Wall Street's Amnesia Cheerleading

by John M. Curtis
(310) 204-8700

Copyright December 4, 2011
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               Wall Street’s spin machine cheered for what they called the best weekly performance since 2009, inviting investors to jump back in the market now that the traditional year-end rally has formally begun.  While it’s true that the Dow Jones Industrial Average gained about 800 points in one week, it’s also true that it lost over 1,000 points the week before, making it the worst weekly performance since 2009.  Investors need to stay sober and realize that the economy remains dangerously close to a double-dip recession, prompting Federal Reserve Board Chairman Ben S. Bernanke to keep interest rates at historic lows.  If the economy were really improving as Wall Street’s PR machine would have you believe, Bernanke would have ratcheted up interest rates at the last Federal Reserve Board Open Market Committee meeting, something that didn’t happen for good reason.

            Wall Street’s PR machine manufacturers more fantasies than Grimm’s Fairy Tales, frequently citing economic data, politics, world events or any other news item to justify the kind of roller coaster buying and selling frenzies all too common in U.S. and foreign stock markets.  While it’s partly true the news drives the markets, it’s also true that the markets drive the news.  Sophisticated programmed buying and selling goes on daily to maximize Wall Street’s profits and minimize losses.  Long-term investors can only pray that steep market downturns are counterbalanced by equally steep market rallies.  Most IRA and 401k investors are at the mercy of major mutual funds that buy or sell massive amounts of shares to move the market up or down.  Add to the mix, short selling hedge and private equity funds and you’ve got a market so volatile, so dangerous, that investors should run for the hills.

              Today’s drop in the jobless or unemployment rate from 9% to 8.6% was more welcomed news that you’d think would rocket markets upward.  Yet the Dow, Nasdaq and S&P all finished slightly down, signaling that more sell-offs could be on the way next week.  When major funds buy back in and take “long” positions markets rocket upward, as seen by the last three days.  Real, steady growth is not marked by rapid swings to the upside or downside.  Before small investors jump on the bandwagon, they need to see, slow, methodical rises in market averages.  Not sudden bursts to the upside or downside.  Violent swings, up or down, signal more volatility caused by unregulated hedge and private equity funds shorting the market, where they bet against further rises in stock prices.  While all eyes are on the European Central Bank’s next move, all eyes should be on unregulated hedge and private equity funds.

            Without some responsible regulation of hedge and private equity funds, markets continue high levels of volatility, where rapid gains give way to instant profits, causing a sideways stock market.  Sideways markets don’t generate enough market capitalization to encourage publicly traded companies to add more jobs.  For long-term economic growth, the stock market needs to rise over time, without today’s frequent fits and starts.  When President Barack Obama signed into law financial reform July 20, 2010, it didn’t include regulating hedge and private equity funds.  Nor did it end the risky practice signed into law in 1999 by former President Bill Clinton or Gramm, Leach Bliley that tossed out Glass Steagall and allowed banks to own brokerage houses and engage in risky stock market trading.  Regulating hedge and private equity funds would go along way in reducing dramatic market downturns.

            Before investors jump back feet first, they need to see more progressive signs of growth, especially improvements in retail sales and the real estate market.  Since the 2008 financial meltdown, banks have been unwilling to lend out cash to even highly qualified borrowers.  Unless banks lend out more money, the real estate market remains flat, siphoning off homeowners’ cash necessary for fueling the consumer economy, roughly two-thirds of the nation’s Gross Domestic Product.  “There’s an increasing expectation that when leaders meet next week they will have the framework of a resolution that will allow greater fiscal unity and some beginnings of a resolution in the European debt crisis,” said Nicholas Colas, chief market strategist at ConvergEX Group in New York.  Statements by insiders like Colas are designed to blow more smoke about how profits are really made on Wall Street.

             Whether or not the European debt crisis or any other manufactured event resolves or not, the nation’s biggest mutual funds and unregulated hedge and private equity funds continue to wreak havoc on long-term investors.  Most long-term investors can live with market run-ups and sell-offs as long as unregulated private equity and hedge funds game the market by short selling.  Unregulated short selling sends ordinary sell-offs into prolonged nosedives, preventing publicly traded companies from retaining enough market capitalization to add full-time permanent employees.  “We’ve been led down this aisle so many times we’re afraid the groom’s not going to show up again,” said Colas, warning small investors to stay skeptical.  Year-end rallies can end badly with major funds pulling the rug out from long-term investors, suddenly reversing gears and dumping stocks.

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.

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