JPMorgan & Chase (JPM) CEO Jamie Dimon made an interesting suggestion last week after buying First Republic Bank. Specifically, he wants U.S. regulators to institute a ban on short-selling banks.
As he stated during a Bloomberg interview last week:
Some people are unscrupulous, and they use other means to go short. I think if you look at the detail, the SEC has the enforcement capability to look at what people are doing by name in options, derivatives, short sales, and if someone’s doing anything wrong, [if] people are in collusion, or [if] people are going short and then making a tweet about a bank, they should go after them, and vigorously, and they should be punished to the fullest extent the law allows it.
It’s a bold statement, but I actually agree with him.
Short-selling is when a trader is essentially betting that the stock will go down. If the stock falls, the short-seller stands to make a tidy profit. When there are a lot of short-sellers shorting stocks, that can impact an industry or broader market direction.
So, when short-sellers went after the regional banks, they knocked down the sector. The reality is they’re jerking stocks around and essentially throwing the baby out with the bathwater.
Now, what I think is even more controversial than the short-sellers is the ETF industry.
If an investor sold the SPDR S&P Regional Banking ETF (KRE) on the week that Silicon Valley Bank was crashing, they got fleeced 12% on average, because KRE was trading at a discount to the underlying value of those bank stocks. Then if the investor bought KRE when it turned around, they paid a 4% premium.
This is how Wall Street makes money. It fleeces you.
Here’s the reality: An ETF may sound enticing because there’s no commission fees, but there is a catch… the spread. What ETFs do is they put a spread on top of a spread. It’s like getting an extra scoop of ice cream, and the firms make more money.
The spread is the difference between the bid and the ask. The bid is what the buyer is willing to pay for the ETF, while the ask is what the seller is willing to accept. Ideally, the tighter the spread, the better, as the ETF is more liquid and easier for an investor to buy and sell. The wider the spread, the less liquid it is and harder it is to buy or sell the ETF at the price an investor wants.
For example, the iShares Select Dividend ETF (DVY), which is the biggest dividend ETF available, had a 34.95% intraday spread during the “flash crash” on August 24, 2015.
The flash crash in DVY was largely caused by margin calls. Buying a stock on margin is similar to purchasing a new suit on credit – you’re borrowing money to purchase something. In the case of stocks, the broker is letting you purchase stock with money that isn’t in your account.
So, when a stock price starts falling fast, brokerage firms fear they won’t get the money they “lent” out back and make what are called margin calls, in which they ask the investor to fund their account to cover the cost of the trade. This can cause a lot of pressure on the stock price and cause flash selling – as it did in the case of DVY.
Another example of market manipulation is what happens if an investor places a stop-loss on an ETF. Simply put, the firms will see that stop, run the investor down and clean them out – buying the ETF at a steep discount from unsuspecting investors. Then when the ETF returns to its underlying value, the firm can cash out for a profit.
This is why Wall Street pushes ETFs so hard now. By creating a basket of stocks, they can profit from the volatility of one or two bad actors and gain access to other solid companies for a discount in the process.
I know this because I used to have my managed accounts approved by these firms, but I sold that business 10 years ago because the firms wanted to go to ETFs so they could all fleece people.
What’s important to understand is the fleecing is brutal.
So, instead of risk being burned by an ETF, invest in fundamentally superior stocks to make money instead.
The fact of the matter is it’s possible to make big returns on stocks in a short period of time, and thanks to my Project Oracle system, I know just how to find them. It targets a specific group of stocks with a three- to six-month timeline. Once it finds the best stocks, I recommend them in my Accelerated Profits newsletter. In fact, it gave the green light today on three exciting new buys that use artificial intelligence (AI) to boost the growth of their businesses.
I just published a report called Urgent Oracle Buy Alert: 3 Stocks to Buy BEFORE 5/18 that gives you all the details on these stocks – including my recommended buy limit prices.
Editor, Market 360
P.S. On Tuesday night, I went live on camera to reveal the cold hard facts about the recent banking crisis and revealed 3 things you can do to protect your cash from any future bank failures…
I called the collapse of Silicon Valley Bank and First Republic months before they caught millions of Americans off guard.
And now I’m making what could be the biggest call of my career…
There is no time to waste.