Davos the summit of Wall Street’s greatest ever pump and dump

Just as the $22 million party held for the opening of the Atlantis Hotel on the Palm Island in September 2008 signaled the end of the Dubai property boom so too the World Economic Forum in Davos last week will likely go down as the summit of Wall Street’s greatest ever pump and dump.

For those not familiar with this process let us refer to the ‘Reminiscences of a Stock Operator’, the 1923 treatise on stock market manipulation thought to have been written under a pen name by the George Soros of his day, Jesse Livermore.

Trader lessons

He explains what happens to shares when the business outlook changes for the worse and the insiders, or business leaders know this is happening.

‘Do they come out with statements or warnings? Not much… now they silently sell. Then the public starts to get the familiar explanations. A ‘leading insider’ asserts that everything is OK… and that a bear drive is to blame.’

Prominent insiders then warn the public not to sell, blaming a bear raider. But the stock continues to go down. Thus the outsiders hold on while the stock goes down and the insiders are out of it.

Fast forward to today and nothing is different this time. It is well known and a matter of public record that insider sales have recently out numbered insider buys by more than a thousand-to-one.

Things are not OK

At the same time we have business leaders reassuring shareholders that ‘everything is OK’. They meet in Davos and talk bravely about the future. Why then are they dumping shares as fast as they can while pumping up their prospects?

For as the same famous stock market operator quoted above also notes: if the profit outlook was really great then this would not be advertised by business leaders as they would first want to buy up as much stock as possible before telling anybody else the good news, and then watch as share prices jumped.

Perhaps in our modern times the latter would be more difficult than in 1923 but the general principle has not changed one iota. Davos was the last hurrah of the greatest pump and dump exercise in stock market manipulation in history with the Fed’s stimulus money used by the banks to drive shares to unrealistic prices. That is to say the six to nine month view of profits does not really support the current share price, so the insiders have cashed out.

And for those who prefer to believe Wall Street, Livermore warns: ‘Brokers make a living out of commissions… and will induce the public… to buy the same shares in which they have received selling orders from insiders or manipulators’.