Tuesday, August 31, 2010

The Revenge of “Dumb Money”!

For many years, Wall Street’s broker honchos have dismissed ordinary small guy investors, including retail investors, as “Dumb money” or “dumb order flow”. At the onset of each Bull cycle they’d sit back and watch as the “dumb money” bought in - hoping to amp up their savings – only to laugh as they were “plucked like chickens” when the “smart money” cashed out leaving little guys to suck up the losses.

However, according to the article ‘Investors Resist the Siren Call of Equities’ in The Weekend Financial Times (p. 15) this game is over. The article pointedly notes how millions of ordinary investors are shunning “the siren call of bullish Wall Street analysts” and pumping money into money market funds instead. In other words, these investors no longer wish to serve as willing hosts to the parasites of the Street.

They’ve seen the writing on the wall for months, including: the crash of two equities markets in the past decade, the Madoff scandal, the bailout of Wall Street banks and all crowned by the May “flash crash” – exposing the perfidious hands of high frequency traders who can sell off millions of shares before a small guy can reach his phone. (Using a peculiar leverage ploy, wherein the high frequency computers insert penny orders in front of all those by small fry, thereby leveraging their 'buy' intent to their own advantage).

Mike Mackenzie in his sideline article on the same FT page (‘Achilles Heel of Professionals shown up by dumb money’) acknowledges that the small guys have made the right call:

The ranks of retail investors, commonly derided as ‘dumb money’ by the Street, have made the right call on equity and bond markets in 2010

The author goes on to note that as recently as July “bullish research notes” were being put out by analysts, calling for "higher stocks”.

But retail and small guy investors weren’t buying. They’ve figured out the stock market is merely a large, sophisticated casino in which the larger or faster players (flash traders) have rigged the game to win nearly all the time – as little guys lose their asses. In that respect, things haven’t changed much since the “investment trusts” (touted as lifelines for ordinary citizens) were created in the 1920s.

As I noted in a number of previous blogs, the tactics of Maul Street are always the same and the objective is to suck up the hard earned money of 401k and IRA- investing small fry to make the rich richer. The strategy begins with analysts and pundits humping and pumping the "bullish outlook" and “new opportunities to buy in” thereby luring the money minnows. As the buy-in increases the price to earnings ratio is inflated – raising the share price, signaling the power investors to cash out while little guys (spellbound under the “buy and hold” mantra) remain and get clobbered. It has happened repeatedly and appeared to be on the way to happening again…when the small fry wised up.

The revenge of the dumb money has been fierce, from hatching a “sour mood” among the money men and green eyeshade types, to the Duquesne Hedge fund pulling back on its buys, delivering “a type of shot across the bow that people in the industry could well look back upon as a foreboding omen”.

Of course, not all of Wall Street’s hotshots are daunted, and as Mackenzie points out: “for many on Wall Street the pain has been minimal” . He adds that this “underpins their usual bullish take on stocks and why they think the economy is currently experiencing a soft patch”

But their false optimism has blinkered them to harsh economic realities. Namely, that we are on the verge of massive deflation as the unemployment rate continues to remain high and will only decrease if the BLS drops workers off the rolls as “discouraged”. This, I predict, will lead to even higher unemployment until one of two things happens: government pumps in more stimulus for truly massive jobs creation (NO more tax cuts!) or corporate America finally begins using some of the $868 billion in cash reserves it’s sitting on to create jobs. If neither happens, people will continue to pare back spending, retailers will be forced to cut jobs and inventories and stock share prices will be volatile or even fall. I predict the latter with a DOW at 9,100 (or lower) by December. (It's near 10,000 now- this before the close today, 8-31)

So long as the “dumb money” steers clear of the rigged stock market, the revenge can continue and eventually all the money men will feel the pain. What's not to like?

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