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At Yahoo: How To Manipulate Stocks

My latest at Yahoo: How To Manipulate Stocks

(Reproduced)

Dear Upcoming Stock Manipulator,

You have heard from all sources that stocks are manipulated, which is why you want a piece of the action. While we cannot hope to enumerate all the methods by which you can steal money from the pockets of retail investors, we can provide you with a few starting points.

Insider Decider

In the large number of stocks available in the country, the real information is available only to the management of companies. Before results are announced, results are already known. All you have to do is to find that inner circle of people that are aware of such details, or tap into the auditing or consulting agency and find "impressionable" people who are responsible for drafting such results. Or find the investment banker responsible for a merger or acquisition. Or get information about a private placement to a large institution from its employees. You might think it is only the young or the less-well-heeled that can be bought with money, but that is the thinking of a beginner, a rank amateur at the art of manipulation.

The biggest fish are even more likely to be "bought", as long as you disguise the purchase as a regular business transaction. Where a direct offer for rewards in return for information doesn't work, you invite the person over to "exclusive" parties, pay for an upgrade of his family's tickets when they go for a holiday or befriend him in the promise of a lucrative position in a company you will eventually create. The promise of power, fame and exclusivity is intensely attractive, even to those without the need for material trappings. Such attractions seem like legitimate benefits of friendship, and it brings across information the general investing public can only dream of.

All you do then is to buy or short the stock with the information you have. Remember of course that this can go wrong — insiders, having found that their information can move stock in the direction they want it to go, might throw about wrong information to suit their own needs. But that's the risk. A smaller risk, you will admit, than acting purely on public information, otherwise known as "being fed to the vultures".

Recently, in very bad news for the insider trading industry, Raj Rajarathnam, a famous hedge fund manager was found guilty of insider trading as if it were a sin.  It is truly disturbing that our industry that has been flourishing for decades has been singled out for treatment by those who think that everyone should have access to the same information. The fools.

The Circular Trade

Stocks move up based on demand, and when people see there is demand, they come and buy thinking there is more demand. In such a situation, it is useful to "manufacture" demand, by buying and selling to yourself. Because you can't really do that, you involve a friend, buy certain shares from him and then sell those shares to him back at a higher price. Continue until others have jumped into the fray and taken the share price to levels so high that you can sell and exit at a profit.

Every once in a while SEBI will detect and discover such circular trading activity. Have no fear, because all SEBI can do is to scream and ban you and your friend for a while. Then, open an account in your nephew's or niece's name and continue your activity. They can't stop your account, but they can't take your money (yet). And if they do get tough, go to the Securities Appellate Tribunal, then to the Supreme Court, and eventually, like Reliance promoters attempted recently, request a "settlement". You might pay about 1/50th the amount of profits you would have made, which is a small percentage of the Income Tax you didn't pay last year.

Pump and Dump

A variation of the circular trade method, here the idea is to use news to pump your stock up, add some money and then transfer the stocks to greater fools.

In India, you will hear "tips" from operators who keep a stock price high by using large amounts of cash, and then dump it on unsuspecting investors after some seemingly bullish news comes along in the manner of "Shell oil considering acquisition of small toothpaste cap manufacturer". This simple method never fails to line your pockets, having bought at a very low price, usually in collusion with promoters.

Our heroes are Nirmal Kotecha and P S Saminathan of Pyramid Saimira fame, who along with a journalist Rajesh Unnikrishnan, forged a letter from SEBI asking them to buy shares of the company in an open offer at a price much higher than the existing market price. The stock zoomed up and then crashed and when SEBI unearthed the scam, Kotecha had already exited. Later in March 2011, another SEBI order revealed that the promoters made up the financial accounts — a large number of the "agreements with theaters" never even existed, and a good portion of their revenues were fictitious. It should be a matter of great pride to budding stock manipulators such as you that a stock could have gained so much attention.

Money Power

When you have some money and stocks trade in miniscule volumes, you can easily move the market by just your actions.

Using money power isn't a big deal. Even Warren Buffet, in 1974, manipulated a penny stock (thanks James Altucher) so that the price would stay high, and paid a $115,000 fine (although he kept buying high so that he could buy the entire company, and that's a terrible use of money when he could have manipulated the stock instead).

The Hunt brothers, in the mid 1980s, tried to corner the silver market by buying all the silver available. They succeeded in driving the price up to $50 then, a price it hadn't reached till 2011. Real estate developers buy their own flats in proxy names and then claim there is too much demand and the price must be hiked.

Hedge fund manager and media personality Jim Cramer sums it up in a video, that they just keep hitting the stock until the person on the other side gives up.

This is not just a refuge for you; it is now being done even by governments. The US Feb buys treasury bills and long term US bonds, and sometimes even junk mortgages, just to keep their prices high. India doesn't like the rupee strengthening against the dollar, so it buys dollars and keeps the exchange rate down. Of course, they have the excuse that they are not just buying to sell it at a higher rate — they buy to hold — but why should such flimsy reasons stop you? If the prices go out of control you can always sell and if asked, say that the "market behavior had changed" and you no longer wanted to keep the stock.

If you think you need a lot of money to manipulate stocks, you are wrong. The smallest stock in the Nifty trades just Rs. 10 crores ($2.2 million) a day, and most stocks beyond the top 200 will find it difficult to even trade Rs. 10 lakhs ($22K) per day — it doesn't take a lot of money to raise the price, or indeed to "show" the presence of a large buyer.

And if you are caught

You will of course have to burn this letter. But have no fear — even if you have manipulated markets as much as Ketan Parekh has, you will find easy ways to come back into the markets, using other people's names and accounts. Nothing will ever happen to you — what, after all, has happened to the bigger political manipulators and scandals? If there are suckers waiting to make losses, why shouldn't you be the beneficiary?

On that note, we invite you to write in with more lucrative and innovative ways to move stocks according to your whims and fancies. And let us know which stocks.

Sincerely,

The Secret Committee of Asset Manipulators (SCAM)

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My Retirement Plan Sucks

For a person that writes on money, and who doesn't really have "regular" income, I'm a strange guy. I talk about how you should save for retirement. I build large excel sheets, that when you click a button, tell you exactly how much you need to save so you retire. I tell people to save today so that they have a friend in the money tomorrow.

And yet, I don't have such a retirement plan for myself. I'm a strange guy.

Oh, I do have a savings plan for my son. And about 12 months of expenses in an emergency fund. But I haven't quite saved for retirement. I'm banking on a lot of luck.

As a startup founder, I can't expect a fixed salary every month. It will come, but I've grown to accept that it will be much lesser than whatever I could get at a regular job. I have a lot of fun, but the financial payback is not expected to be a larger paycheck; it's supposed to be one large cheque.

I'm betting my future on the hope that I'll make a ridiculously large sum of money when I sell my company. Or that my business will get so rich it'll pay me way beyond anything I could get in a job. In my own way, I'm focussing on capital appreciation of my investment (of time and opportunity cost and money) rather than income.

There is no diversification. I'm betting on me and my luck. In a job, you can switch employers, without much of a thought. To me, that's like switching out of me, a failure of sorts. I'm not afraid of failure - after three startups you don't give a damn what other people think - but I'm going to give everything my best shot before I give up, for sure. But it is true that I have a very concentrated portfolio - it's just what I do and how lucky I am, now even necessarily in that order.

The one big difference is that I get to build an asset. At a job, you hardly ever own a piece of what you do, though stock options do provide some upside. At a startup, you build an asset for yourself. Sometimes it's junk. And some other times it's so valuable people will pay a lot of money for it. And you get to shape that asset, so unlike buying a company's share and hoping they'll make more profits, with your own company you can convert that hope into effort and reality.

What I'm really doing is betting that if I keep at it, something big will happen. It has, in the past, and I'm grateful that gave me the money to be able to do this and not have to really worry about the rent. But to truly be able to retire, I have a long way to go financially.

So my retirement plan is a pot of gold at the end of a rainbow. In a world increasingly populated by gadgets that I want NOW, time I need to take off today, that plan sucks. Until one day, when it doesn't.

(Yes, you should try it. No, it's not glamorous. Yes, it's so much fun. No, I'm not smoking.)

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Speak Asia CEO Apologizes, HT Exposes More

Manoj Kumar, CEO of Speak Asia has apologized for the gross error in saying they actually did any survey for Brands such as ICICI or Airtel or Tata Nano. It seems now that no such survey was done. (See the Headlines Today Video)

And he says these exact words:

"We do not say or believe that any one can pay us Rs. 11,000 and earn X amount of rupees. That's not our promise."

(Read the full story)

Ooh. That must hurt. You don't really earn money from surveys. You don't expect your customers to earn money from their "investments" (technically the payment is for a newsletter).

More: The Goa government and RBI are investigating Speak Asia. And ET says even the MCA and Economic Offenses Wing are looking into the operations.This could just be the end-game for Speak Asia.

After all this if people still don't get the concept that the company makes money out of new people, or new "bakras", then it really is not for lack of trying. Just avoid such companies, unless they offer you entry for free. If you are approached, say that you know other people who got in for free so you want free entry as well. If they vanish, you know how scammy it is.

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Volume-To-Nifty Ratio at a 5 year Low

The Nifty volumes of late have been depressing. Here's the ultra long term volume chart:

Nifty Monthly Chart With Volumes (Long Term)

The Chart shows Average Daily Volume in terms of Total Traded Value on a Monthly Nifty Chart. The Average Daily Volume in May, till now, is a miserable 10,000 crores. Look at the chart closely:

Nifty with volumes (Short Term)

Average Daily Volumes are the lowest since, hold your breath, Feb 2009.

This is not good. And this is on the back of many more listings and securities traded.

Number of Scrips Traded

But you might say, listen Deepak, you are taking the Total Traded Value. If Nifty is high, the prices of securities is higher, and if someone always buys 100 shares of something, then the amount he pays is higher when Nifty is high and lower when Nifty is low?

This logic makes partial sense, at least to traders. Many people buy 1000 Nifty futures (20 lots of 50 each) regardless of where the Nifty is. Much of the action in the cash market is because of hedging against what is in futures. So yes, that logic does apply, to some extent.

So let's see the Volume-Nifty Ratio. This is the ratio of the NSE Volumes in Crore to the Nifty value. It is not useful in isolation, but it is useful to see if there is a trend in the overall movement and position of this ratio relative to the past.

image

We are at the lowest since 2006 (when the Nifty fell 30% after the RPL listing and when NSE increased margins). Before that, this kind of ratio was only in 2001!

The ratio usually bounced off these levels, but remember, this ratio can increase if the volumes stay the same and the Nifty drops. The one thing that an increase in this ratio CAN point you to, is an increase in volatility. A straddle or a strangle - buying a put and a call - is likely to be useful. But I would wait for the break of the technical figure of 5400 on the downside before initiating the position.

The lack of volumes are a reflection of lack of investor interest. We'll check on the DII/FII/Retail investor interest in another post, but overall volumes are quite disappointing.

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How to Analyze a ULIP: Video

At MarketVision, I have a 10 minute video of a ULIP Review (HDFC SL Crest) that will help you understand how to look at a ULIP and analyze it's charges and so on.

Would love your comments.

Do look at more Short Takes as well.

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