Use Dividends Against the Crazy Hedgies

The market right now is being overwhelmed by hedge funds using instruments that are way too powerful for the market when used in the size they are being employed. That's how you get big stocks torn asunder like this.

Like everything else that seems to go wrong in this era, we can't stop this madness.

You see when the hedge funds lever up as they do, when a $17 billion fund becomes a $170 billion fund, it can overwhelm the whole market. If two or three have the same strategy -- which they often do -- of shorting the market because their longs keep going down, if something good happens -- the bank bailout plan -- then a rally becomes a monstrous event to the upside. Perhaps the market should have gone up a percent or two; instead it goes up 10. Same thing on the downside: Perhaps the market should be down 2% on a bad forecast from a couple of companies. Instead because of the magnification factor, it goes down 10. When you add in the liquidations, it gets exacerbated even more.

In other words, it is possible, given the power and size of these funds, that we could have 5% to 10% swings until we get a handle on the leverage or make funds put down more money when they buy or sell these instruments.

Of course that won't happen. It is like credit default swaps. The government either doesn't understand the power these hedge funds have to move the market or it doesn't want to know, and the exchanges have little interest in stopping it because volatility is good business.