Strong Hands/Weak Hands

In the bad old days, before the SEC policed stock manipulation, investment pools were formed for the purpose of conducting campaigns in selected stocks. Pool managers of the day were well-known speculators, and included the likes of Jesse Livermore, J.P. Morgan, Edward Harriman, Jay Gould, Russell Sage and James Keene. These savvy traders were responsible for day-to-day operations of the pool. Sometimes campaigns were conducted on the long side, sometimes on the short side of targeted issues. Often one well-known manipulator on the long side of an issue was pitted against another equally notorious operator on the short side of the same issue. Normally, however, these giants were not looking to do battle with each other, but to lighten the public’s wallet.

The typical bull campaign went something like this:

Shares of a target issue are quietly accumulated. “Accumulation” is not synonymous with “buying”, but refers to the exercise of systematic buying over days, weeks, or months by sizeable and well-informed parties.

Stock is accumulated on dips, when offerings are plentiful. Operators are careful not to show their hand by bidding too aggressively for stock. For their operations to work, secrecy is paramount. Once word gets out that so-and-so is setting up a bull campaign, brokers and the public jump into the game, competing with the pool for available shares.

Pool managers did not want the public to begin buying until the pool had accumulated its full line of stock. If buying by the pool forced the price of the target stock to rise before pool managers acquired all the shares they wanted, operators might sell back some of the shares they had accumulated in order to force the price down. Negative rumors were often spread in an effort to inspire selling by public traders. In this way, the operator had little trouble taking in large amounts of stock at favorable prices.

Pool operators knew that most traders have weak hands. That is, they do not hang onto shares tightly, but chase “action” by constantly buying and selling. Weak-handed traders are impatient, and think a stock should move immediately just because they have taken a position. They take profits quickly, when they have them, and shed positions readily once trading activity becomes dull.

Because pool operators typically bought on dips, then sold to contain rallies, their accumulation produced lack-luster back-and-forth trading. Exasperated traders looking for action eventually sold their shares, often to the pool, before moving on to more active issues.

Large campaigns which aimed at very substantial profits took longer to engineer than smaller operations with more modest profit targets. Large campaigns required the accumulation of many more shares than smaller operations. Generalizing, the longer an issue remains under accumulation, the higher it is likely to go once mark-up begins.

Because the pool controlled most of the stock’s supply, they ultimately controlled the price. Shares held by the pool were in strong hands, held tightly until the pool’s substantial profit objectives were reached. Outsiders wishing to buy were left to scramble for the few shares not held by the pool. With the supply of stock in strong hands, any increase in demand forced the price to rise.

Once the pool had its fill, bullish rumors were floated to attract outside buying. Bullish rumors, news and, above all, a rapidly rising price attracted an increasing number of traders looking to make a quick buck.

Once the price had advanced smartly and public buying had reached a frenzy, the pool manager was able easily to sell large amounts of stock without depressing the price. Volume increased as public demand was met by sales from the pool’s account. Eventually the pool distributed all of its position to action-hungry traders and get-rich hopefuls. “Distribution”, as we shall use the term, refers to systematic selling by large and well-informed interests.

Having earned a tidy profit for himself and his partners, the pool operator had no further interest in the stock. He knew that the stock was now in weak hands, and that, in time, a trickle of selling would trigger a deluge. He might now take the short side. Or he might simply wait patiently until the stock was once again out of favor before attempting another bull campaign.

Do large speculators conduct campaigns today? You bet. But in international markets, which are unregulated by any single authority. Here’s an excerpt from Paul Krugman’s excellent account of the Asian crisis:

There are, for obvious reasons, no hard numbers on just what happened in August and September of 1998, but here is the way the story is told . . . A small group of hedge funds — rumored to include Soros’s Quantum Fund and Julian Robertson’s less famous but equally influential Tiger Fund, although officials named no names — began a “double play” against Hong Kong. They sold Hong Kong stocks short — that is, they borrowed stocks from their owners, then sold them for Hong Kong dollars…

In the view of Hong Kong Officials, the hedge funds weren’t just betting on these events: like Soros in 1992, they were doing their best to make them happen. The sales of Hong Kong dollars were ostentatious, carried out in large blocks, regularly timed, so as to make sure that everyone in the market noticed. . . In other words, they were deliberately trying to start a run on the [Hong Kong] currency.

The Return of Depression Economics.

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