The Philippine SEC’s Phantasm of “Trading Gangs”

Below is an example of Hayek's Fatal Conceit applied to the Philippines

From the Business Mirror,

The Securities and Exchange Commission (SEC) is studying new surveillance initiatives that may see the establishment of a special division to monitor online chatter targeting so-called trading gangs, SEC Commissioner Juanita Cueto said on Thursday.

Trading gangs, according to Cueto are loosely defined as short-term trader syndicates who have both the resources and numbers to drive market prices and volumes.

She added that the trading rings that “play” the market are nothing new in the country or even abroad, but she noted that their influence had been growing in recent years, aided by the anonymity offered by the Internet and the influx of new and relatively inexperienced investors who may fall prey to these groups.

“They have pseudo names on the Internet. The scary part is they buy and sell in unison. Some of their analyses are inaccurate and can hurt issuers,” Cueto told the BusinessMirror. “It is a concern of legitimate brokers and issuers.”

She said the surveillance measures could involve closer scrutiny of Internet-based stock-market forums.

Some people cheer at this development WITHOUT an inkling of understanding HOW the SEC will be able to define and enforce surveillance of the so called "short term trader syndicates" that “have both the resources and numbers to drive market prices and volumes” from so-called trading gangs.

At what criterion will groups of people (syndicates) who shares “beliefs” in certain stocks, even in the short term, whom they are or could be exposed to, culpable of “driving” market prices and volumes? What if the stocks they promote indeed goes up? 

If a prediction fails, does this mechanically imply fraud?

In bear markets, does allegations of “pump and dump” proliferate or even exist at all?

Importantly what delineates “belief” and “analysis” from the intent to “defraud” through manipulation?

So the implication is that such regulations will be arbitrarily defined or established according to the whims of the political masters.

People who espouse political intrusions have a strange mystic adulation for the supposed omniscience of authorities and of the platonic ethics of regulators.

Yet if this logic holds true, then markets DO NOT need to exist at all.

Áll such ruckus essentially boils down to the definition of prices and values.

Who determines what appropriate prices and values are? The SEC? From what basis?

For starters, market prices are ALWAYS subjectively determined

To quote the great Ludwig von Mises,

It is ultimately always the subjective value judgments of individuals that determine the formation of prices. Catallactics in conceiving the pricing process necessarily reverts to the fundamental category of action, the preference given to a over b. In view of popular errors it is expedient to emphasize that catallactics deals with the real prices as they are paid in definite transactions and not with imaginary prices. The concept of final prices is merely a mental tool for the grasp of a particular problem, the emergence of entrepreneurial profit and loss.

Prices, which are subjective expressions of people’s value scales and time preferences, are principally used for economic calculations from where trades (of all kinds including stock markets) emerge, again Professor Mises

In the market society there are money prices. Economic calculation is calculation in terms of money prices. The various quantities of goods and services enter into this calculation with the amount of money for which they are bought and sold on the market or for which they could prospectively be bought and sold. It is a fictitious assumption that an isolated self-sufficient individual or the general manager of a socialist system, i.e., a system in which there is no market for means of production, could calculate. There is no way which could lead one from the money computation of a market economy to any kind of computation in a nonmarket system.

So if prices are subjectively determined, how then does the "gods" of the SEC know each and every individuals order of priorities?

And at what levels are prices to be considered “fair”?

Again Professor Mises,

The concept of a "just" or "fair" price is devoid of any scientific meaning; it is a disguise for wishes, a striving for a state of affairs different from reality. Market prices are entirely determined by the value judgments of men as they really act.

So supposed fraud will be substituted for propaganda and the curtailment of civil liberties.

This comment by a market practitioner from the same article “It could be really hard to prove wrongdoing this way,” is half correct, but has been obscured by the misleading reference of “noting how identities can be masked online”.

“Anonymity” does not automatically make stock promotions unethical. What makes unethical is the deliberate act to defraud or bamboozle people, e.g. a breach of contract or deprivation of property rights, which based on the above seems very difficult to prove.

This would be analogical to say that advertising is a fraud.

To which government providing “truth” in advertising is likewise delusional, Professor Ludwig von Mises writes,

But whoever is ready to grant to the government this power would be inconsistent if he objected to the demand to submit the statements of churches and sects to the same examination. Freedom is indivisible. As soon as one starts to restrict it, one enters upon a decline on which it is difficult to stop. If one assigns to the government the task of making truth prevail in the advertising of perfumes and toothpaste, one cannot contest it the right to look after truth in the more important matters of religion, philosophy, and social ideology.

And government interventions DO NOT make transactions ethical too, on the contrary, they make them worst.

Bruce L Benson in “The Enterprise of Law: Justice Without the State” writes, (bold emphasis mine) 

When government becomes involved in the enterprise of law, both the rules of conduct and the institutions for enforcement are likely to change. The primary functions of governments are to act as a mechanism to take wealth from some and transfer it to others, and to discriminate among groups on the basis of their relative power in order to determine who gains and who loses.

Yes most people don’t seem to realize that in an inflationary boom, the guiding incentives provided by manipulation of interest rates promote rampant gambling and irresponsible actions which are always blamed on market actors.

From the great Henry Hazlitt

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.

Non-Austrian Charles Kindleberger author of Mania’s Panics and Crashes also notes how swindles emerge during bubble cycles. (Previously I quoted him here)

Commercial and financial crisis are intimately bound up with transactions that overstep the confines of law and morality shadowy though these confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft embezzlement or fraud

And as proof, I cited instances of Ponzi schemes in the US has had meaningful correlations with the FED’s credit easing policies.

When political gods determine winners and losers, contrary to popular brainwashed expectations, the outcome is not one of optimism. According to author, philosopher and individualist Ayn Rand on her classic novel Atlas Shrugged,

Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

Such interventionism also leads to a suppression of freedom of expression.

Nonetheless, sorry to say but regulations will not solve or protect people form their silliness or foolishness, their reckless behavior and the entitlement mentality which most likely has been a result of existing policies…instead these would only do worse.

And in contrast, as I previously noted, successful investing requires Self discipline.

Phisix: Why The Correction Cycle Is Not Over Yet

A delirious stock-exchange speculation such as the one that went crash in 1929 is a pyramid of that character. Its stones are avarice, mass-delusion and mania; its tokens are bits of printed paper representing fragments and fictions of title to things both real and unreal, including title to profits that have not yet been earned and never will be. All imponderable. An ephemeral, whirling, upside-down pyramid, doomed in its own velocity. Yet it devours credit in an uncontrollable manner, more and more to the very end; credit feeds its velocity- Garet Garett

Portfolio Pumping at the Philippine Stock Exchange

Friday’s session, which marked the last trading day for the month of August, manifested another probable sign of the politicization of Philippine equity market.

95% of Friday’s trading activities saw the sluggish Phisix in the red, albeit modestly. That was until the last few minutes where a spike occurred, as shown by the intraday chart from Bloomberg. Such fantastic comeback accounted for a hefty 1.4% move from bottom to the session’s close.

On social media, market participants occasionally yammer or bellyache about supposed price manipulations on certain issues, but Friday’s action makes them pale by comparison.

Because the event happened on the month end, I earlier noted[1] that the typical rationalization will be that of ‘window dressing’. And perhaps too some may say that last minute flow of new information might have prompted some fund managers with sizeable portfolios to urgently position based on an anticipated boom.

But I see none of the above. From the flow of circumstantial empirical evidences, the last minute juggernaut seems to have been well crafted, through coordinated executions.

For starters, it usually takes a handful of heavyweight blue chip issues to move the Phisix. Of course being that they are blue chips this entails huge amount of money as these issues are the most liquid or frequently the most heavily traded

However, a push based on select heavyweights, while providing a lift to the Phisix, would not be reflected on all sectors.

This is why Friday’s action has been remarkable. As illustrated by the intraday charts from citiseconline.com, the resurgent Phisix was not limited to Phisix component leaders but to the major market caps of ALL the sectors.

Coordinated and synchronized buying has been adeptly executed which targeted heavyweights of every sector.

The systematic buying activities, thus, projected a broad based advance. (table from the Philippine Stock Exchange)

Among the sectoral benchmarks, the service sector, led by PLDT, promptly stood out. PLDT remains as the largest free float market cap constituting 14.62% of the Phisix basket as of Friday’s close. PLDT closed 2.16% on Friday (see red arrow below).

Ironically, there were some major issues that closed in the red such as Ayala Corp and Metrobank.

But again, the well contrived buying operation ensured that their losses had been neutralized by gains on some other heavyweights. For instance, in the holding sector, Ayala Corp’s losses had been offset by the gains of larger market cap Aboitiz Equity Ventures [PSE: AEV] and SM Investments [PSE: SM]. Also in the banking sector, Metrobank’s losses were countered by material gains of Bank of the Philippine Islands [PSE: BPI] and BDO Union Bank [PSE: BDO]

In short, the strategy’s centrepiece was that PLDT ensured the gains of the benchmark, while other blue chips were meant to “paint the town red”.

Peso volume net of special block sales, for the day, accrued to a substantial 6.9 billion pesos (US 165 million).

Since foreign money posted substantial net outflows (Php 1.8 billion; USD 43 m) during the session, this means that the local institution/s, channelled through a variety of leading brokers, were responsible for the synchronized buying spree.

It would seem senseless, if not irrational, for money managers with substantial portfolios to undertake what seems as dicey actions, considering the current risk environment and given the recent correction phase the Phisix has been undergoing.

This also means that the parties involved may not be after pursuing Alpha (investment) returns[2] but intended to garnish the Phisix for whatever non-financial reasons.

Importantly, in the absence of economic incentives, the likelihood is that the hefty risk money used could have been third party money.

If such actions have been limited to a single issue, then this would be known as “marking the close” which under Philippine laws are considered illegal[3]

In the US “marking the close” is defined[4] as “the practice of buying a security at the very end of the trading day at a significantly higher price than the current price of the security”.

Even if these acts has been engineered for so-called “window dressing”, they are reckoned as unethical, if not illegal, through Portfolio Pumping[5]

The illegal act of bidding up the value of a fund's holdings right before the end of a quarter, when the fund's performance is measured. This is done by placing a large number of orders on existing holdings, which drives up the value of the fund.

Nonetheless because “marking the close” is technically hard to prove, the elaborate broad index “management” scheme may have also been designed to elude legal technicalities.

Such “marking the close” manipulation was part of the insider trading charge[6] levelled against crony Dante Tan on the BW Resources scam but whose twin cases were eventually dropped by the Supreme Court[7].

Bottom line is that whatever gains accrued from Friday’s ploy to artificially boost stock prices should be taken as temporary and with a grain of salt. Eventually markets will prevail.

Global Equities on a Correction Mode

Most of the weekly 1.03% gain by the Philippine benchmark, the Phisix, can be traced to Friday’s extraordinary recovery of .91%.

For the week, among major international bellwethers, only the Phisix posted positive results.

The rest of the world seems to be in a correction mode.

However, the emerging market majors, particularly the BRICs, endured the heaviest losses.

What seems even more worrisome is that backed by a string of negative developments, such as Saturday’s post-trading announcement where Chinese manufacturing activities shrank or contracted (and not reduced growth) for the first time in nine months[8], China’s Shanghai index continues to fathom new depths. This may point to greater possibility of a hard landing for China.

Ignoring developments in China would be a reckless proposition. Aside from being the second largest economy in the world, China assumes very important roles in many aspects of global trade. This only means that a sharp unexpected downturn in China may amplify the risks of contagion.

It would also seem foolhardy to become overly optimistic on the sustained narrative by mainstream media that Chinese authorities would eventually come to the rescue. Chinese markets have so far dispelled the torrent of propaganda.

Well, the global equity market downturn seems to have affected even the streaking hot Thailand equity bellwether, the SET. Thailand’s SET sizzled even as the other ASEAN peers fumbled over the past few weeks.

Thailand SET (green) now joins the Phisix (PCOMP, red orange), Indonesia’s JCI (orange) and Malaysia (FBMKLCI, red) in rolling over to what seems as a downside bias.

If the SET should continue to correct, then this goes to prove that the forces of “reversion to the mean” are at work. This should also debunks the anachronistic idea of decoupling.

Risks to Ben Bernanke’s Political Career Points to Fed Action Soon

On the other hand, the cumulative weekly losses by US markets has been apparently been mitigated by a strong Friday close.

Again, the one day rally came amidst promises made by the US Federal Reserve’s Ben Bernanke for more policy stimulus in his Jackson Hole speech.

The Bloomberg gives us a good account on the Pavlovian behavior adapted by the markets[9],

U.S. stocks rallied with commodities and Treasuries as Federal Reserve Chairman Ben S. Bernanke said he wouldn’t rule out more stimulus to lower a jobless rate he described as a “grave concern…

Bernanke’s 24-page speech at the Kansas City Fed’s symposium made the case for further monetary easing and concluded that the central bank’s non-traditional policy tools such as bond purchases have been effective in boosting growth and improving financial conditions. He said that declines in the unemployment rate would continue only if growth picks up above its longer term trend.

Mr. Bernanke’s speech seems to impart subtle political implications.

Mitt Romney, Republican presidential candidate, lately announced that should he win the presidency this November, according to a Bloomberg article[10], “he wouldn’t reappoint Bernanke, raising questions about the succession more than a year before Bernanke’s term expires in January 2014.”

And as noted last week[11], the performance of the US stock market has had a strong correlationship with the outcome of the presidential elections. Strong stocks mostly led to the re-election of the incumbent (chart from yahoo[12]). This again may be due to public’s interpretation of rising markets as signs of economic “progress” even if in reality such artificially tweaked gains were mainly due to bank credit expansions.

This from USA News[13],

InvestTech Research, an investment firm out of Montana, says the stock market is the most reliable indicator of who will win the presidency and has been for more than 100 years.

"The election is a reaction to the stock market. If you see strength in the market, consumer sentiment and confidence among the voters is higher. If you see volatility, you are going to see investors take that out on the incumbent," says Eric Vermulm, an InvestTech Research senior portfolio manager.

Gains of the US stock markets have essentially been built around the slew of policy steroids or from repeated interventions by US Federal Reserve. This essentially postulates to the deepening politicization of US financial (equity) markets.

And as I pointed out in the recent past[14] the New York Federal Reserve even blustered about successfully boosting the US stock markets. Thus, the fate of equity markets seems largely beholden to the Fed’s sustained infusion of steroids.

In the knowledge that the Fed can tweak policies to favor the stock markets, and in the prospects that Mr. Bernanke will be out of work from a Romney presidency, then the most likely guiding incentive for Mr. Bernanke will be to work to retain his tenure by promoting the re-election of President Obama through “stock market friendly” policies in September or October.

Besides Mr. Bernanke seems to have a strong backing from FOMC members, according to the Carl Tannenbaum of Northern Trust[15], “more than half of the current FOMC members would be amenable to additional easing”

I previously said that the Mr. Bernanke may likely wait for the ECB to move first[16]. Now I am more inclined to the scenario or the probability that Fed action this September or in October may become a reality.

Two major variables yet could prevent Mr. Bernanke from doing so; one is a sustained surge in food prices, and the other, would be a more vocal opposition by the public on expanded Fed policies.

All Eyes On Central Bankers

Global equity markets have generally been on a correction mode, a dynamic which is likely to continue, until perhaps central banks lay down their cards.

Only the US markets seem to contradict this. Yet the strength of the US markets has been mainly erected from expectations of further policy easing by the US Federal Reserve.

On the other hand, the ECB may finalize the rescue mechanism within the first half of the month. This in spite of incipient signs of stagflation[17]; elevated inflation, high unemployment and contracting economic growth.

Mounting expectations and deepening dependence from central banking opiate, which has been clashing with the unfolding economic reality, will prompt for more price volatility on both directions. The Bank of America posits that QE 3.0 has been substantially priced in[18].

Eventually stock markets will either reflect on economic reality or that central bankers will have to relent to the market’s expectations. Otherwise fat tail risks may also become a harsh reality.

Market direction now depends on the details of central bank actions.

Mounting Stagflation Risks

Rising commodity prices appear to be factoring in the imminence of such actions. Gold’s recent recovery leads other commodities, Energy ($GKX-S&P GSCI Energy Index) and Industrial metals ($GYX-S&P GSCI Industrial metals) except Agriculture ($GKX-S&P GSCI Agricultural Index) which seems to have presaged the commodity rally.

For emerging markets, sustained high levels of food prices, which incidentally have now become a global phenomenon according to the World Bank, raises the risks of stagflation[19] which will force their respective central banks to tighten.

An environment plagued by stagflation will not be friendly to the stock market in general.

Perhaps China’s procrastination to pursue further aggressive stimulus has been due to the supposed huge disconnect between statistical CPI index and on the ground real food prices[20].

Surging food prices have been prompting many Asians to stockpile.

According to Wall Street Journal[21],

Reduced availability and higher prices are spurring importers to buy more, not less, as a hedge against even higher prices in the future. China, which accounts for more than 60% of the world's soybean imports, is also buying cargoes several months before shipment. Demand there is driven mainly by double-digit annual growth in dairy-product consumption, 5% to 6% growth in poultry consumption and 3% growth in pork consumpion, said Christopher Langholz, the business unit leader at Cargill Investments (China) Ltd.'s animal protein division in Shanghai.

Yet the prospects of Fed and the ECB simultaneously easing in the coming days, weeks or months will likely intensify not only on stagflation risks but the risk of a global food crisis as well.

Incipient stagflation, aside from micro bubble busts, may have been a principal reason why major emerging markets continue to underperform.

Correction Mode: PSE Capital Flows and the Peso US Dollar Trend

For the Philippine equity markets, the ongoing episode of correction has also been evident in the foreign fund flows.

Net foreign flows have begun to turn negative over the past weeks.

And negative foreign fund flows may have been influencing on the decline of the Peso.

According to an IMF paper[22], foreign capital flows dynamic via stock market transactions influence exchange rates more than the bond markets.

when it comes to external capital flows, it is foreign investors’ private information related to the stock market and not the bond market which drives the exchange rate.

This may hold some relevance to the relationship between the Phisix and the Philippine Peso

The correction phase of the Phisix (red candle), partly influenced by increasing net foreign sales, has likewise been manifested through the weakening of the Peso vis-à-vis the US dollar (black candle). The Phisix and the Peso exhibits strong correlations which may partly validate the theory that flows in and out of the stock market influence more the direction of the exchange rates.

So far, the Phisix correction cycle seems largely intact and could intensify

Domestic market technical picture and internal market dynamics, two items I discussed last week, along with capital flows and the trend of the Peso have converged to suggest that the correction phase of the Phisix has unlikely been over.

Add to these the external based dynamics which are likely to be transmitted to the local financial markets and to the real economy.

Don’t get lulled into the mainstream idea that the domestic central bank, the Bangko Sentral ng Pilipinas (BSP), will be able to successfully achieve so-called “inflation targeting” or contain price inflation through macro ‘policy toolkits[23]’ and that the statistical economic growth will remain robust as mainstream economists predict.

Had these policy toolkits “worked” then the world would not be experiencing what has been a lingering and worsening crisis since 2008. Technical gobbledygook has only been meant to project an aura of pretentious superiority in knowledge to justify the existence of unsound political institutions, even if they really don’t work.

Once price inflation accelerates through food and energy channels, which is likely to be accentuated by current easy money policies, and where stagflation becomes a clear and present threat, statistical economic growth, like a bubble, will simply pop. Then, the BSP will be in a state of panic. The public will discover that the emperor has no clothes.

---

[1] See Phisix: Another Fantastic Last Minute Upward Push August 31, 2012

[2] Wikipedia.org Alpha (investment)

[3] Security and Exchange Commission, CHAPTER VII Prohibitions on Fraud, Manipulation and Insider Trading Securities Regulation Code

[4] USLegal.com Marking the Close Law & Legal Definition

[5] Investopedia.com Definition of 'Portfolio Pumping'

[6] Philstar.com SEC favors random closing time for PSE December 3, 2002

[7] Manila Bulletin SC oks dismissal of Dante Tan charges in BW Resources case August 1, 2010

[8] Bloomberg.com China Manufacturing Unexpectedly Contracts As Orders Drop, September 1, 2012

[9] Bloomberg.com Stocks Rise With Commodities, Treasuries On Stimulus Bets, September 1, 2012

[10] Bloomberg.com Bernanke Makes Case For Further Stimulus To Help Jobless September 1, 2012

[11] See Phisix: The Correction Cycle is in Motion August 27, 2012

[12] Yahoo.com Obama’s Re-Election Odds Are Better Than You Think Says Hirsch, August 15, 2012

[13] USA News Stock Market Picks 90 Percent of Presidential Elections February 24, 2012

[14] See Bernanke Doctrine: New York Fed Boasts of Pushing Up the US Stock Markets, July 14, 2012

[15] Carl R. Tannenbaum The Message from Jackson Hole, Northern Trust Augst 31, 2012

[16] See Phisix: Managing Through Volatile Times August 6, 2012

[17] See Eurozone’s Nascent Signs of Stagflation September 1, 2012

[18] Zero Hedge, Chart Of The Day: With All Of QE3 Priced In, The Only Way Is Down Should Bernanke Disappoint, August 31, 2012

[19] See Stagflation Risk: Food Price Inflation is Worldwide August 31, 2012

[20] Zero Hedge, Big Outflow Trouble In Not So Little China? August 25, 2012

[21] Wall Street Journal Soybean Worries Spur Asian Buying August 29, 2012

[22] Jacob Gyntelberg, Mico Loretan, and Tientip Subhanij Private Information, Capital Flows, and Exchange Rates IMF Working Paper September 2012

[23] Businessonline.com BSP ready to tweak policy August 30, 2012

Soros, Paulson and Emerging Market Central Banks Ramp Up Gold Purchases: Calm Before the Storm?

Speaking of demonstrated preference or actual choice revealed through actions taken, billionaire fund managers-investors George Soros and John Paulson have reportedly been escalating on their gold positions.

From the Bloomberg,

Billionaire investors George Soros and John Paulson increased their stakes in the biggest exchange- traded fund backed by gold as prices posted the largest quarterly drop since 2008.

Soros Fund Management more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30, compared with three months earlier, a U.S. Securities and Exchange Commission filing for second-quarter holdings showed yesterday. Paulson & Co. increased its holdings by 26 percent to 21.8 million shares…

Paulson, 56, who became a billionaire in 2007 by betting against the U.S. subprime mortgage market, lost 23 percent in his Gold Fund through July as lower bullion prices and slumping mining stocks contributed to declines.

Holdings in the SPDR Gold Trust are Paulson’s largest position. He also bought shares of NovaGold Resources Inc. (NG) last quarter and sold other stocks, leaving his $21 billion hedge fund with more than 44 percent of its U.S. traded equities tied to bullion.

Paulson’s U.S.-listed holdings peaked at $34.3 billion at the end of March 2011, with about $7.7 billion of that amount, or 23 percent, invested in gold related stocks. He had 33 percent of his U.S. stock holdings in gold-related securities at the end of the first quarter and 25 percent a year ago.

What has piqued my interests me has not just been Mr. Paulson or Mr. Soros’ gold buying spree, but of the apparent shifting made by Mr. Soros, who seem to be emptying his stock market exposure, particularly on the financials, and repositioning them all into gold ETFs.

Analyst Mac Slavo at the Shtfplan.com notes,

Soros, who manages funds through various accounts in the US and the Cayman Islands, has reportedly unloaded over one million shares of stock in financial companies and banks that include Citigroup (420,000 shares), JP Morgan (701,400 shares) and Goldman Sachs (120,000 shares). The total value of the stock sales amounts to nearly $50 million.

What’s equally as interesting as his sale of major financials is where Soros has shifted his money. At the same time he was selling bank stocks, he was acquiring some 884,000 shares (approx. $130 million) of Gold via the SPDR Gold Trust.

When a major global player with direct ties to the White House, Wall Street, and the banking system starts off-loading stocks and starts stacking gold, it suggests a very serious market move is set to happen.

And this hasn’t been just about Messrs. Soros and Paulson; emerging market central banks, including the Philippines, the ultimate insiders, seem to be joining the ranks of gold hoarders.

The Mineweb reports,

perhaps one of the most interesting findings of this latest analysis is that gold buying by the world's Central Banks hit a new record of 157.5 tonnes , more than double the level of Q2 2011 and accounting for 16% of overall global demand. This, by our reckoning is also around 22.5% of total gold supply over the period extrapolating from the WGC's own annual figures for 2011. Central banks that significantly bolstered their holdings during the quarter included the National Bank of Kazakhstan, and the central banks of the Philippines, Russia and Ukraine.

The irony of this is that all these insider buying comes amidst dampened demand for gold in terms of investment and jewelry.

Chart from Forexpros.com

Yet part of the current slowdown in the conventional demand for gold can be traced to the ongoing weakness in the global economy.

A sign of this can be seen in Lisbon Portugal where residents may have already depleted their jewelries for cash.

From Bloomberg,

In Portugal, the historical home of some of Europe’s biggest gold reserves, the number of jewelry stores, which include cash-for-gold shops, increased 29 percent in 2011 from a year earlier, a study commissioned by parliament found. In the first quarter, an average of two new stores opened every day, the report said. Now some of them are closing.

“Business has gone from great to terrible in a matter of months,” Luis Almeida, whose family has owned a gold store near Lisbon’s Rossio Square for more than 40 years, said in an interview. “The sad truth is that most of my clients have already sold all of their gold rings.”

Selling gold for cash exhibits that gold barely functions as hedges against deflation.

Technically speaking, gold prices has been in a two year consolidation phase.

A seeming trend-continuing pennant or wedge-neutral formation could suggest that a breakout of the 1,650 resistance level could incite a test on the previous highs at the 1900 level.

Nonetheless, could (White house insider) Mr. Soros, Mr. Paulson and emerging market central bankers (ultimate insiders), such as Bangko Sentral ng Pilipinas’ Amando Tetangco, Jr. be anticipating something big soon?

Does the current environment represent proverbial calm before the storm?

Bernanke Doctrine: New York Fed Boasts of Pushing Up the US Stock Markets

Remember the following statement which I have quoted numerous times on this blog?

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Those came from Ben Bernanke when he was yet in the academe.

Nevertheless such priorities seems to have served as the guiding policy creed by the Bernanke led US Federal Reserve ever since he took on the helm.

Proof?

The New York Fed even brags about their supposed accomplishments: providing lift to the US stock markets.

From CNBC

A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank.

Theoretically, the S&P 500 would be more than 50 percent lower—at the 600 level—if the bullish price action preceding Fed announcements was excluded, the study showed.

Posted on the New York Fed’s web site Wednesday, the study sought out to explain why equities receive such a high premium over less risky assets such as bonds.

What they found was that the Federal Reserve has had an outsized impact on equities relative to other asset classes.

For example, the market has a tendency to rise in the 24-hour period before the release of the Fed’s statement on interest rates and the economy, presumably on expectations Chairman Ben Bernanke and his predecessor, Alan Greenspan, would discuss or implement a stimulus measure to lift asset prices.

The FOMC has released eight announcements a year at 2:15 ET since 1994. The study took the gains in the S&P 500 from 2 pm the day before the announcement to 2 pm the day of the statement and subtracted that market move from the S&P 500’s total return over that time span.

Without the gains in anticipation of a positive Fed action, the S&P 500 would stand at just 600 today, rather than above 1300. (bold emphasis mine)

So there you have it: the ultimate insider trading and manipulators of stock market.

This also implies that the FED’s priority has been to advance the interests of the financial markets (Wall Street, bankers and the financial industry) at the expense of the real economy (entrepreneurs).

Yet many carp about US trade deficits (mostly mercantilists), when it seems clear that policy directives of the US government has long been in the direction of the financialization of the US economy.

Bottom line: Each time the US stock markets will come under selling duress, expect Bernanke’s FED to throw in taxpayers money in support of equity shareholders.

Shoot the Messenger: Japan Authorities Targets Insider Trading

When markets don’t go in the way the politicians want them to, the intuitive reaction for politicians has been to shoot the messenger.

From the Bloomberg,

Japan’s crackdown on insider trading barely scratches the surface of a practice that allows traders to profit and brokerages to boost their underwriting business at the expense of shareholders and issuers.

The disclosures have undermined confidence in the world’s second-largest stock market, where the Nikkei 225 Stock Average (NKY) remains 77 percent below its 1989 peak and scandals such as the accounting fraud at Olympus Corp. and covered-up losses at AIJ Investment Advisors Co. deter investors from a waning economy.

In the five insider-trading cases uncovered since March, regulators have proposed fines for traders who short sold shares based on information leaked to them by underwriters before public offerings were announced in 2010. The revelations prompted at least two clients of Nomura Holdings Inc. (8604) to take their business elsewhere after Japan’s biggest brokerage acknowledged the breaches by its sales staff.

“Japan has been letting the animals run wild for two or three years now -- that wouldn’t happen in the U.S.,” said Takao Saga, a professor who studies the financial industry at Waseda University in Tokyo. “Insider trading is still going on in the Japan market.”

With the latest actions, the Securities and Exchange Surveillance Commission and its parent, the Financial Services Agency, are keen to show they are cracking down after it took them nine years to discover AIJ hid losses that reached $1.4 billion on pension money it managed. Olympus admitted to a $1.7 billion, 13-year coverup of losses after former President Michael Woodford blew the whistle last year on inflated fees the camera maker paid for takeovers.

Hindering Fundraising

Authorities are paying attention now because short selling by insiders is hindering corporate fundraising, not just burning investors who aren’t privy to the tips, according to consultant Robert Boxwell. The transactions involve traders selling borrowed shares, betting that the price will fall once the offerings become publicly known on concern over dilution.

“These types of insider trades cost Japan Inc. money,” said Boxwell, 54, who has lived in Japan and now studies global insider trading as director of consulting firm Opera Advisors in Kuala Lumpur. In Japan, “after years of ignoring protests from the West about cleaning up their act, they’re talking tough.”

Never mind if Japanese authorities have stubbornly refused or has procrastinated in adapting the necessary reforms and instead opted to prop up zombie institutions.

Such failure to reform has not only led to more than three decade slump in the Nikkei 225 (chart from yahoo), but also has put tremendous strains on Japan’s fiscal (debt) conditions.

Nevertheless, Japan’s authorities has joined their western peers to do more of the same thing, of escalating inflationism, which has led to their self perpetuating crisis. The Bank of Japan has even been supporting her stock markets, apparently, to no avail.

Japanese authorities repeatedly failed to comprehend that the root of their problem has not been insider trading but of having too much interventionism or excessive politicization of their markets and their economy

They should heed the prescient admonitions of the great Professor Ludwig von Mises,

The various measures, by which interventionism tries to direct business, cannot achieve the aims its honest advocates are seeking by their application. Interventionist measures lead to conditions which, from the standpoint of those who recommend them, are actually less desirable than those they are designed to alleviate. They create unemployment, depression, monopoly, dis­tress. They may make a few people richer, but they make all others poorer and less satisfied.

Shooting the messenger and witch hunting won’t solve the problem of productivity, competitiveness and fiscal discipline. They are symptoms of the growing desperation of political authorities

To the contrary such repressive measures would only worsen the situation.

In Defense of Insider Trading

From Harvard Professor Jeffrey Miron (Hat tip: Bob Wenzel)

Most policymakers, along with the general public, believe that insider trading should be banned. Yet straightforward economic reasoning suggests the opposite.

The most obvious effect of a ban is delaying the release of relevant information about the fortunes of publicly traded companies. This means slower adjustment of stock prices to relevant information, which inhibits rather than promotes market efficiency.

Imagine, for example, that the CEO of a pharmaceutical company learns that a blockbuster drug causes previously unknown side effects. Absent a ban, the CEO might rush to sell or short his company’s stock. This would have a direct effect on the share price, and it would signal investors that something is amiss. Insider trading thus encourages the market to bid down the shares of this company, which is the efficient outcome if the company’s fortunes have declined.

Under a ban on insider trading, however, the CEO refrains from dumping the stock. Market participants hold the stock at its existing price, believing this is a good investment. That prevents these funds from being invested in more promising activities. Thus the ban on insider trading leads to a less efficient allocation of the economy’s capital.

Whether these efficiency costs are large is an empirical question. Short delays of relevant information are not a big deal, and the information often leaks despite out the rules. Thus, the damage caused by bans is probably modest. But efficiency nevertheless argues against a ban on insider trading, not in favor.

And bans have other negatives. Under a ban, some insiders break the law and trade on inside information anyway, whether by tipping off family and friends, trading related stocks, or using hidden assets and offshore accounts. Thus, bans reward dishonest insiders who break the law and put law-abiding insiders at a competitive disadvantage.

Bans implicitly support the view that individuals should buy and sell individual stocks. In fact, virtually everyone should just buy index funds, since picking winners and losers mainly eats commissions, adds volatility, and rarely improves the average, risk-adjusted return.

Thus, if policy is worried about small investors, it should want them to believe they are at a disadvantage relative to insiders, since this might convince them to buy and hold the market. Bans instead encourage people to engage in stupid behavior by creating the appearance – but not the reality – that everyone has access to the same information.

The ban on insider trading also makes it harder for the market to learn about incompetence or malfeasance by management. Without a ban, honest insiders, and dishonest insiders who want to make a profit, can sell or short a company’s stock as soon bad acts occur. Under a ban, however, these insiders cannot do so legally, so information stays hidden longer.

Thus, bans on insider trading have little justification. They attempt to create a level playing field in the stock market, but they do so badly while inhibiting economic efficiency

Information will always be asymmetric.

People do not read news or even mandated ‘public disclosures’ at the same time or at similar degrees. And people’s interpretation and absorption of information will be always be distinct.

I don’t read the newspaper by choice, so I am at a disadvantage on information or facts disclosed. Also, readers of broadsheets have different preferences, e.g some value the business section, some read sports, some prefer entertainment and so forth…

Yet this deficiency in information does not deprive me of the necessary knowledge required for investing overall. In short, the desire for information is about tradeoffs and preferences. Legal mandates will not equalize information dissemination.

And this applies to insiders as well.

The price channel is always the best medium for information (economic or fundamentals).

Importantly, a ban on insider trading or attempts to equalize information through restrictions of insider knowledge does not attain the political objectives intended, as pointed by Professor Miron. In reality, such regulations tilt the balance to favor transgressors.

Insider trading bans is another example of feel good arbitrary laws which in reality are ambiguous, uneconomical, and repressive, i.e. can be or has been used to intimidate or harass individuals or entities for political goals rather than to attain market efficiency.

Yet the ultimate violators of insider trading are central banks who have been manipulating the financial markets, through various means (QEs, swaps, zero bound rates, subsidies, etc...), all to the benefit of the banking system and other Fed cronies, as well as, regulators who erect walls of protectionism to protect favored political entrepreneurs (cronies) which enhances their company's stocks values.

Video: Murray Rothbard on Insider Trading

Insider trading regulations are regulatory shields used by the elites to prevent competition (source: Lew Rockwell blog).

Politicization of the Financial Markets

Below is an example of what I have been calling as the politicization dynamics of the financial markets.

Writes fund manager Axel Merk [who calls this celebrity central banking], (bold emphasis mine)

Swiss National Bank (SNB) President Philipp Hildebrand finds himself in the hot seat. SNB rules prohibit his family from trading based on non-public monetary and foreign exchange intentions of the SNB (c.f. §4). His wife netted a 60,000 Swiss franc profit buying, then selling U.S. dollars, all within a month; her husband’s intervention in the currency market was mostly responsible for the gain. Arguably, she traded to make a profit, publicly explaining, “what motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap”. In instructing her account manager, however, she emailed that her motivation was to manage the share of US dollars in their asset mix as part of a long-term investment allocation (c.f. Hildebrand statement).

The court of public opinion might be more damaging than the legal process in a country with a tightly knit elite that favors consensus over controversy. Relevant for policy makers and investors alike is that this episode highlights the vulnerability of what we call celebrity central banking. That is, central banking that heavily relies on the persona rather than underlying policy. In Switzerland, the 2009 attempt to peg the Swiss franc to the Euro was mostly driven by Hildebrand; similarly, last year’s introduction of a ceiling for the Swiss franc versus the euro is again mostly attributed to Hildebrand. The 2009 peg was given up after it proved too expensive. The 2010 intervention has, so far, held. But it is entirely dependent on the market believing that the SNB will do “whatever it takes” to keep the Swiss franc from rising….

What the Fed and the SNB have in common is that they are both run by celebrities. Bernanke has appeared on “60 Minutes”; Hildebrand is also learning what it means to be in the media limelight. Policy makers only have themselves to blame with the market’s obsession with their personas. If they pursued sound monetary policy rather than try to micro-manage their respective economies, market forces could play out. Instead, we may have capital chase the next perceived move of policy makers, leading to capital misallocation, greater volatility, and ultimately more intervention; a self-reinforcing cycle. The public has a high price to pay for modern celebrity central banking.

Conflict of interests (agency problems, regulatory capture and arbitrage), insider trading based on actions of politicians or bureaucrats, intensive lobbying and anticipating political actions by policymakers becomes the major thrust of market participants, instead of working to satisfy the consumers.

End result: vast distortions of the marketplace, malfeasant actions by political actors and their networks and boom bust cycles.

China Aims To Centralize Underground Stock Exchanges

Informal economies are symptomatic of the state of affairs for economies struggling with byzantine legal and bureaucratic entanglements.

But in today’s modern finance based economy, it’s my first time to hear of the proliferation of informal stock exchanges.

From Bloomberg,

China will ban trading of securities and futures on unauthorized exchanges to regulate the market and prevent financial risks, the State Council said.

Some of the trading activities have led to price manipulation and fund embezzlement by the exchange managers, China’s cabinet said in a statement dated yesterday. Such problems may cause regional financial risks and endanger social stability, the statement said.

There are over 300 unregulated bourses across the country, the Financial Times reported today, citing analysts. Turnover on the three authorized commodity futures and a financial futures exchanges in China fell 4 percent to 113.4 trillion yuan ($18 trillion) in the first ten months from a year ago, according to the China Futures Association.

“Regulators are concerned because these exchanges do not pay much attention to risk control, and volatile trading could hurt the participants and have a spillover effect on other companies and related industries,” said Shen Zhaoming, a Shanghai-based analyst at brokerage Changjiang Futures Co. “Local governments all hope for bigger economic influence, and they think establishing such exchange platforms is an efficient way to achieve the goal.”

Apart from the stock and futures exchanges approved by the State Council, no other bourses are allowed to list new shares, offer centralized pricing or make markets, the statement said. Exchanges that trade gold, insurance or credit products must receive approvals from financial authorities under the State Council, it said.

Price manipulation and fund embezzlement (e.g. MF Global Holdings) have also been present in ‘regulated’ exchanges.

Centralization does not sanitize or prevent markets from having miscreants. To the contrary, politicized regulated markets may even spawn them e.g. Philippines’ BW Resources Scandal and the US shadow banking system, where the former is the result of cronyism and the latter has mostly been product of regulatory capture and regulatory arbitrage.

So price manipulation and fund embezzlement would be a flimsy pretext by the Chinese government to exercise control over informal exchanges.

Besides, bailouts, unilateral credit margin maneuvering, quantitative easing, artificially low interest rates, Operation Twist (manipulation of the yield curve), Basel Accord (Financial Repression), ban on shorts and other forms of politicization of the marketplace represent price manipulations which has been the du jour policies being undertaken by global governments at the expense of the average market participants and the taxpayers.

So it is ‘legal’ for governments and their cronies to finagle or to manipulate or to exercise insider trading of the markets. To add, governments are beyond or are exempt from the laws which they implement. Again this implies that 'what may be legal is not moral'. One would call this political inequality.

Finally it is simply amazing how “300 unregulated bourses” exists in China.

Again some possible drivers here,

-regulated exchanges have been too much bureaucratic or extensively politically controlled to force many financial market investors to go underground,

-the major bourses of mainland China Shanghai and Shenzhen have not expanded enough to cover the entire country. However, the current state of technology seem to reduce the odds of such dynamic unless restrained by politics.

-China’s capital markets have been so limited or constrained such that boom bust policies have been compelling many investors to seek ways to stretch on yields by participating in the informal stock exchanges. And a possible symptom of this would be the China’s version of the shadow banking or financing system that has funded the recent property boom (and possibly informal stock exchanges too?).

This should be a great example of how the markets are always way ahead of and manage to circumvent regulators—a perpetual cat and mouse game.