead of treating it as “resistance”, consider there may be larger players who have an interest in it not going up at this time. What does that mean? How long can they hold down the stock (hint: not forever)? When you hear negative rumors on CNBC, is that possibly a time to buy? Be suspicious of premarket gaps. The game will continue to evolve and it is imperative that all successful traders evolve with it.
-John
March 22nd, 2007 at 1:08 pm
Hi John,
I agree with most of your post. I don’t personally believe that performing actions in the market to force a particular reaction should be illegal. As you point out, the trader is risking their own capital to make that play. Further, proving intent would be difficult, at best.
I do however have an issue with his comments about calling reporters and planting completely false stories. It doesn’t matter that anyone’s an idiot for acting on such a story; the action by the trader is malicious and explicitely trying to move the market under false pretenses.
From a legal standpoint what I don’t understand is how a teenager got thrown in jail a few years ago for going on message boards and making up news to move a stock, but a hedge fund manager can call real news organizations, plant completely false stories to move the market, and that’s all OK.
March 22nd, 2007 at 8:34 pm
Neil,
You make a very good point. I do recall that case where the teenager was thrown in jail. Obviously in that case prosecutors probably had logs showing him posting the false news on the message board at such and such a date. With CNBC, and any “real news organization”, they have a tendency to protect their sources and are _supposed_ to at least attempt to verify a story before reporting it. Obviously when they preface something as a “rumor” (ie the rumor of MOT buying PALM they mentioned yesterday, etc), things get extremely gray. Which leads me to think that they (the news organizations) share a large percentage of the blame as they allow themselves to be manipulated like puppets.
March 25th, 2007 at 2:41 am
This is an excellent post. I am most impressed with your “deal with it” response to the matter. I personally feel the same way. This stuff happens, learn it, trade it, profit from it.
June 29th, 2007 at 11:10 pm
[...] the message boards for and against Tim remind me of those aroused by Cramer who I defended in this post. While I know far less about Tim than I do about Cramer, what I do know is that by actually [...]
August 7th, 2007 at 11:08 am
[...] On the end of the “illegal spectrum,” a few months ago market commenter (and former hedge fund manager) Jim Cramer admitted that fund managers will call news organizations and plant completely fake stories to help them make a profit. See some discussion of that here: Cramer and Personal Responsibility. [...]