Efficient Market Hypothesis - EMH

EMH is a cornerstone of modern financial theory. EMH asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.

But what if there is one big stakeholder who has enough stake to manipulate the market in the direction he wants.

The Wall Street Journal has just reported that in the copper market "a single trader has reported it owns 80% to 90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion."

The following reading in the context of above news report and EMH is interesting.

Copper soared to a new record of $4.2705 per pound on Tuesday in New York, and is up 28.3% this year. The LME's three-month copper contract closed at $9,353.50 a metric ton, up 1.6% on the day, a new record.

J.P. Morgan Chase & Co. recently had a large position in copper, though it is unclear whether the U.S. bank increased its holdings, or whether a new player has taken dominant position.

"Regardless of who owns it, the only thing of note here is that we are being told that one person has a substantial position," said David Threlkeld, president of Resolved Inc., a metals consultancy.

While commodities exchanges scrutinize all holdings to ensure a single player isn't trying to corner the market, and many of the positions are owned by big firms on behalf of clients, the large holdings do result in a concentration of ownership that could skew prices.

Please keep the bolded text in mind, as you read the following description of the idiocy spewed on TV tonight, via the Street:

"Everything that goes up is not a bubble," Jim Cramer told the viewers of his "Mad Money" TV show Tuesday, as he reminded viewers that the laws of supply and demand have not been replaced by the law of gravity.

Cramer said he's had enough with the skeptics keeping investors from making real money in stocks, and especially in commodities. He said it's OK to be skeptical sometimes, but being skeptical about everything will only hurt your portfolio.
Case in point, the commodities. Cramer said the last big rally in commodities like copper and oil was indeed driven by a hedge fund frenzy, but this time is different.This time, he said, commodities are being driven higher by real demand, by the fact that the world is growing, and there's an inability to find new raw materials fast enough.

In other words: per Cramer, the story broken by the WSJ is just fabulation and JPM's 90% lock of the copper market is as indication of proper supply/demand dynamics. Because, in some parallel universe, JP Morgan controlling 90% of the market is real demand...

You read that right.

Here is another twist to the financial theory.

Here's yet another diabolic cycle for ordinary Americans, engineered by the grifter class. A Pennsylvanian like Robert Lukens sees his business decline thanks to soaring oil prices that have been jacked up by a handful of banks that paid off a few politicians to hand them the right to manipulate the market. Lukens has no say in this; he pays what he has to pay. Some of that money of his goes into the pockets of the banks that disenfranchise him politically, and the rest of it goes increasingly into the pockets of Middle Eastern oil companies. And since he's making less money now, Lukens is paying less in taxes to the state of Pennsylvania, leaving the state in a budget shortfall. Next thing you know, Governor Ed Rendell is traveling to the Middle East, trying to sell the Pennsylvania Turnpike to the same oil states who've been pocketing Bob Lukens's gas dollars. It's an almost frictionless machine for stripping wealth out of the heart of the country, one that perfectly encapsulates where we are as a nation.
When you're trying to sell a highway that was once considered one of your nation's great engineering marvels — 532 miles of hard-built road that required tons of dynamite, wood, and steel and the labor of thousands to bore seven mighty tunnels through the Allegheny Mountains — when you're offering that up to petro-despots just so you can fight off a single-year budget shortfall, just so you can keep the lights on in the state house into the next fiscal year, you've entered a new stage in your societal development.

You know how you used to have a job, and a house, and a car, and a wife and a family, and there was food in the fridge — and now you're six months into a drug habit and you're carrying toasters and TVs out the front door every morning just to raise the cash to make it through that day? That's where we are. While a lot of this book is about how American banks used bubble schemes to strip the last meat off the bones of America's postwar golden years, the cruelest joke is that American banks now don't even have the buying power needed to finish the job of stripping the country completely clean.

So, it is high time that all the assumptions underlying modern financial theory like Banking, Stock Markets, Corporatization, Securitization etc. should be re-visited by honest academics, practitioners.