CSMS Magazine Staff Writer
Whew, what a month of activity! First, an unknown hedge fund trader, John Paulson, made billions betting against sub-prime mortgages. A year after the fact, European banks cry foul and inspire the Senate to hold hearings, a witch hunt for political self gain, ultimately blamed Goldman Sachs for the government’s failure to prevent our financial meltdown.
I know of no financial laws that Goldman broke. Several investment banks provided similar vehicles for investors to bet the overheated housing market was hell-bent for correction. Locally, if I were to blame an organization it would be the Town of Fishers of Indiana, which has been expanding the size of municipal government by annexing for dollars. I would blame the local school board that demands another $65 million dollars to build yet another school. Higher property taxes do not make home ownership affordable. I would blame state and federal governments that if left unchecked will outpace the debt and financial ruins of Greece, Spain, and Portugal. Lest we forget the mortgage originators, many required no proof of income, and the list could go on. But, let’s stop with the rating agencies.
Isn’t it amazing that the rating agencies are FINALLY doing their job and NOW European governments don’t want to be told the truth!
Thursday saw the Dow dropped a thousand points, and people, who I thought understood the workings of the market, panicked. Every day on my platform I see stock bids (buy orders). The purchaser is willing to buy 10,000 shares for one cent per share. Also, the ask (the seller) wants $10,000 for an $8 stock.
Similar bids and asks were in place long before someone panicked and said, “The problems in Greece may lead to contagion. Sell now, and get us out of our position.” That “SELL NOW!” became a market order and the computers did exactly what they were programmed to do: Find the best ‘Bid’ and get us out.
Other computers were programmed to observe S&P, Dow, or another market valuation and if price moves to a predetermined value, then buy or sell orders kicked in and became market orders. This cumulative snowball action dropped the Dow to one-thousand points. It is not surprising that the market fell so quickly. Most mornings, frighten equity owners sold out and about three-thirty each after noon programmed computers bought and drove the Dow and S&P to new closing highs. Very often the higher movement was Very Thinly Traded.
A Market Order is a command to the computer to seek out the best price. When the exchange’s trading platforms received large quantity of market sell orders, prices fell to fill demand. If you are a new trader always input your trades with limit orders, then you know exactly your fill price.
If I lived in Greece I would join the demonstrators and throw bricks through the windows of German, French, and Swiss banks. These banks knew early on that the Greek government was not a good credit risk. The Greek people have a two-hundred year history of debt defaulting. Over half the population draws a check from their government. Most ignore their responsibility to pay taxes.
The solution is to increase the retirement age, increase the value added tax (VAT) from 21% to 25%, and reduce entitlements. The loan from the IMF and other countries is a quick fix that delays their financial ruin forward three years. Or the Greek people could opt out of the European Union, print their own currency, and tell the German, French, and Swiss banks, ‘Thanks for the loan.’ You knew that we were a bad investment and now we are sorry to inform you that we are cancelling our debt. Next time choose your investments carefully!’
A VAT tax has been proposed in the US. I am against it. As we see here in this Greece example, providing more money to governments only delays the ‘people’s problems’, and a VAT tax is a tax on poor people.
Note: CSMS Magazine and the author are not in the business of providing financial services or advice. Prior to investing, readers must seek professional assistance.
Andrew Robbins is the author of: It Took My Breath Away; One Man’s Experience May Save Your Life. He may be reached by email at: email@example.com