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People have to remember what it was like during some other bad periods. They have to remember how easy it was to knock stocks down in 1987 and again in 1990. Stocks can lose value in a minute when hedge funds circulate negative rumors about companies. Yes, they do that.
In this era, when there are so many accounting irregularities and so much debt on the balance sheet, you can rumor virtually anything down.
How does it happen? OK, first you go in and buy 5,000 puts on a stock. Let's do it to
. You buy the August 75 puts for $6. (I did not do this, but I have been on the receiving end of it dozens of times.) Then you spread a rumor that the
is going to crack down on Fannie Mae because it doesn't have enough disclosure. Or you say that Fannie Mae doesn't have enough cash on hand to back up its debt. (No kidding.) Or you say that the Congress is going to convene hearings to "do away" with Fannie Mae.You get things rolling. Others see your put buys. You spread the word that this stuff is imminent.
Next thing you know, in this tape, Fannie Mae is down $7. You sell the puts and go home. Or you buy common against the puts and do it again after FNM rallies.
This kind of stuff happened constantly in 1987 and 1990. It was the daily occurrence. It was unstoppable; it was the equivalent of Joe McCarthy finding Communists in the State Department. It had resonance because there were Communists!
What stopped it in 1987 and 1990? Nothing, except dividends and buybacks. The raids were literally Dresden-like, with thousands upon thousands of short-bombers blocking out the sky.
Nothing's new. Same kind of era. Same kind of game. Just more players. Understand that what you see, stocks getting clocked mercilessly, is often just this process. The goal is, ultimately, to panic the mutual funds. They are such doofuses and so easily panicked that you can see how the shorts want to play the game just to make a buck.
It is what it is.
James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made.
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