Reflecting market or blinding it?

FSA hits Dubai-based investor with £4m fine [Well, actually, 6million pounds including the disgorgement order.]

Rameshkumar Goenka manipulated the closing share price of Reliance on the London Stock Exchange in 2010, as part of a ruse to avoid losing nearly £2m.

The 66-year-old trader had acquired an investment product from an unnamed European bank that paid out if Reliance's shares reached a pre-determined level by a certain date. But when the investment looked as if it would go sour, Goenka swung into action.

According to the FSA "[he] had arranged for a pre-planned series of substantial and carefully timed orders to be placed in the final seconds of the LSE's closing auction.

The FSA ordered him to remit £2m to the bank and fined him a further £4m. The fine would have been even higher, £7.7m, had Goenke not settled early and benefited from a 30% discount.

Tracey McDermott, acting director of enforcement and financial crime at the FSA, said: "Goenka's structured product was an investment that would have made him a considerable profit had it been successful. When he saw that it was not going to produce the desired result, Goenka manipulated the market to avoid a substantial loss.

"The impact of such behaviour goes far beyond one counterparty. Market confidence will suffer if participants cannot be satisfied that the price of quoted securities reflects the proper interplay of supply and demand."

As usual, there's more to this story and you should consider at least reading it on the link above.

But Guambat remains impressed that someone some place is sticking with the rather quaint idea that markets are what you trade and not how you trade. Guambat is quite certain that no one has told that to the black boxes, algorithms and other creatures inhabiting the deep seas of the closing and opening half hours of the global markets. Where does market manipulation begin and market regulation end if not in efforts to make a gain or avoid a loss? And does that matter to sharks?

Guambat is not inclined very much to swimming in those channels any longer.

Bernanke: Rising stockmarket = economic growth

Forget high unemployment.

Forget falling dollar.

This is what the Federal Reserve Chairman had to say in today's op/ed in WaPo. Guambat may have cut and pasted and re-arranged the statement, but these are all direct quotes:

What the Fed did and why: supporting the recovery and sustaining price stability

The Federal Reserve's objectives - its dual mandate, set by Congress - are to promote a high level of employment and low, stable inflation.

Two years have passed since the worst financial crisis since the 1930s dealt a body blow to the world economy.

Among the Fed's responses was a dramatic easing of monetary policy - reducing short-term interest rates nearly to zero. The Fed also purchased more than a trillion dollars' worth of Treasury securities and U.S.-backed mortgage-related securities, which helped reduce longer-term interest rates, such as those for mortgages and corporate bonds.

The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011.

This approach eased financial conditions in the past and, so far, looks to be effective again.

Stock prices rose and long-term interest rates fell.

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable.

And higher stock prices will boost consumer wealth.

Lower corporate bond rates will encourage investment.

Dear Reader: what the Fed is doing is printing bogus bills. As fast as it can.

And, like his predecessor, who invented this shill (or, if not invented it, adopted it wholesale into the main tool of US monetary policy), as long as stock prices go up, stuff direct action to temper high unemployment and low inflation.

This policy will not, by any linkage or mechanical transmission, lower employment any time soon, if at all. It will, however, most assuredly, debase the currency.

And history tells us the only certain result of a debased currency is staggering inflation.

Hell of hyperinflation

a hyperinflation can be stopped easily. No outside help is needed and stabilisation at least can be achieved without much reform. All the government has to do is make a credible promise that it will not revert to the printing press and that it will balance its budget.

The hyperinflation is driven by corrupt and inefficient public bodies, packed with government cronies, that demand foreign currency from the central bank to buy fuel or fertiliser from abroad. They siphon off wealth and come back for more.

Of Dell and supplier side economics and illusory competition

The Register has done a fine piece by Andrew Orlowski exposing how Dell didn't sell its computers, it sold its customers. To Intel.

Practical monopoly power has its privileges, and you wonder how others with such power in the computer based cloud handle the same influence, given the notion that power tends to corrupt.

Guambat mentioned the Dell SEC settlement a few posts back, but assumed it was your run of the mill(ion) dollar financial frauds. Many thanks to Mr. Orlowski for explaining the fraud was on the PC market more than the financial market.

The Justice Department should have brought this case against Intel and Dell years ago.

Having the SEC do it now is sort of like how the IRS was used to bring in Al Capone when the police couldn't or wouldn't.

Dell's fraud settlement explodes PC market myths

On Thursday, Dell agreed to pay a settlement for fraudulent accounting from 2001 to 2006. The company admitted no wrongdoing, as is the custom in such settlements.

The SEC settlement casts the entire PC market in an entirely new light.

Intel was Dell's most important component supplier. Every ten years or so, Intel unveils a truly competitive processor architecture, from which the company reaps the reward for several years.

But there are times when Intel isn't so competitive.

So the supplier made financial arrangements (in the form of credit memos rather than "payments") to ensure its number one customer maintained exclusivity. These had been going on for many years in the form of 'Market Development Funds' - but new inducements (initially dubbed MOAP, or Mother Of All Programs) were introduced in around 2001, on top of the MDF programme. These were so great that over a five-year payment, the supplier ensured the purchaser traded in the black for five years.

Intel's rebates amounted to 38 per cent of Dell's operating profit in the fiscal year 2006, and rose to 76 per cent (or $720m) in one quarter alone, Q1 2007. While almost all of the Intel funds were incorporated into Dell's component costs, Dell did not disclose the existence, much less the magnitude, of the Intel exclusivity payments.

Knowing that Intel's processors were regarded as less competitive, Dell kept returning to Intel for better and better deals. Intel considered it a price worth paying. In 2003 Dell considered investing in AMD, filings reveal, and shifting a quarter of its CPU procurement to AMD. Intel's response was a new "Tactical and Strategic Fund" worth $258m for a year. Dell closed down the discussions.

Dell was getting lazy - and greedy. Dell began to see the Intel rebates as a financial instrument - to top-up its balance sheet. The arrangements were disguised on the balance sheet, while Dell maintained a "Strat Fund" - what the SEC calls a "cookie jar", that it could dip into at will.

"Dell would often seek additional rebates," SEC explains, "in order to close a gap between its forecasted and its earnings targets. Dell was quite open with Intel about the reasons it was requesting additional money".

For example, in Q4 FY 2004, Dell needed a $25m lump payment after forecasting a shortfall. Dell hadn't failed to hit an earnings target since 2001, and thanks to the payment, it duly met its forecast. None of this was known to investors; Dell CFO Kevin Rollins explained to investors it had met its targets because of efficiency savings and lower component costs. The SEC calls the latter claim "materially misleading"

In another quarter, a $70m lump payment was made so Dell could meet its forecast, in another, $125m. Intel even agreed an "Opteron Fund" worth $275m specifically to keep Dell from defecting.

Ironically, Intel was only six months away from shipping a competitive server processor - Woodcrest - when Dell finally announced AMD as a supplier in May 2006. Intel responded by lopping an arbitrary $250m from the funding arrangement. SEC notes:

"This dramatic cut in the MCP payments did not reflect any contemporaneous meaningful purchase of AMD processors or substitution of AMD processors for those of Intel. Rather, Intel's reduction in MCP payments reflected Intel's response to Dell's announcement of an intention to use AMD products in the future."

While vowing to put its customers' needs first, Dell was keeping competitive products away from its customers, in order to meet short term quarterly financial targets.

It's hard not to conclude that the PC processor market is now a monopoly cast in granite - and that the SEC settlement has come too late to introduce any meaningful competition.

When AMD ceased operating as an independent company in late 2006, it ended twenty years of independent competition (and for much of the time, litigation) against Intel.

AMD was originally an official Intel licensee, the second source supplier that IBM required, until 1986.

It settled all outstanding lawsuits against Intel for $1.25bn last year - about eight months' revenue of its final year as an independent company.

SEC notes somewhat ruefully that five previous antitrust investigations into Intel's market funds had failed to bring results. They certainly failed to bring the funding to light in time for AMD's best crack at the market - the years from 2001 to 2006.

One small detail seems to have escape[d] a lot of people's attention - and it's that Intel now formally marshals the competition in some interesting ways. Last year Intel and Taiwanese foundry TMSC signed an interesting agreement whereby TMSC is allowed to create variants of the Atom processor which are then rebadged as Intel designs and sold into the OEM channel.

In doing so, funnily enough, the PC chip market takes a step closer to the potato chip market. PepsiCo's Frito-Lay offers the illusion of competitive market by offering up apparently independent brands of snacks. You just wouldn't know it. Frito-Lay's UK operation is better known as Walkers, and Walkers still offers Smiths crisps in certain markets. ®

Read more of the story.

And read more of Andrew Orlowski.

Can't you just picture Alan Greenspan as Gepeto?

The ever on top of it Barry Ritholtz got the cite (http://bigpicture.typepad.com/comments/2005/09/chart_of_the_we_1.html) to the report ("MOVE OVER, ADAM SMITH:The Visible Hand of Uncle Sam") from the story I referenced a couple of days ago at http://guambatstew.blogspot.com/2005/09/calvary.html. You ought to read the full report at http://www.sprott.com/pdf/pressrelease/TheVisibleHand.pdf.

It's interesting that he referenced that issue (government intervention in the equity markets). In my "Calvary" post, I had also made reference to my "Heartless mother" post, with both posts implying the stock market, post Katrina, was also being guided (manipulated, rorted, squeezed, whatever) by Big Money. You can get real paranoid in this trade. But even paranoid people can have legitimate fears. Like the tombstone that said "I told you so."

I think Barry might be of two minds about this market right now. He suggests we have a short term upside "This does not affect our expectations for the rest to grind higher through November, and then . . ." http://bigpicture.typepad.com/comments/2005/09/chart_of_the_we_1.html
At the same time he has lots of concerns about the fundamentals (for lack of a better term) of the economy and market, e.g., http://bigpicture.typepad.com/comments/2005/09/sometimes_there.html and http://bigpicture.typepad.com/comments/2005/09/delayed_onset_s.html . I posted the comment, on his "Delayed onset" post, to the effect that "guiding hands" are acting to prevent the market from reacting to the negative elements, which is where this post came in and where we now exit.

The Calvary

Over the years I have heard many references, some behind the hand others more blatant, that there is more than Adam Smith's hidden hand guiding the market, in particular the stock and finance markets. You hear this particularly when there has been some out-of-the-blue event that would normally be expected to push the market down yet, miraculously, the market "performs" much more resiliently than you'd think. It's like being Custer, surrounded by Indians, but this time the Cavalry actually comes.

For instance, Katrina the hurricane was a stealth event. It was a large storm, but no one really expected it to have the killer punch it did have until just as it hit. And when it did hit, what did the stock markets do? Did they reel, shudder and fall under the weight of the mammoth destruction and disruption? Nope; the market was a heartless mother: http://guambatstew.blogspot.com/2005/09/heartless-mother.html

When you see the kinds of things that government actually gets caught out messing with (e.g., contra guns/drugs strategies, Watergate), it is easy to imagine that the effects of the markets are too dramatic to expect the government not to meddle (not to mention the money that's at stake). Plus, we do know that government central bankers must participate in financial markets to do their routine jobs of regulating rates, and do regularly "intervene" in the currency markets, even though that behaviour too is often somewhat opaque.

Yet, we also expect, and are led to believe, that the markets, particularly the equity markets, should be left to their own devices because "the market" jointly knows better than the several rest of us, and the market is fair and efficient when we individuals are not. (Or, as my Doodoo economics rants pointed out, sometimes it is unfair and inefficient when we would prefer to be, but let's not beat dead horses.)

So, in our more polite moments we are all more than inclined to believe that all those "unsubstantiated" "rumours" are mere "conspiracy theories". And so they may be, at least until we find bullet, body and smoking gun with finger prints.

And so, I commend to those of you who need a daily dose of conspiracy theory to put you to sleep at night the following: "Government Intervention in Stock Market is Detailed by New Report" at http://biz.yahoo.com/bw/050906/65371.html Myself, I've given up on such theories, and sleep very well indeed without need of a daily dose of same, at least so long as that commie under my bed doesn't snore.

PS: If you want to see just how "out there" the conspiracy theories can get, see the site where I got that "market manipulation" image: http://cuttingedge.org/news/n1856.cfm