Is the stock market going to tank?

[Benny Profane]

http://online.wsj.com/article_email/...TYxNTEwWj.html

How Traders Killed Value Investing
Want to know why GM stock is above zero? Look to hedge funds and short-term trading.
By DAVID WEIDNER

Long before the June 1 negotiating deadline, it became quite clear that General Motors Corp. was headed for bankruptcy. Its debtholders were going to get crushed. The shareholders were wiped out.

Except that they weren't. As the deadline neared, shares of GM did a funny thing: They kept trading at more than $1 each. They didn't disappear.

Last month, shares rose a few pennies during a given trading day and fell a few pennies the next. Taken as a whole, GM shares reflected nearly $1 billion in value that did not exist. Even today, with GM in bankruptcy, the automaker's shares are trading around $1.50.

Market analysts seem baffled, but trading in GM reflects the sea change that's taken place in the markets during the last decade. Simply put, the market has slowly given itself to short-term traders. The traders control volume, and whoever controls the volume controls the price.

The old notion that profitable companies with good growth prospects should have rising share prices -- and that failures like GM should be gone, or at least trading in the pennies -- is history.

Today, a hedge fund investing billions using a quantitative formula can stall a stock; a couple hedge funds aligned can turn a profitable company into a Dow laggard. Toss in a few short sellers and you have the great Wall Street collapse of September 2008.

It wasn't always this way. Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company's prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models.

Those fellows are a far cry from this generation's masters of the universe. Traders are in charge now. They rule the market. They dominate volume. That stock you bought because you thought the company was in good shape? It's a pawn in the hands of a computer model or some supertrader like Steven Cohen at SAC Capital Partners or Bridgewater Associates' Ray Dalio.

To move a security, they don't need to own it. They can have a short position. They can put an order to sell 1 million shares in a dark pool, those anonymous marketplaces that operate outside the walls of the exchanges. They can own options or futures contracts. Buy enough GM puts and watch the price begin to fall under the pressure.

Stocks As Targets
For the long-term investor, whether you're investing for retirement or simply betting on a company's potential success, the payoff is suddenly in play -- every stock is a potential target of forces outside of the traditional movers.

The buy-and-hold guys are still there, but lately they've been less successful than their hedge-fund counterparts.

Mr. Buffett and Mr. Miller ride the wave of the overall market, hoping that their undervalued holdings will someday be valued by investors. The hedge fund guys create their own wave. Mr. Buffett is slow and deliberate with his investments, usually holding stakes for years. By comparison, Mr. Miller is a speed demon. He turns over 20% of his portfolio every year.

Quants, hedge funds and today's new breed of trader can turn over their holdings in a day or even just a few hours.

Slowpokes like Mr. Buffett and Mr. Miller don't bring Wall Street enough fees for the brokerages to care about them. For all the success markets and regulators have had in slashing trading costs, those reforms have inadvertently hurt small investors.

Mr. Cohen and Mr. Dalio are exactly the kind of customer Wall Street cares about. You and the guy who runs your retirement portfolio couldn't provide enough fees to buy a dinner and drinks at Dylan Prime for the prime brokerage trading desk, much less a Bentley. The brokers just want to handle the action and they don't care what kind of order you place: long, short, puts or calls.

As spreads on the exchange have shrunk, trading margins squeezed middlemen on every transaction. The best way to offset those losses has been to increase the number of transactions. Brokers have been happy to step up to heavy traders such as hedge funds and provide margin loans. Those loans not only increase volume, but carry more lucrative fees.

The special attention paid to big traders doesn't only distort the market, it leaves fewer resources for investors with longer time horizons. During the last year, about 2,000 sell-side research analysts -- the guys paid to inform investors -- have exited the business, according to an earlier report in The Wall Street Journal.

And why not, when machines make so many of the day's trades?

Wagging The Dog
Program trading, which mechanizes a variety of trading strategies, accounted for about 30% of volume on the New York Stock Exchange in May, compared to 10% a decade ago. It was just 4.6% for the same month in 1989. The NYSE cautions that its methodology for counting program trades has changed over the years, but you can see the trend.

A 2007 study by the consulting firm Greenwich Associates found that the credit derivatives market -- the vast network of agreements and contracts that bet on debt -- now drives the pricing of the corporate bonds that underlie those derivatives, a development akin to the rabbit chasing the hound.

Money managers have complained this trend is making corporate bond prices more volatile. The study concludes: "In many ways, hedge funds have become the market."

A market dominated by nontraditional trading forces explains, in part, why GM shares have kept so much value. Arbitrage traders make a lot of contrarian moves. They buy to cover their short positions. They sell to take a profit. All they really need is for the price to move.

There's no simple solution to the problems of the market. A few proposals today aim to improve things a bit, such as the elimination of naked shorting, reinstatement of the uptick rule and more transparency of traders' holdings. Some people, like Grant Thornton's David Weild are calling for separate markets for certain securities, such as newly issued stock.

But separating investors from traders in the market would destroy it. The market needs both. Traders, after all, provide regular price discovery and the other side of the deal. They keep the market moving, but they've also replaced investors as the market's driving force. Don't bet on that changing anytime soon.

Write to David Weidner at david.weidner@wsj.com

[ICEHOCEY77]

They can own options or futures contracts. Buy enough GM puts and watch the price begin to fall under the pressure.

Reminiscences of a stock operator would say that price would continue in the direction it was going beforehand. Unless there was already underlying sentiments.

[Sea 2 Ski]

A better question is when does the Dow hit 14,000 again. I'm thinking sometime between 2012 to 2030.

[iceman]

A better question is when does the Dow hit 14,000 again. I'm thinking sometime between 2012 to 2030.

Way to narrow it down, bro.

I'll take the under, definitely over 14K by 2121. In a huge way. All the stocks I've bought at 7,8, 9, will be buying me drinks on the beach on St. John in 20 years.

In case that doesn't work out, I've learned to repair shoes, I've bought some pots and pans and some fake medicine, and I've bought a donkey to carry my wares from village to village.

It's really amazing that people pay you guys for advice. Why pay for a horse's ass when you can get a whole donkey for dirt cheap?

[tronacate]

[Hutch]

^^^^^^^^^^^^Looks like you've got it all figured out there, flyboy.

[Stu Gotz]

“While rational expectation is returning to part of the investment community, most are still trapped in institutional weaknesses that make them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in the business world need something to do. Since they invest with other people’s money, they are biased towards bullish sentiment. Otherwise, if they say it’s all bad, their investors will take back the money, and they will lose their jobs. Governments know that and create noises to give them excuses to be bullish.”

This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than owning bonds in the U. S. market, lost big in Japan and emerging markets in general. It is astonishing to see how a value-destroying industry has lasted for so long. The bigger irony is that the people in this industry have been 2-3 times as well paid as in other industries. The key to its survival is volatility. As markets collapse and surge, it creates the possibilities for getting rich quickly. Unfortunately, most people don’t get out when markets are high like now. They only go through the ride.”

--Andy Xie, former Morgan Stanley economist

[liv2ski]

Looking at the 3 month S&P 500 chart, looks like it has broken through support to me. I am super nervous about the current levels holding.

[4matic]

It's quint expiration week so we could easily test both sides of the range 903-950 SP00

[ICEHOCEY77]

The yen is blowing through all kinds of supports right now. Tomorrow, 8572 is a key area of support, it held today. It held as resistance 4 times during the month of May on the daily chart, but if 8572 can't hold then around 8500 the 150 EMA is lurking.

[Stu Gotz]

It will be interesting to see what happens to the various capital markets as California gets closer and closer to whatever the end game is.

[Steven S. Dallas]

as California gets closer and closer to whatever the end game is.

It's not a great scene when people are actively praying the Big One hits before the next mortgage payment is due.

[Benny Profane]

We'll bail them out somehow. New York next. Moral hazard, my ass.

[bean]

It's not a great scene when people are actively praying the Big One hits before the next mortgage payment is due.

I doubt that's the case. Stop paying your mortgage and bam, free housing for a year (or more!).

[Benny Profane]

"opacity reduces scrutiny and confers power on the few with the ability to pierce the veil."

[Benny Profane]

Robert Reich

THURSDAY, JUNE 18, 2009
Does the Obama Plan for Reforming Wall Street Measure Up?
In a word: No.

The plan doesn't stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn't require bankers to take their pay in long-term stock options or warrants, and it doesn't even hint that banks should go back to being partnerships instead of publicly-held corporations.

All this means traders still have very incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets.

Nor does the plan do anything to prevent banks from becoming too big to fail. It doesn't hint at a return to the days before the late 1990s when commercial banks were separate entities from investment banks -- before mammoth bank supermarkets like Citigroup came to be so tied up with so many other commercial and investment vehicles that they couldn't be allowed to go under. And there's not the slightest mention of antitrust, to break up the largest banks.

The plan does focus on a few conflicts of interest, such as how credit rating agencies are paid. And it does establish a new agency to oversee all forms of consumer loans -- thereby helping make sure borrowers know what they're getting into, and can comparison shop. But these are small potatoes relative to the size of the overall problem. The Fed is given new oversight powers, but there's no suggestion that regional Fed bank presidents, who already have a substantial oversight role, should be recruited from the ranks of people who are not bankers and don't have a big financial stake in keeping oversight to a minimum.

In short: It's a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 -- which lead to the biggest taxpayer bailout in history, very likely the largest taxpayer losses on record, and the largest investor losses since 1929 -- will repeat itself within a decade, if not sooner.

In fact, the banks that have repaid their TARP money are already planning to resume supersize bonuses, even though many of them are still awash in toxic assets and their non-performing loans are up. Bad credit-card and commercial property debts are mounting. Foreclosures are soaring. Yet several of the big banks are showing profits. How are they pulling this off? First, they strong-armed the Financial Accounting Standards Board into allowing them to assign whatever value they wanted to all the junk on their balance sheets. Then they played hardball with the Treasury staffers whose so-called "stress tests" lapsed into little more than negotiations over numbers and probabilities. (The national unemployment rate is already approaching the highest unemployment rate in the stress tests.) Then they convinced investors that financials have hit bottom and were now good bets. Presto!

Watch your wallets. The Street is up to its old tricks. And the White House's so-called reform is little more than a whitewash.

[tronacate]

NDX outlook:

[tronacate]

S&P

[tronacate]

[Moeghoul]

We'll prolly retest the lows. My outlook is we chop sideways and lower into June, then we hit an inflection to retest lows.

So far so good.

[tronacate]

So far so good.

Probably one more countertrend rally to get everybody's enthusiasm at fever pitch, then the big rollover to new lows. Depression if that happens.

[tronacate]

Looks liks a big bearish head and shoulders on the Dow 60 min forming.

[Moeghoul]

Looks liks a big bearish head and shoulders on the Dow 60 min forming.

Bailed outta all my PM stocks when gold hit 965, been in cash for a coupla weeks, started adding back miners at the end of the day today. The dollar is trying hard to stay above 80. No idea if it goes higher or lower, but I'm betting lower. Good luck all.

[tronacate]

Bailed outta all my PM stocks when gold hit 965, been in cash for a coupla weeks, started adding back miners at the end of the day today. The dollar is trying hard to stay above 80. No idea if it goes higher or lower, but I'm betting lower. Good luck all.

I don't think the Fed can pump the economy enought to cover debt destruction. We could easily see a continued destruction in the value of all asset classes.....real estate, commodities, equities, bonds. Good luck "recovery" if interest rates rise further.
Any real estate price increases is a countertrend dead cat bounce imo.

A dollar opinion:

"The [U.S. Dollar Index] is either ready to explode higher in a third wave, one that should carry well past 84.00, or the index is in a smaller-degree fourth wave that will soon lead to a fifth-wave down to beneath 78.33 to complete wave (C). Our stance is that as long as prices hold above 79.19, the June 11 low, we remain near-term bullish in anticipation of the strong third-wave rally. However, any break of 79.19 would mean the opposite, that a fifth-wave down to beneath 78.33 was probable prior to a more solid and lasting bottom (per the alt. line on the chart). So the wave structure has provided us with a set of parameters in which to judge price action."

[liv2ski]

Dollar is set to tank, as the wife and I will be traveling for a few weeks.
Your welcome.