I recall the case of Intervale Oil. There was a pool in it that put the stock up and found some buyers on the advance. The manipulators ran the price to 50. There the pool sold and there was a quick break. The usual demand for explanations followed. Why was Intervale so weak? Enough people asked this question to make the answer important news. One of the financial news tickers called up the brokers who knew the most about Intervale Oil’s advance and ought to be equally well posted as to the decline. What did these brokers, members of the bull pool, say when the news agency asked them for a reason that could be printed and sent broadcast over the country? Why, that Larry Livingston was raiding the market! And that wasn’t enough. They added that they were going to “get” him. But of course, the Intervale pool continued to sell. The stock only stood then about $12 a share and they could sell it down to 10 or lower and their average selling price would still be above cost.
It was wise and proper for insiders to sell on the decline. But for outsiders who had paid 35 or 40, it was a different matter. Reading what the tickers printed there outsiders held on and waited for Larry Livingston to get what was coming to him at the hands of the indignant inside pool.
In a bull market and particularly in booms the public at first makes money which it later loses simply by overstaying the bull market. This talk of “bear raids” helps them to overstay. The public should beware of explanations that explain only what unnamed insiders wish the public to believe.
XXIV
The public always wants to be told. That is what makes tip-giving and tip-taking universal practices. It is proper that brokers should give their customers trading advice through the medium of their market letters as well as by word of mouth. But brokers should not dwell too strongly on actual conditions because the course of the market is always from six to nine months ahead of actual conditions. Today’s earnings do not justify brokers in advising their customers to buy stocks unless there is some assurance that six or nine months from today the business outlook will warrant the belief that the same rate of earnings will be maintained. If on looking that far ahead you can see, reasonably clearly, that conditions are developing which will change the present actual power, the argument about stocks being cheap today will disappear. The trader must look far ahead, but the broker is concerned with getting commissions now; hence the inescapable fallacy of the average market letter. Brokers make their living out of commissions from the public and yet they will try to induce the public through their market letters or by word of mouth to buy the same stocks in which they have received selling orders from insiders or manipulators.
It often happens that an insider goes to the head of a brokerage concern and says: “I wish you’d make a market in which to dispose of 50,000 shares of my stock.”
The broker asks for further details. Let us say that the quoted price of that stock is 50. The insider tells him: “I will give you calls on 5000 shares at 45 and 5000 shares every point up for the entire fifty thousand shares. I also will give you a put on 50,000 shares at the market.”
Now, this is pretty easy money for the broker, if he has a large following and of course this is precisely the kind of broker the insider seeks. A house with direct wires to branches and connections in various parts of the country can usually get a large following in a deal of that kind. Remember that in any event the broker is playing absolutely safe by reason of the put. If he can get his public to follow he will be able to dispose of his entire line at a big profit in addition to his regular commissions.
I have in mind the exploits of an “insider” who is well-known in Wall Street.