Another Perfect Storm or just Shorting?

“Capitulation fever has swept global markets on triple fears of faltering recovery in the US, Chinese credit curbs and Europe's intractable escalating debt crisis.”
Is what we are seeing a correction, a manipulation, investor capitulation or - all three or a short selling consolidation?

4 Points to Ponder

• Financial Reforms Are Just 'Cosmetic'

• Market Selloff Isn't Over: Pros

• Germany to Curb Naked Short Sales

• Market Meltdown Still a Mystery

The “Faux” financial reform being hailed as a victory for Obama is really a commitment to business as usual by the “White shoe boys” of Goldman Sacks et al. In its essence, this bill makes the Federal Reserve a true monopoly, ignores Freddy Mac and Fannie May’s problems, ignores the meltdown of American banks, the FDIC insolvency, & doesn’t restore Glass ~ Segal. What it does is assure a continuous bailout. Wall Street will be backed by the Federal Reserve and its printing press.

“Stocks are likely to continue their aggressive decline and shed another 20 percent in value as the world economy weakens”, noted economist Nouriel Roubini told CNBC.
As the market slides into correction territory, Roubini said weakness in euro zone countries and a slowdown in the US and other developed countries will make things even more difficult for investors in the months ahead.

"There are some parts of the global economy that are now at the risk of a double-dip recession," said Roubini, head of Roubini Global Economics. "From here on I see things getting worse."Prices in both stocks and commodities are likely to take a hit, and investors may only be safe in cash and other safe havens. Roubini said investors also can use options to hedge against future market risk that he said is sure to come as conditions weaken in the US, Japan, China and through much of Europe.

This was easily checked by the fact that gold slid in harmony with the Dow. While this doesn’t equate to traditional thinking, this can mean only two things; either Dow sellers were not moving to hard assets or gold was being shorted. I think the later.

"There is that risk because the problems on the macro level are first in the euro zone. Then in China there is evidence of economic slowdown...Japan is in trouble and US economic growth is going to slow down," he said. "There is also regulatory risk because we don't know how financial reform is going to occur."

"Apart from cash I would invest in short-term government bonds of countries that don't have a serious debt problem, countries like Germany and maybe Canada, a few other advanced economies that from a fiscal point of view are sounder than the weaker economies," he said. These are also countries who are taking on issues like naked short selling.

Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame, the result is known as a "fail to deliver". The transaction generally remains open until the shares are acquired by the seller, or the seller's broker, allowing the trade to be settled. Naked short selling can be used to fraudulently manipulate the price of securities by driving their price down, and its use in this way is illegal as is its trading sister, front running. Both are ways for a trader to profit from his investor’s losses.

Most stock market investors know little about flash trading, black box trading or nano second trading. Top trading houses, bankers, well financed foreign day traders and the like have been using high level electronic trading systems that can trade at the nanosecond level. On eBay, we call this use of trading/bidding software as sniping and its users as Snipers.

The recent sudden meltdown of the Dow was clearly a Sniper event. One large trader armed with a nanosecond trading capacity could easily set in motion a series of trades that would have not only set off the run, but profited from it by buying back at the same speed. Illegal? No. Controllable? Maybe, but at what price?

Omar P Bounds III
The Bounds Auction Company