A headline from an email from the Wall Street Journal this morning:
"The Morning Risk Report: GameStop (GME) Stock Surge Tests Scope of SEC's Manipulation Rules"
I have seen or rather we all have seen countless people complain, object, and decry the moves by the brokerage firms and the regulators to "handle" the financial fight of the century, pitting the underdog little investor and newcomer versus the all powerful deep-pocketed Brown-educated hedge funds. The patriotic believing-in-America-odd-
Is this the level of speculation like Resorts International in 1976-77? I was working as a "customer's man" (this is what stockbrokers were called before they got fancy titles like account executives and financial advisors) at Smith Barney Harris Upham and saw widows in New Jersey who needed safe dividend-paying stocks selling their shares of AT&T (T) to buy Resorts as it went parabolic.
Recently I have read comments on Facebook (FB) from my high school classmates of 50 years ago that read like they were written by AOC. Please, no more please!
Let me tell you about what went on in the late 1970s in the commodity markets. There are lessons to be learned.
Starting in about 1973 the world saw one commodity after another soar northward. It was a confluence of events.
There was the Russian wheat deal, price controls from Nixon, OPEC, a freeze of the orange juice crop in Florida, the freeze of coffee trees in Brazil, and a La Nina that hurt anchovy production which boosted soybean demand, the development of COLA clauses in union contracts, and on and on. There was hoarding of sugar, coffee and yes, toilet paper.
Firms like Philip Brothers, Conti Commodities and Bunge and Mocatta Metals were where all the real action was.
When a short squeeze unfolded in the silver market in New York on the Comex Exchange (then more of a private club and not a listed public company like the markets are today) you got to witness a gradual ratchet up in measures. Yes hedgers and "the trade" were largely short the market against inventory or future mine production, while speculators like the brothers William Herbert Hunt and Lamar Hunt of Dallas, Texas were long. Yes there were many other "specs" as we call them who were buying futures. The world of ETFs and fractional shares did not exist. Van Eck ran the most notable mutual fund of the day that bought the mining names.
As silver prices went parabolic, the governing board of the COMEX met behind closed doors. Margin requirements were increased steadily as prices rose and volatility increased. Original margin and variation calls had to be met in cash and not T-Bills or bonds with a haircut. Margin levels changed frequently and the Fed wire was extremely busy.
At some point in the rally the exchange moved to gross margining. What's that? Brokerage firms normally put up the trade or member margin for their net position. 100 longs and 75 shorts mean the net position is long 25. Gross margining means that the brokerage firm needs to post margin for 175 positions - both the longs and the shorts.
At the tail end of the silver saga the COMEX declared that the market was "for liquidation only", meaning you had to exit your positions. Order needed to be restored. The continuity of the marketplace was more important than individual speculators. This was real life and not "Trading Places" with Eddie Murphy.
History tends to repeat itself so as inflation heats up in the next few years you heard it here first how the rules can change in the middle of the game.