Short Covering to Drive Stock Prices Higher


Will the current bounce last? Will analysts keep setting the bar low to help stocks rise? Will beating bad numbers remain the game by which stocks are priced? The future level of stock market indices cannot be predicted because the calculations that will go into future market manipulations are yet unmade.

George Soros is largely correct in postulating that market action can stimulate changes in economic fundamentals. If markets could not be manipulated by mega-interests, then the April 1994 Soros speech at M.I.T. would be without meaning. As Soros explained, the world economy is a real-time laboratory to see how far markets can be pushed out of equilibrium, and how state economies respond to changes in market direction.

The gods of the mega-interests constantly study economic indicators and the actions of players, publics and resource managers. They evaluate how preferred fraternities are positioned relative to other populations. Then, they decide where and when to puff up prices or drain them down through mechanisms as simple as patterned responses to earnings in relationship to analyst estimates — a matter hinted at in the Gibson article.

Mega-elites are willing to sacrifice the financial interests of lesser members of preferred fraternities if it advances their game plans. Likewise, they’re willing to take temporary losses, if, in the process, their opponents and competitors are made to suffer relatively larger competitive impairments. It is a game about relative wins, not absolute gains. Hence, prediction of where the stock market is headed is futile because the market will buck and heave in whatever ways it serves those who have long made capital markets their religion.

There is a lot of market activity that is a random walk, even as a good deal of market action reflects the constant winnowing efforts of the mega-program traders that rely heavily upon proprietary computerized trading systems. The random aspects of market activity and the irregular mixing of that activity into longer-term price movements serve to conceal the designed-in purpose of financial market architecture; namely, to draw off through speculative maneuvers the productive wealth generated by the broad middle class.

Outsiders making market projections should offer them subject to revision, since market action reflects the ever-adapting tactics of mega-interests. A month ago I suggested a clear possibility that equity markets could retrace 50% of their decline during the next 12-18 months. I am now reinforcing that observation and suggesting that market indices may recover (on a temporal basis) at least 60% of their decline from their 2007 tops.

A rebound of more than 50% will produce shock and awe worldwide, triggering an upswing in economic conditions that is currently not priced in. The market beast will awaken from its deadly wound: The world will wonder and worship. The gods of money, peace and safety will be praised. Worshipers of fast money will run back to the Ponzi designs that they criticized only months before. Arrogance will again replace hope. But someday the world will reap the whirlwind it has sown, with a lot of bones left to bleach in the wilderness.

I am no market cheerleader, no neocon, and certainly not someone with a vested interest in seeing new speculative bubbles. I am deeply concerned about pushing a rebound that is founded upon the governmental mismanagement of financial resources, widespread injustice, an unsustainable economic model, an elitist preferentialism that rewards moral hazard, and a regulatory environment without scrupled propriety. Granted, there are dozens of reforms underway that are warranted. But they serve to patch up a financial system that is nefariously unjust and unwholesome.

Granted, in many ways the world is better than ever before — in someways immeasurably better. There is laudable goodness, fairness and decency in many quarters. But tragically this progress on countless fronts is undermined by intractable evils in matters of high finance and politics.

Rising stock market indices should not be equated with a rosy economic outlook. To the contrary, the prices of equities often move in opposition to underlying fundamentals. In some cases prices move in opposition to performance expectations six to twelve months out — in total contradiction to received market wisdom. There are various reasons for these phenomena, not the least of which is the perception that key players in the casino have decided to play their hands in contrarian fashion against received wisdom. Hence, copycat money chases contrarian money and creates a self-fulfilling prophecy. Since profits for mega-powers are maximized when large numbers of rational players have to capitulate, the goal of manipulators is often to make markets proceed in irrationality beyond what risk management can tolerate.

There are thinking people who are quite certain that markets will collapse from here, either to retest recent lows (technical chartists) or to reflect evolving fundamentals. If these people over-extend themselves, their positions will be attacked. They will short mini-tops only to find that they are selling into bottomless pools of bidding. When they seek to cover, market makers will show no mercy as prices rachet higher. The repeated attempts of some groups to short stocks is enough to drive this market much higher, as it did in the NASDAQ market in 1998-2000. Granted, we WILL retest market lows before going much higher IF that is where the craftiest cabals find the most alluring opportunities to exploit public vulnerabilities or stimulate coveted political concessions.

The general public needs to be aware that short covering could produce such upward market momentum as to trigger a BUYING PANIC as people rush in from the sidelines. A buying panic in the mutual fund universe could produce a super-spike in market prices — a disequilibrium — that would in turn lead to the demise of the spike. In this scenario, money would flow out of safe havens, especially treasuries. The resultant environment could make it very difficult for the U.S. government to continue funding an economic recovery, leading to a reverse panic and an opposite disequilibrium. Since a good deal of program trading nowadays is based upon trend following systems, the swings could be rapid, diminishing the utility of policy adjustments.

Readers should remember that unforeseen events may occur that cause mega-interests and hedge funds to reverse their positions again, just as they did in March 2009 (going from short to long). Hence, a keen eye on developing circumstances is needed, along with mental flexibility.

Is this not a reprehensible way to run capital markets? Why structure economies so that mega-elites, manipulators, fraternal insiders, and advantaged speculators disproportionately gain the world’s capital and control of key organizations? Why not reward honorable merit instead? Scientific accomplishment? Labors for the public good?

It is time that “America the Great” properly identifies a wide set of financial improprieties, criminalizes exploitative acts, then punishes this evil in the same ways that burglary, rape and murder are punished. Why should heinous acts go unpunished because they are “financial” rather than physical? Why should people escape justice because they attended an Ivy League school rather than a community college? There should be one justice for all.

We ought to create a new humanitarian capitalism that rewards honorable merit rather than gamesmanship, ruthlessness, deception, exploitation, and fraternally protected incompetence. Decent people must unite across ideology, race, religion, geography and social class. If we do not act with timely prudence, the days will come when the laws of this land no longer tolerate a public uprising against corrupt masters. People who see and care must make larger commitments to organize for political and institutional redress.