by John M. Curtis
(310) 204-8700

Copyright Octorber 20, 2007
All Rights Reserved.

all Street resumed its roller coaster ride with programmed selling dropping the Dow Oct. 19 366.94 or 2.6% to an inflated 13,552.02. While the sell-off seemed triggered by lackluster earnings, the real reason involves profit-taking by the nation's biggest investment funds. Small investors don't have a clue when the big boys decide it's time to take profits. “There is a lot more people who are bullish than bearish, and there's a mentality that even a pullback would create an opportunity to buy,” said Todd Leone, managing director of equity trading at Cowen & Co. in New York, admitting that institutional investors, not individuals, take profits and then buy back deflated shares. Economic downturns or recessions don't bother Wall Street as long as the Federal Reserve Board keeps interest rates low and forces investors to keep cash out of fixed income securities.

      When the market plummets, it's up to Wall Street's PR machine to reassure investors not to stampede out of equities, signaling a bear market. For much of 2007, Wall Street has moved sideways, alternatively ratcheting up share prices and then correcting inflated values. Mutual fund investors like to ride out ups and downs, hoping investments don't shrink too much when forced to liquidate and withdraw cash. Clichés like “earnings drive the market” mislead small investors into understanding the grossly manipulated nature of Wall Street investing. Carefully orchestrated programmed buying-and-selling make a substantial amount of the profits for institutional investors, concerned about daily, weekly and monthly fluctuations in share prices. Brokers routinely counsel small investors about “long-term investing” when, in fact, institutional investors trade on a short-term basis.

      Wall Street's spin machine finds plenty of excuses to justify frenzied buying or selling. Friday's sell-off noted the 20-year anniversary of Wall Street's all-time one-day sell off Oct. 19, 1987, when the Dow dropped 508 points or 22.6% to 1,739. On today's standards, the Dow would have to drop over 3,000 points, something viewed as unthinkable. While trading curbs or circuit breakers try to prevent a plunge of that magnitude, institutional investors still have the power to “correct” the market as much as they like. If the current selling trend continues, it's Wall Street's way to pressure Fed Chairman Ben Bernanke to further cut interest rates and drive the dollar to more all-time lows against foreign currencies. If Bernanke reads recession in the Fed's tealeaves, he may have no choice but to cut rates and sacrifice the dollar, causing more wholesale and retail inflation.

      Slow-downs and recessions don't scare Wall Street, where bull markets often lead a sick economy back to health. President George W. Bush told an Oct. 17 press conference that the economic fundamentals are sound. Yet the Fed continues to cut interest rates in hope of staving off a possible recession. Central bankers don't slash rates unless the economy is sick. “Bull markets really don't die of old age,” said Philip Dow, managing director of equity strategy at RBC Dain Rauscher, hinting at what really makes Wall Street tick. “The public might not be very bullish looking at what happened this week, but institutions are because there's a feeling that you can't miss the upside in trading,” disclosing, for the first time, how Wall Street manipulates markets to maximize profits. Wall Street knows that you can't make money with long-term investing, only buying low and selling high.

      Conventional wisdom holds that earnings drive the market upward or downward. Yet when earnings retreat in slowdowns and recessions, Wall Street lowers earnings forecasts, allowing lowered growth targets to satisfy investors. Dow predicts that after disappointing earnings continue to hammer markets, bargain hunters will jump back in. When slow-downs or recession hit, consumers belt-tighten. With mortgage defaults and foreclosures on the rise, it only makes sense that consumers won't have the cash to fuel economic growth, where spending accounts for two-thirds of Gross Domestic Product. With shrinking equity and dramatically higher mortgage payments, consumers don't have the discretionary cash to sink into consumer purchases. Consumer spending takes a hit when real estate heads south. Most consumers find themselves strapped for cash and pinching pennies.

      No one knows for sure how far Wall Street insiders will take the market down before they can jump back in. Economic doom-and-gloom only affects Wall Street to the extent that they see buying or selling opportunities. Whatever today's excuses, Wall Street finds the right rationale to buy or sell. Small investors must accept they're along for a wild ride, unable to predict when Wall Street implements and decides to coordinate programmed trading. ”The fourth quarter outlook is changing as news of earnings emerges, oil prices continues to rise, the Federal Reserve October meeting gets closer, and of course, as every housing and unemployment numbers is released and related,” said Howard Silverblatt, a Standard & Poors' senior index analyst, hoping that the market returns to business as usual. Market-corrections help Wall Street's big firms lock-in big profits at the expense of small investors.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

©1999-2005 Discobolos Consulting Services, Inc.
(310) 204-8300
All Rights Reserved.