Here is a fascinating interview with Jim Cramer explaining “the mechanics of the market”, ie how the market is manipulated.
Essentially, he is talking about shorting a stock, spreading rumors so the stock goes down, then profit from the shorts and buy the stock to profit again when people realize the rumors were BS and the stock goes back up.
I have no idea what he was thinking talking about this publicly, but you now know how much you can trust the financial advice you see on TV and in the papers.
Full transcript is after the jump (click on the “read more of this entry” link).
FULL TRANSCRIPT:
You know, a lot of times when I was short at my hedge fund—when I was positioned short, meaning I needed [the stock to go] down—I would create a level of activity beforehand that could drive the futures. It doesn’t take much money. Similarly, if I were long, and I wanted to make things a little bit rosy, I would go in and take a bunch of stocks and make sure that they’re higher. Maybe commit $5 million in capital, and I could affect it. What you’re seeing now is – maybe it’s probably a bigger market. Maybe you need $10 million in capital to knock the stuff down.
But it’s a fun game, and it’s a lucrative game. You can move it up and then fade it—that often creates a very negative feel. So let’s say you take a longer term view intraday, and you say, “Listen, I’m going to boost the futures, and the when the real sellers come in—the real market comes in—they’re going to knock it down and that’s going to create a negative view.” That’s a strategy very worth doing when you’re valuing on a day-to-day basis. I would encourage anyone who’s in the hedge fund game to do it. Because it’s legal. And it is a very quick way to make money. And very satisfying.
By the way, no one else in the world would ever admit that. But I don’t care. And I’m not going to say it on TV.
[...]The hedge funds are positioned long/short, okay? — not just long with mutual funds, so it’s really vital these next 6 days, cause of your payday, you’ve really got to control the market. You can’t let it lift. When you get a Research in Motion, it’s really important to use a lot of your firepower to knock that down, because it’s the fulcrum of the market today.
So, let’s say I were short. What I would do is I would hit a lot of guys with RIMM. Now, you can’t “foment.” That’s a violation. You can’t create yourself an impression that a stock’s down. But you do it anyway, because the SEC doesn’t understand it. That’s the only sense that I would say this is illegal. But a hedge fund that’s not up a lot really has to do a lot now to save itself.
This is different from what I was talking about at the beginning where I was talking about buying the QQQs and stuff. This is actually blatantly illegal. But when you have six days and your company may be in doubt because you’re down, I think it’s really important to foment—if I were one of these guys—foment an impression that Research in Motion isn’t any good. Because Research in Motion is the key today. [...]
What I used to do ‘ if I wanted [a stock] to go higher, I would take and bid, take and bid, take and bid [repeatedly buy stock and then make an offer for more], and if I wanted it to go lower, I’d hit and offer, hit and offer, hit and offer [repeatedly sell stock and then put more up for sale]. And I could get a stock like Research in Motionthat might cost me $15 to $20 million to knock RIM down, but it would be fabulous, because it would beleaguer all the moron longs [investors betting the stock would go up] who are also keying on Research in Motion.
So we’re seeing that. Again, when your company is in survival mode, it’s really important to defeat Research in Motion, and get the Pisanis [journalists] of the world and the people talking about it as if there’s something wrong with Research in Motion. Then you would call the [Wall Street] Journal and you would get the bozo reporter on Research in Motion, and you would feed that Palm’s got a killer [competitive product] that it’s going to give away. These are all the things you must do, and if you’re not doing it, maybe you shouldn’t be in the game.
INTERVIEWER: Let’s talk about Apple…
CRAMER: Apple’s – it’s very important to spread the rumor that both Verizon and AT&T have decided they don’t like the phone. It’s a very easy one to do and you also want to spread the rumor that it’s not going to be ready for MacWorld. This is very easy because the people who write about Apple want that story and you can claim that it’s credible because you spoke to someone at Apple. Because Apple…
INTERVIEWER:They’re not gonna comment…
CRAMER: …doesn’t refute statements. So it’s really an ideal short. And again if I were short Apple, I’d be working very hard today to get that. I’d pick up the phone and I’d do that today. And the way you do that is you pick up the phone and you call six trading desks and say, “Listen, I just got off the phone with my contact at Verizon and he has already said, ‘Listen, we’re a Lucky G [LG] house. We’re a Samsung house. We’re a Motorola house. There’s no room for Apple. They want too much. We’re not gonna let them in. We’re not gonna let them do what they did to music.’” [Note: just to be clear, he is suggesting you make all that up] You know, I think that’s a very effective way to keep a stock down.
I might also, by the way, because the stock is at 84-85 [USD]. [You use a] little bit of capital, you go buy some Jan 80 puts that makes it look like there is going to be something going on. So maybe you give Morgan an order to buy 1000 Jan 80 puts. Then you go position a limit with a — use a firm that doesn’t know what the heck it’s doing, maybe go to UBS for puts. You just kind of create an image that there is going to be news next week. And that’s going to frighten everybody. They all go out and say large put buyer at UBS. Then they call Pisani – you have to use those guys. Say “Listen, I’m told there is a big put buyer and its SAC”. You would do that too.
These are all what’s really going on under the market that you don’t see. What’s important when you are in hedge fund mode is to not do anything remotely truthful because the truth is so against your view. And it’s important to create a new truth — develop a fiction. The fiction is developed by almost anybody who is down like 2% or up 6% here. You can’t take any chances. You can’t have the market up any more than it is, if you are up 6, because starting Jan 2 you’ll have all your money coming out. What would you do if you were in that situation and you feel like you’re desperate? You would do these actions.
INTERVIEWER: You’re talking about the mechanics of the market.
CRAMER: Cash is much more important than the fundamentals.
INTERVIEWER: Okay, but in terms of fundamentals…
CRAMER: Who cares about the fundamentals? RIMM just blew out the quarter, but look what people can do. I mean that is a fabulous thing. Now the great thing about the market it has nothing to do about the actual stocks. Now look maybe over two weeks from now the buyers might come to their senses and realize everything they heard was a lie. But then again Fanny Mae lied about their earnings of $6Billion. Its just fiction and fiction and fiction. I think it is important for people to recognize that the way the market really works is to have that nexus of hit the brokerage houses with a series of orders that can push it down , then leak it to the press, and then get it on CNBC – that is also really important, and then you have a vicious cycle down. It’s a pretty good game. It can pay for a percent or two.
INTERVIEWER: and then do you get long before Mac World, in the expectation that…?
CRAMER: Yes because you drove it down, sometimes you have to use the other side [and be long]. And there is a case where I would say the January 80 puts can be justified, because after I’ve moved the stock down to 80 I can buy a lot of common [stock] and play it into Mac World where they will probably introduce the phone, and Verison is going to take it [and this will drive the stock up].
Bottom line is, to trade and win, you just can’t trust whatever you hear. You need the right tools to analyze what’s really going on and beat the crowds. Make extra money the easy way with this forex method.