MONEY 48 - STOCK MARKETS

THIS IS MY 48^TH POST ON UNDERSTANDING MONEY TOOLS

In this blog we are going to talk about the stock market and the real world. I would imagine most people who buy stocks or mutual funds believe that it operates under the principles of an honest free market made up of buyers and sellers from all over the world. These buyers and sellers place orders through stockbrokers, investment banking firms, banks, or through on-line services. The vision comes to mind of each night’s news drawing to a close showing the floor of the New York Stock Exchange and traders with slips of paper in their hands yelling out buy orders or sell orders at requested prices.

Did you see the segment on 60 minutes August 17, 2014 on the stock market and how “rigged” it is? I hate to bring the bad news to you, but it is both rigged and crooked, and so are so many things in life.  Like most industries trades of stocks and options are mostly not placed with the human element any longer, but with computers in fractions of a second. Permit me to digress. I have been on the floor of the New York Stock Exchange several times and had wonderful lunches in the “member’s dining room of the New York Stock Exchange. One close friend owned two seats on the exchange and leased them to Bear Stearns, and loved working on the floor as a trader. What a blessing to love your work. He was awarded the “oldest person” to work on the floor in his later years.

World investors aren’t interested in making money by purchasing a stock and holding it for 6 months, or a month, week or day; it’s get in, get out, make money. As 60 Minutes pointed out it is now down to faster cable lines and connections. I’m not selling 60 Minutes, however some time ago they did a similar segment. The owners of an investment and trading company knew nothing about stocks and bonds, however they were very good at designing computer software that would permit their computers to trade in fractions of a second when certain variables were favorable for a trade that made money.

Is this rigged and making money new? Heck no.  Unfortunately, greed is a human element. Fear is one of the only human emotions stronger, and of course politicians use it every day. The opportunity at one point to buy Microsoft was at hand in the 1980s. I passed knowing nothing about high tech. Then, missed again because of names of companies, Yahoo, Apple, Google and more. Who would buy a stock with such names? Answer is wealthy people today.  I let fear in. 

In the late 1960s and 1970s I lived in Vail, Colorado,  surrounded by the wealthy. In about 1971 I was at the home of one of these wealthy families for dinner. I was tipped off on a particular stock by a New York stockbroker, so I asked the patriarch of the family what he thought about my buying the stock. His words I will always remember, “don’t get involved with the purchase, we have several floors of employees analyzing stocks and companies and most times we have bought and sold a particular stock and  made money before you and others get in”.

I have worked for several wealthy US families. How do many make their money in the stock market?  They remove variables. How do you remove variables?  They primarily deal on qualified inside information. The network of the inside “boys” is extensive, but it doesn’t reach you nor me.  When you work for these families you typically sign confidentiality agreements so that no information goes out the door, so with that said I will leave the topic.

Money managers running top funds are just as bad. They regularly have conference calls to see what corporate information has been leaked at the clubs and cocktail parties. These wealthy families employ young business graduate students from top colleges to assist in gathering of information for analysis. Several of the “wealthy” have at least two separate stock departments, one for buying a stock and going “long”, and another for selling stock and selling “short”. We have discussed these techniques of investing in previous blogs.

Is this the end of the stock markets being rigged? No. I have been privy to much more including using phony names, telling companies you are interested in buying the stock, wanting to talk to the CFO telling him/her you are interested in buying a big block of their stock, when in actuality your employer is intending to substantiate information to warrant shorting their stock.

Over my work career I have been retained as a consultant for a large regional investment banking firm. Here is another note of corruption that historically happened. As I have covered in prior blogs when a company goes public there is a managing investment banking firm. That firm also acts as a market maker, or controller of the price of the stock. That firm allocates certain amounts of stock to other investment firms and “institutional” buyers. Some of the wealthiest families are designated institutional.

If a company’s financial performance deteriorates normally the managing investment firm will know. If they have hold a lot of such a company’s stock it has been known that they will tell their top brokers who have performed well for clients to lay off and recommend this stock so the “house” does not get stuck with the loss. So much for ethics. This behavior goes on regularly and yet no one has gone to jail since at least 2008 because of corruption.

Now, the news is that Wall Street is heating up again with the same derivatives that took down the US Banks and some countries around the world like Iceland. Regulation of the financial industry has only hurt the middle class with tight money and restrictions, while Wall Street and the large banks go unpunished even after the US taxpayers bailed them out.

After hours trading?  You may think the stock market is open certain hours during the day.  Trading goes on around the clock. You buy what you think of as a safe stock, and all of a sudden the next morning you check the price and it has lost major value.  Happens all the time.  Negative news slipped out, and people sold the stock overnight, unbeknownst to you. You can use techniques of trading place a “stop loss” or a “market sell order” at a specific price. The only problem here is that I have used especially the stop loss to hedge on my market downside and protect profit only to learn that a stock slipped past my stop loss sell price, and then headed back up again, thus I was out of the stock and albeit making a bit of money was out of any future profit in the market price rising.

To place a hedge to protect your profit in a long stock position, you can use stock options. You can buy a put option or sell a call option, both are betting that the stock will go down. I believe we have discussed this in previous blogs.

Ending on a note of market direction…who knows. This past week George Soros, one of the biggest hedge fund managers,  shorted $2 billion worth of a well-known index to hedge his long positions in stocks. He and his partner in Singapore, Jim Rogers who I have followed since the 1970s and early 1980s when he cruised the world on his motorcycle looking at companies, should know which direction the markets are going but they don’t.