The Latest Financial Gambling Tool

  • Posted on: 3 August 2010
  • By: Connecticut Man1

“I make a living off the dumb money,” says Emil van Essen, “These index funds get eaten alive by people like me”

Just so you know, Joe and Suzy Sixpack with your 401ks and other investments... You are the tool with the dumb money. And, yes. The game is rigged in the favor of the house again.

From Bloomberg News we get the tale of contango, commodities futures trading and the savvy using your gullibility to fleece you with their latest "financial innovation":

ETFs Imperil Commodity Investors When Contango Conspires With Pre-Rolling

The commodity ETFs were supposed to offer a hedge against equity losses, but in the crash of 2008 everything fell in tandem. Now it was early 2009, and Wolf was watching oil fall to $34 a barrel. That had to be an opportunity, he figured, so he called his Merrill broker and asked about the U.S. Oil Fund, an ETF designed to track the price of light, sweet crude. “This seems to be something good,” Wolf told the broker, and had him buy about $10,000 of USO.

Going Down

What happened next didn’t make sense. Wolf watched oil go up as predicted, yet USO kept going down. In February 2009, for example, crude rose 7.4 percent while USO fell 7.4 percent. What was going on? Wolf logged on to Seeking Alpha, a financial blog, and searched for USO. He found plenty of angry discussion about the fund -- lots of people were losing lots of money, because thousands of American investors had seen the same sort of opportunity Wolf had.

By the end of 2009, they had a record $277 billion invested in commodity ETFs and other securities linked to raw materials - - a 50-fold jump from $5.5 billion a decade earlier, according to Barclays Capital. During that time, Wall Street had transformed the reputation of commodities from a hyper-volatile investment that can steal your shirt to a booster for battered portfolios, something that rose when stocks fell and hedged against inflation, Bloomberg Businessweek reports in its July 26 issue. People who would never think of buying a tanker of crude or a silo of wheat could now put both commodities in their 401(k)s. Suddenly everybody was a speculator.

And some were losing big. The commodity ETFs weren’t living up to their hype, and the reason had to do with a word Wolf had never heard before. As he browsed the blogs, he says, “I’m seeing people talking about something called contango. Nobody would define it.” Wolf called his broker and asked about contango.

‘Rigged Game’

“I don’t know what it is,” he replied. He called his other broker, at Charles Schwab. “He didn’t know either,” Wolf says. “He said he’d ask around.” Weeks later, after Wolf educated himself, he fired his Merrill broker and pulled out his money. (Merrill and Schwab declined to comment.) By then he had lost $2,500 on USO. “If it wasn’t a rigged game,” he says, “I could figure it out. But it is a rigged game.”

This particularly long excerpt gives you an idea of what was wrong... But you have to read the whole piece to get the big picture of another Wall Street scam documented in detail and explaining how the "smart investors" will gladly relieve you tools of your dumb money using the latest "financial innovations" every time in this choreographed fleecing of your "investment".

“It’s the same with these products. You’re playing a game with a very high rake, a very high house advantage, and you’re not the house.” Greg Forero

Comments

if planning to take one's life savings along for the swim in the ocean in which aforementioned sharks evolved  ;-) 

I vaguely recall an old parable about a scorpion and a frog negotiating the scorpion's ride across the river.

I'm still reading that piece, glad you covered it!  I had to laugh and cite this bit, however:

Even the former Deutsche Bank lawyer who helped open the floodgates now says something has gone wrong. “Like most things on Wall Street, they have been over-marketed,” Collett says. “The complications have been glossed over. I’m not sure the people marketing them even understand the complications, and that’s a shame.” Collett left Deutsche in 2008 and is pursuing a career as a stand-up comic in New York.

Maybe we're about to get a Jon Stewart out of the deal?

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"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson


dark comedy material using Wall Street experiences to draw upon.