Tuesday, January 22, 2008

AmericanGoy takes on the Stock Market

I am now completely, 100%, out of the market. Been that way for several years. And I am a much happier man.

The Fed's quick reaction in cutting interest rates made my prediction of 4-6% DOW market plunge wrong (I guess I was right for the first minute of trading today, then the market rallied to roll back the losses).

According to an AP article, "The Fed, announcing its action after an emergency video conference Monday night, indicated further rate reductions were likely, aimed at encouraging people and companies to start spending again."

Holy shit, more cuts!
We already hit the $100 per oil barrel, now it seems we will break the interest rate record also. We can only cut the rates to zero, natch.

From the same article: "President Bush and leaders of Congress joined in a rare show of cooperation in promising urgent action to pump up the economy with upwards of $150 billion in tax cuts and government spending."

$150 billion in tax cuts and government spending? What's the time span on that action? Just... wow.

We live in interesting times y'all.

So, on to my musing about the US market.
Take it with a grain of salt and enjoy the ride.
Onward we go...


After watching the bullshit artists on cable TV "news" for years, I realized one truism - whatever they said, think exactly the opposite of their view. Whatever they recommend to do - do exactly the opposite.

Think bizarro world - whatever is the accepted "truth", do the opposite. It is not 100% true, but feel free to use your own common sense. It is your most powerful weapon.

Example: the media was baying for blood, howling at the moon, and getting embedded to enthusiastically support the war invasion of Iraq. Think they were right on the issue?

The media are bullshit artists. Example: Look at this picture.

The media is built as a business. That means that a TV network, is a for profit and screw everything else business organization (like your health insurance, for example). As an example, General Electric owns NBC TV. Do you think that NBC and MSNBC "news" shows report the full truth and nothing but the truth?

Of course not - all those TV networks are small parts of the gigantic corporate machine, General Electric.

It is so blatant that it goes without saying that, even if NBC, MSNBC, CNBC do not make a single dime, it is worth it for GE to hold on to them?

If you still don't get why, let me be blunt - GE has a very powerful public relations branch in America. Guess what's it called?

That's right - NBC.

From money.cnn.com article: "And Barry Ritholtz, chief investment officer with Ritholtz Capital Partners, a hedge fund that focuses on media and technology stocks, adds that the biggest benefit of owning NBC is that it helps GE control its image and present itself in a favorable light. (His firm does not have a position in GE.)

"The value of NBC hasn't been its bottom line impact or the amount of cash throws off. It is having a mouthpiece that protects GE. It enables the company to maintain and control its own public relations," Ritholtz said."

All those little NBC bears do what the big GE bear tells them to do. And do you think that CBS, owned by Viacom corporation, or ABC, owned by Disney corporation are any different?

Think about it - how do you run a business in America these days? I don't mean a mom and pop restaurant - I mean a multi billion dollar enterprise?

Corporations cut news-related costs by laying off staff, eliminating foreign bureaus, and reducing investigative reporting. Local political affairs, viewed as a ratings loser, are ignored. A “race to the bottom” with violent or sexual programming ensues because this grabs the most “eyeballs.

As Lowry Mays, CEO of radio giant Clear Channel Communications, said: “If anyone said we were in the radio business, it wouldn’t be someone from our company. We’re not in the business of providing news and information. We’re not in the business of providing well-researched music. We’re simply in the business of selling our customers products.”

Controversial issues are ignored for fear of losing advertiser support.


Do you see a cognitive disconnect here - the media is supposed to inform us about controversial issues, but they cannot, because they are eeky and not popular. How about reporting controversial investigative reports dealing with their parent company? Oh yeah, that will happen...

Pretty simple shit to grasp, right? Got it?
Good.

Moving on.

All American "news" shows, whether cable or non-cable, have segments on the markets. There are specific pundits who do not deal with politics, but are the "experts" on markets.

If you read my blog, you already know my view on political pundits - they are there, plants from various think tanks and other organizations, as propaganda specialists. They are paid by their clients, whether political parties or business interests, to give their point of view.

Which usually has nothing to do with the truth, real life or common sense.

So... are the economic pundits on those TV "news" shows different from their political ilk?

I highly doubt it. The friendly face on TV talking about the markets is usually a very pretty young girl, who with a solemn expression as if she was talking about the Armenian Holocaust in Turkey during WW1, tells you that the market is up. Or down.

Anybody with an internet access can do that job. Those women are usually very nice to look at though.

The "serious" market pundits are men (except Suze Ormond, gosh darn bless her for jacking the stereotype). There are two kinds: the ones from a network stable and "analysts" from some corporation. You can differentiate which is which because the invited "experts" not from the TV network stable are thanked for their views, while the stable boys are not.

These experts will spend all of a 3 minute segment to educate you about the market and what's going on. In practice, what happens is these experts usually repeat what the pretty young woman already said (the market is down y'all!) but they do it in a better, more "expertly" sounding way.

Now, there are also hour long programs that are all about how to invest. Usually an expert will talk about specific stocks, and advise his audience if they should invest in said stock or not.

Which is pretty strange, as the programs, watched by hundreds of thousands of people, if not millions, must have an incredible effect. If only a small percentage of people listen to this yahoo "expert" and invest in a company which he or she recommends, that runs up the price of said company. Jacks it up.

It is a false dynamic - think about it. By recommending a stock, a market "expert" on TV has the power to raise or lower a stock price. Literally.

In fact, their egos are so big that they boast about it. CNBC's Jim Cramer - you know, the crazy person jumping up and down and running all over the studio as he literally screams at the microphone - boasts that he manipulates markets with his TV show.

Yes, Jim Cramer admitted that he manipulates the stock market for personal gain.

Wow! Shocking ain't it?
No not the fact that this balding dork has this kind of power to manipulate the market for his own profit but that he feels secure enough about it to boast about it.


Ufffffffffff...... deep breath....
OK, time to do a summation of all this TV market coverage stuff.
First, TV networks are small cogs in a much bigger parent company, and are basically a public relation branch of that company - whether GE, Disney or Viacom.

Second, the pundits on the TV "news" shows on the political side and the pundits on the market side who are not part of the network "stable" of experts, are employees of various corporations, propaganda outfits and public relations firms. It doesn't mean that they necessarily lie to you, the viewer - it means that they are paid to say exactly what they are saying on that TV show.

Third, the pundits from the network's own "stable" of experts, who are full time employed by a network, have their own agendas - chiefly to get you, the sucker, to invest in the market in a way that will make them the most profit. (Did you see the Jim Cramer interview?)

But the funniest - at least to me (I have a fucked up sense of humor) - is the fact that market experts were basically tied in stock predictions by people throwing darts at a board and picking stocks that way.

This is a true story - feel free to read the whole short article here I will quote the funniest parts in here:

In 1988 the Wall Street Journal began a contest that was inspired by Burton Malkiel�s book A Random Walk Down Wall Street. In the book, the Princeton Professor theorized that "a blindfolded monkey throwing darts at a newspaper�s financial pages could select a portfolio that would do just as well as one carefully selected by experts."

The Journal set out to create an entertaining contest to test Malkiel's theory and give its readers some new investment ideas in the process. Wall Street Journal staff members typically play the role of the monkeys (the Journal listed liability insurance as one reason for not going all the way and actually using live monkeys).

The contest began on October 4, 1988 and since then more than 100 contests have been completed under the current rules. Initially the contest lasted one month, but recognizing that the publication of the contest was creating a publicity effect on the pro�s stock picks, the Journal began measuring the results over a six month period beginning in 1990.

The rules have changed at various times during the contest, but the current rules are as follows. Each month four "professionals" are given the opportunity to select one stock (long or short) for the following six months. The stocks must meet the following criteria.

1. Market capitalization must be at least $50 million.
2. Daily trading volume must be at least $100,000.
3. Price must be at least $2.
4. Stocks must be listed on the NYSE, AMEX, or NASDAQ and any foreign stocks must have an ADR.

The pro's stock picks compete against four stocks usually chosen by Journal staffers flinging darts at the Wall Street Journal stock tables, which are pasted to a board. At the end of six months, the price appreciation for the pro�s stocks and the dartboard stocks are compared (dividends are not included). The two best performing pros are invited back for the next contest and two new professionals are added. In the latest twist to the contest, the Journal has begun taking stock picks from Journal readers which will also be compared with the pro's and dart's picks.

On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. That�s better than the 50% that would be expected in an efficient market. On the other hand, the pros losing 39% of the time to a bunch of darts certainly could be viewed as somewhat of an embarrassment for the pros.


So the stocks picked by people in a blindfold throwing darts randomly at a board won just 39% of the time. Which means that the pros won, right? Hooray for the "experts"!

Well, hold on there fella, and listen to this:
"Rather, they argue that investors that buy the pro's recommend stocks are "naive" and that those investors are acting on nothing more than "noise.

Before the contest even began, Professor Malkiel had suggested that the results would be affected by an announcement effect. In other words, the very act of publishing the pro's picks in the Journal could cause those stocks to rise as the hundreds of thousands of Journal readers (the Journal's current circulation is listed at over 1.7 million) open their morning paper and react to the recommendations of the pros. Professor Malkiel suggests to Investor Home that the pros advantage effectively disappears if you (1) account for the fact that the pros pick relatively riskier stocks and (2) measure returns from the day after the column appears (thereby eliminating the announcement effect)."

Hopefully that didn't confuse you?
It's really simple. The sheep, aka the American public looking to make money without any effort or work (hooray for the stock market!), read the Wall Street Journal and dutifully, and while making baa-baa-baa like noises, put their money into the stocks picked by the "experts". Because they are smart enough not to pick the stocks chosen at random by a dart thrown by a blind folded dude...

So to my summation which I posted above in the post, is added a fourth point - it's all bullshit. It's smoke and mirrors. No one knows how to invest money, despite the hundreds of courses, TV shows, radio shows and books, all "teaching" you how to anyway.


But but but... People make money off the stock market. And I don't mean a Joe Schmoe with a measly 50 to 200 thousand dollar portfolio. No, I mean power players, the people who have millions to play the stock market with.

How do they make the money?

Remember how I started the post? Think bizarro world - whatever is the accepted "truth", do the opposite?

Watching the CNN coverage in the morning, as the run on the stock market started, the smiling faces on TV told me that now is the time to buy buy buy and that people should be in the market for the long haul to make money. OK, time to get my discerning idiot contrarian hat on my head:

Buy buy buy is the mantra, almost a religious chant, heard on EVERY TV market show. Basically what they are telling you that you do not know what to do with your money, and that you should give your money to "professionals", who know better than you. Give the money to the market! Give us your money! Now!

It's as simple as that.

The stay in the market for the long haul mantra is designed for a similar effect. The market loves to hold on to your money, as that money makes interest and profit for someone else, not you. All those giant investment companies that have tens or hundreds of thousands of clients - they know exactly what to do with that money. That money is in motion, globally, earning tremendous interest and profit - but not for you.

It is very funny to me personally to see the performance of mutual funds, which the media and other experts recommend for "market newbies", as they supposedly mirror the market's performance.

Anybody who has had the misfortune of having bought shares in a mutual fund will tell you, it is bullshit. As the market goes up, usually the mutual fund will go up at a fraction of the market's rate. But when the market goes down, the mutual fund will mirror that downward trend 100%. Doesn't that prove my point?

Where's the proof you ask? Well, my own experience in years in the stock market with some mutual funds. You want more?

OK.

Read about The Performance of Mutual Funds, which asks the two questions every mutual fund owner asked themselves: "How could the market be up 22% in 1998 and my returns be only half that?" and "Why, you ask, do all my mutual funds suck?"

From the article: "the vast majority of mutual funds underperform the returns of the stock market (as represented by the S&P 500 index). Because of their excessive annual fees and poor execution, approximately 80% of mutual funds underperform the stock market's returns in a typical year."

Ahh the "experts" picking the stocks - be still my beating heart.

And what about the bear market? Oh, surprisingly, the mutual funds mirror the market exactly in a down market. From Lessons of a Bear Market from Journal of Accountancy: "In downturns, these funds mirror the market and move where the market moves". Yah don't say?


So how can you, as an insignificant little investor, with $500 to $200K to gamble, make money off the market?

You can't.

Well, you can - if you stick with the market for the long haul, and have a portfolio that is not a mutual fund but is VERY diversified, you will, after a few years make some money. IF you didn't pick the wrong stocks and got wiped out by a bear market, that is, which will get you down to a starting point. It is legalized gambling after all...


Bonus Material: The Big Boys
The big boys don't play that game - there are two main ways to make money from the markets.

The best way is inside information of course. If you KNOW that a company will make a research breakthrough, develop a new product, or acquire a company BEFORE every one else, you will make a killing. And it is not that hard to acquire information - hell, if you have a friend or a relative working for a big corporation in a high enough management place or the R&D division, chances are YOU are investing very wisely indeed in that company, in stocks or put options...

Oh fine I will post some examples - you really should use google or yahoo and see for yourself. But you are lazy. Fine - see examples of recet insider trading here, here, here.

These 13 folks made netted more than $15 million in illegal profits by trading in inside information allegedly stolen by a high-level executive at UBS Securities and a corporate attorney at Morgan Stanley..

Heck, everybody does it. Neil Bush, the president's brother, "$798,218 on three stock trades in a small U.S. high-tech company where he had been a consultant, according to his tax returns, including $171,370 buying and selling the company's shares in a single day." You don't say CNN.com?. Of course this was perfectly legal - with a name like Bush, you can't be wrong...

That is the main and most profitable way to make money in the stock market - inside information.

The second is even more jazzy and much more fun - Currency Speculation.

This has the power to destroy whole countries' economies as you, the big time currency speculator, make your money.

I will let others do the talking now.
http://chris.quietlife.net/:
The reason that selling short is seen as riskier than selling long is that because when you buy a share of stock at $50, the maximum risk to you is $50, because the price can only drop to $0. However, when you short-sell that same stock, there is no limit to how high the price of the share can rise (instead of falling, as desired). Hence, the potential for your loss is without limit.

For this reason, short-selling alone is typically a luxury of the wealthy, however a combination of short-selling and long-selling is often used to “hedge the bets” of both, in what are aptly named “hedge funds”.

This is the strategy that Soros used to make nearly a billion dollars and generate international publicity as possibly the most famous financial speculator ever. How did he do it?

In 1992, the United Kingdom joined the ERM, which was a system of fixed exchange rates as a precursor to the introduction of the euro. Because of the disparity between the economy of the UK and the countries to which its currency was pegged, popular support for ERM membership was waning. Due to this, and other factors, most economists considered the Pound to be overvalued. George Soros saw this as the opportunity of a lifetime.

Using his extensive financial resources, he very quietly secured millions in loans in Pounds, which he then converted to dollars. Once his money was securely in dollars, he went from quiet to noisy. He publicly voiced his opinion that the pound was seriously overvalued, and that he considered its devaluation to be imminent. Many others followed suit, and a run on the Pound was the result. The UK tried, unsuccessfully, to prop up the Pound, but after only three days, the UK was forced to withdraw from the ERM and float its currency, which settled at around 85% of its initial value.

Soros was then free to convert his money back into pounds at this new exchange rate, pocketing nearly $950 million in the process.


The destruction of several countries wealth and livelihood from www.garretwilson.com:

On Tuesday, May 14, 1997 speculators were increasingly selling the baht forward, putting downward pressure on the baht's price. The Bank of Thailand, however, after allowing the price of the baht to fall, formed an agreement with the Hong Kong Monetary Authority and the Monetary Authority of Singapore to purchase baht in exchange for dollars, bringing up the price overnight. On Thursday, Thai banks were cautioned not to lend baht.. Speculators found that baht prices had rose by the time their forward deals matured, but they still had to cover their short positions. This meant that the speculators themselves, by buying the now more expensive baht to cover their forward deals, raised the price of the baht even more (Henderson, 104-105).

Tricking speculators and spending reserves can only go on for so long until the economic problems surface again. As with Mexico before and with Brazil later, speculators eventually succeed in lowering the price of a currency that was not backed up by a sound domestic economy. On Wednesday, July 2, 1997, after repeated speculative attacks, the Thai authorities declared it would no longer defend its peg - the baht was allowed to float (Henderson, 108).


"Currency trading is unnecessary, unproductive, and immoral!" proclaimed Dr. Mahathir Mohammed, the Malaysian prime minister, at the Annual Meeting of the IMF and World Bank in Hong Kong in September 1997. "It should be stopped. It should be made illegal!" Malaysia had in the previous months experienced something similar to what Brazil would later endure: through the activities of traders, the Malaysian currency, the ringgit, had been significantly lowered, and Malaysia's stock and bond markets had followed along (Henderson, xi).


Although a country's economic problems can simmer for some time, a currency crisis brings the issues to a boiling point, with speculators at the forefront of one of the visible side-effects - the falling price of the currency.


By selling forward contracts for currencies, traders can realize profits if the currency price has decreased by the time the forward contract matures. By pooling large amounts of money, hedge funds can be created. By their very size, the selling of a currency by a hedge fund can cause the price of a currency to decrease.


Fascinating subject and I have just scratched the surface.

Why is currency trading so profitable to the big boys?
Read Global currency speculation and its implications.

Again, I will let the real experts (not the TV kind) do the talking:
There are three cumulative causes for this explosive increase in currency speculation:

*

Systemic redefinition: The first important act was US President Richard Nixon's unleashing of the dollar from the gold standard in 1971. 'Floating' the dollar allowed currency values to be determined by traders in currency exchange markets. Currencies from countries with strong economies and sound monetary and fiscal policies were given more value than currencies from countries with shaky or weak economies and policies. This'opening' of the system created a framework for the speculation game.

*

Legal deregulation: In the 1980s, both former President Ronald Reagan and former Prime Minister Margaret Thatcher introduced deregulation strategies. The Baker Plan, implemented by the World Bank and the International Monetary Fund (IMF), applied those changes to a dozen key Third World countries. This created a lot more leeway for movement of capital internationally, and for corporations that previously would not have participated in speculation.
*

Technology: The structural, deep-lying phenomenon behind the whole system, is the technological shift: the electronification of money and the computerisation of market systems.


From an investor's viewpoint, this new asset class - currencies - has some significant advantages over the old ones:

*

Extraordinarily low transaction costs. Placing a few billion dollars in foreign exchange costs very little; as much as 10 or 20 times cheaper than a stock transaction.

*

Twenty-four-hour market environment; one can actually play around the clock.
*

The foreign currency market is the largest and deepest market around by a long shot. If you have a few billion dollars to place, bringing them to the stock market is going to move the stock's value and tip off other traders as to what you are doing. This is true in most bond markets (except for the US and some European markets because of their large size). In foreign exchange, even $5 or $10 billion won't make a blip. So if you have a substantial amount of money to move around, this is the place to do it. You can get in and out without affecting the market.

Because of these three advantages, the act of lending money to people (to buy houses, cars, expand businesses or whatever) is no longer the best way to make money. The foreign currency market is the place to do it. Banks are no longer the big players in terms of supplying credit. In the last 25 years, banks, as a source of financing in America, have dropped from 75% of the total supply of credit to 26.5%. For the major international banks, like Chase Manhattan, Citicorp, Bank of America, Barclays, or Sumitomo, currency trading typically accounts for at least 20% of total earnings. In a good year, it will be more than 50%.


Great - now you know how the banks REALLY make their money using your money from the savings account, checking account and CD's.

So, you thought you were the shit with your $200,000 invested in the market? A big boy?

Well, until you roll with people who operate in billions of dollars, who bring Malaysia, Mexico, Brasil to its knees, to make profit from their misery, you are certainly not.

After all, you cannot affect a whole country with your speculative actions.

They can.

Good luck in the stock market, chump!

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2 comments:

Anonymous said...

Interesting take there.

The big boys can invest several milion or bilion dollars into a stock and artificially pump up its value, then once it reaches a higher price dump it making a run on the stock.

another way that the big boys manipulate the market for profit

tomosius... said...

it sucks that me and my dad had to learn all this the hard way... by losing half of our fortune ;(