WASHINGTON, Sept. 7, 2015 — Happy Labor Day to all. And to you remaining retail stock market investors as well. Today is a happy day for you and for the Maven. That’s because nothing bad can happen to our portfolios on Labor Day. U.S. markets are closed to celebrate the way most of us actually used to make money: by working and producing goods that the public wanted and needed. It was once a fairly good deal. But now that deal is gone.
Wall Street’s “Wheel of Fortune” driven by Wall Street greed and Washington mendacity
Today, businesses — particularly those that are publicly traded — have become mere cogs in a massive wheel driven by executive greed, utter disdain for the workforce (aka “human capital”) and a machine-driven “Wheel of Fortune” attitude towards investments in stocks and bonds.
A villainous tag-team of the wealthy, the politicians they own and the regulators they co-opt or pay off, aided and abetted by the video-gamers otherwise known as high-frequency traders (HFTs) Have turned Wall Street into a gigantic casino where the house always wins.
Worse still, most of those wholly-owned politicians, a majority in both parties, claim to be the saviors of America’s middle-class and working class while actively conspiring with the wealthy to crush what’s left of our jobs, our savings and our investments.
Investing has changed and not for the better
From the Great Recession-induced market bottom in March 2009 through January 2015, the Maven, along with at least a small band of intrepid, well-informed individual investors, was generally able to extract a reasonable return on investments in stocks and bonds, combining bargain-basement high quality bonds and hard-won capital gains with investments in stocks into portfolios that consistently yielded well-above modern averages.
To be sure, such modest but profitable portfolios weren’t earning percentages that set the investing world on fire. But they were good enough returns in light of our current perilous times, which have been worsened, not improved, by a mendacious Congress that blatantly ignores the wishes of its constituents and a willfully ignorant president maniacally focused on destroying a magnificent country that his Marxist-, post-colonialist- and critical theory-driven brain has never been able to comprehend.
Part of the last several years of investing hell were deftly masked, concealed beneath the halo-effect provided by the Federal Reserve’s successive QE programs. Brought to an end in the autumn of 2014, QE dumped loads of taxpayer-financed money into the vaults of banks and into the hands of big-time traders, HFTs and hedge funds. These wealthy individuals and institutions used this essentially free money in return to buy stocks with abandon, driving them relentlessly upward to meet and then exceed pre-Great Recession averages.
Adding to the illusion, many large corporations used (and are still using) buckets of this free and borrowed money to buy back their own shares at a record pace, allowing price-earnings ratios to remain attractive to the casual observer while masking the fact that real earnings per share remained relatively static, indicating that much of the last six years’ “recovery” was really a mirage, designed to trick beleaguered and debt-laden consumers into what got them into trouble before—credit card-fueled consumption that created a sense of happiness and well-being. It was all a lie, fueled by a federal government and Federal Reserve version of “moral suasion” gone horribly wrong.
But there was a flaw with this government and fat cat mirage. First of all, once badly burned, those stupid people in flyover country stubbornly decided they’d ignore all the government and media happy talk and focus on paying off the indebtedness that had got them into trouble in the first place. Thus, those allegedly flat prices they’d been paying—and even recent plunges in the price of gasoline at the pump—merely induced these rubes to increase efforts to pay down their debt loads still further rather than perform their patriotic duty to run up those credit cards again, just in time for the next ruinous debacle to throw them out of work and gouge them again.
Even worse for our cadre of impossibly wealthy, elitist thieves and their government toadies, while all those skeptical consumers were busy being sensible and prudent, a largely unregulated Wall Street ran wild, earlier creating complicated ETFs by the boatload and then purchasing high-powered computer platforms and brainy young nerds to invent other investments, algorithms and associated scams to fleece middle America, robbing them of whatever wealth they may have had left.
These government and private sector thieves – the 21st century’s robber barons – succeeded in transforming what had traditionally been a market of stocks and a relative store of value for Everyman into a massive private Las Vegas where the house—the elites and the wealthy—always won. They cleverly and greedily deployed their massive wealth and computing power to create illusory prices, massive, erratic market moves, and other baffling happenstances geared toward robbing those prudent institutions and investors still trying to put money to work in a rational manner.
Markets are now a sophisticated, machine-driven operatic tragedy in three acts
Often vilified (with some merit) as today’s clown prince of investing, CNBC’s Jim Cramer—a onetime hedge fund manager, lest we forget, and thus in the know when it comes to current market shenanigans—recently outlined the bizarre and obscenely manipulated Slough of Despond this market has become for investors large and small.
That includes their 401(k)s, BTW, which are being severely battered by the Greatest Casino-Based Video Game in investing history even as their negligent and indifferent employers provide them with few viable investment choices in those vehicles..
Cramer notes—with stunning accuracy—the three-act tragic opera that each Wall Street trading day has gradually become. He calls it the “three markets”:
The first session occurs at the opening bell, and is driven from the data and stock market action in China and Europe. The futures now completely control the morning session…. Bad news will come out of China, and then the Chinese stock market will tank, and then its stocks will be either halted or propped up by the Chinese government to try and assure investors that there is more order to the chaos.
And of course when the Chinese market is down, Europe will also trade down. The two continents are somewhat linked, because 25 percent of China’s exports go to Europe…. [Then] the U.S. market goes down harder than Europe because of investor’s newfound negative bias.
Act I sets the table for the even more vicious Act II:
The second session takes place at approximately 11:30 a.m. ET every day and is entirely dictated by sellers…. [These] ‘margin session’ [are] driven by speculative traders who have borrowed money from their brokerage firms on margin.
On a hideous trading day, the value of collateral held in these investors’ accounts will drop significantly, prompting margin clerks to send out margin calls. If the investors do not wire in more money, then securities must be sold to raise the money.
That margin selling can last until 2 p.m. and flood the market if there are a lot of margin calls.
Thus ends the daily bloodbath of selling. But not quite. A tragic opera always wraps up with an inevitable tragic climax where all the chickens, whether just or unjust, come home to roost and where hubris (pride) is often punished.
… with an abundance of margin calls, the third session called the ‘ETF-dominated session’ is created.
The final ETF session kicks in at approximately 2:45 p.m. ET each afternoon [ETF Digest impresario Dave Fry calls this the ‘Sell Program Express’] when exchange traded funds have to settle up. When someone buys an ETF that bets heavily against stocks, it settles up by knocking down the stocks. The same thing occurs with a bullish ETF, as they use leverage to magnify their influence.
Typically you don’t see them play such an outsized role, but this is not a typical market.
Generally corporate buybacks will cushion the blow to ETF selling, but buybacks are halted at 3:30 p.m. ET every day so the company cannot control the price of its stock at the close. However, right now the market is so thin that these ETFs are now determining the close…. As a result, traders now spend the afternoon trying to figure out how the ETFs will settle up so they can determine the direction that the market will close.
Similar to the Maven’s observations above, Cramer concludes, “None of these sessions has anything to do with individual stocks or the underlying fundamentals of a company. For now, the old fashioned methods of trading have been thrown out the window. Instead, it has created a new world of futures, margin and ETF dominance.”
The Maven’s point, exactly.
In other words, Wall Street has steadily evolved into its present state, a machine-driven, full-time day-trader’s market. Investing in it is a crapshoot, and the stock pricing we see on our own machines may be increasingly illusory. Worse—something Cramer doesn’t mention—machine-driven trading is all about precise timing measured in nanoseconds along with the concurrent ability to grab and act on breaking, headline news (and carefully placed rumors), all of which the machines can discover well before such true (or false) information reaches the investing public.
What’s a small investor to do? Some preliminary notions
Until and unless things change in the world’s biggest den of thieves, the Maven is going to have to recalibrate the tactics and techniques he’s employed as a successful investor for over 35 years. Right now, as 2015 staggers to a close, it’s clear that Wall Street is broken, perhaps irretrievably. Traditional patterns and valuations no longer drive stock prices. Instead, the game now is to predict either what the machines will do next, or how and where the system is being gamed and manipulated at the moment. This can actually be done. But it’s hard without the kind of expensive hardware and brainpower the enemy can well afford to deploy.
This tactical shift will take some doing. In the meantime, the Maven will continue to reduce positions, go more and more to cash, and re-enter the market only when prices have clearly bottomed and when at least some of the nonsense has lessened.
Many of us are down in 2015, but we don’t have to be out. There’s still money to be made in this game. But the rules have changed radically, at least for now.
Since the federal government and its toothless watchdogs have chosen to abandon their responsibility to protect the average investor by maintaining a market of stocks with a level playing field, we’re going to have to figure out how to do this ourselves.