REVISITING WALL STREET’S BIAS! June 20, 2008.

No matter where we are in a cycle an investor listening to Wall Street representatives on financial TV shows, or seeing their advice in financial publications, hears only that they should be buying stocks somewhere, never anything about taking profits, or heaven forbid, repositioning for the downside by selling short, or buying inverse mutual funds and etf’s.

To hear Wall Street tell it, there is no time that it’s wise to sell, no time that it’s wise to take profits. Oh sure, after a big decline has created serious losses in a sector or the overall market, Wall Street’s advice turns to talk of if the bottom might be near, whether it’s time yet to buy the tech stocks, or the financials, or the home-builders again, implying that, although you didn’t hear it from them, there certainly had been a time to sell them.

But that would be market-timing you say. And Wall Street tells us the market can’t be timed. Even after two hundred years of the most successful investors in each generation, hedge funds, corporate insiders, and mutual funds, proving otherwise, too many investors still believe it.

There are forces at work that prevent Wall Street firms from admitting how well market-timing works, even though that is the strategy they use for their own money.

To begin with, there’s no profit for Wall Street firms, only problems, if they tell investors when to sell.

 Among the problems, a firm that issues a sell recommendation will reap the wrath of the corporation whose stock they advise selling. They will certainly not get their share of the company’s future investment banking business. In addition, mutual funds that own the stock will be angry, and mutual funds are far bigger customers of brokerage firms than are individual investors. When the time comes to sell a stock, or a lot of stocks, mutual funds want to quietly unload their portfolios while individual investors are still buying. Otherwise who could they sell to?

It might help investors realize the game Wall Street plays if we recall the late 1990s.

In 1997, Wall Street was pushing the Internet sector hard, which was a good move that worked until 1999, pulling investors into those stocks, with most making good paper profits. But investors were not told to take their profits in 1999. It was only investors thinking for themselves, and noticing that those who were recommending Internet stocks, including the founders who dreamed them up, the venture capitalists who financed them, and the institutions that were favored with the shares in the initial public offerings, were selling them as soon as lock-up periods ended. They were not holding them for the long-term growth that was promised.

 Sure enough, the Internet stocks crashed in 1999, with no forewarning from Wall Street, except their own prior selling. The average Internet stock plunged 65% in a matter of months.

 Wall Street quickly changed its story. It was the high-tech stocks that ‘enable’ the internet, those that provide the software, fiber-optics, switching networks, and the like, that were the place to be. After all, the internet is here to stay. So, no matter whether internet companies themselves make a profit or not, the high-tech sector would thrive and grow for decades.

 So the high tech sector, already over-valued, soared into a bubble by March of the next year, 2000. Then, again with no warning from Wall Street, the bottom dropped out. The Nasdaq plunged 34% in a month, and was down 67% twelve months later.

And once again, while Wall Street institutions were still touting high-tech as the place for investors to have their money, the institutions themselves had been moving the opposite way with their own money.

As I reported in this column in April, 2000, “The statistics show that 81% of the selling in the tech sector over the last 6 weeks, (and it was considerable, with volume on the Nasdaq hitting numerous new daily records), was by Wall Street institutions, while public investors remained confident. Mutual funds have reported very little in the way of selling or redemptions by individual investors. Brokerage firms say they also see little increase in selling by individual investors.”

So Wall Street obviously knows when to sell, knows the market can be timed, but won’t ever tell you when to sell. That’s a decision you have to make on your own.

The market can be timed, and certainly not only by Wall Street institutions, mutual funds, hedge funds, and other so-called ‘smart money’. My Seasonal Timing Strategy (STS) has more than tripled the S&P 500 and Nasdaq over the last nine years (since it was introduced publicly in my 1999 book Riding the Bear – How to Prosper in the Coming Bear Market), with no down years and only 50% of market risk. It’s also well ahead of the market so far this year, with the Dow having fallen 8.5% since our STS exit. (We have the Aggressive Seasonal Timing Strategy 50% positioned for the downside, so far making more profits from the downside).

And in my Market-Timing Strategy my technical indicators triggered a sell signal four weeks ago, and I had my subscribers begin taking profits from upside positions, and move into downside positions, reaching 50% downside positions, 20% cash, and only 20% left in upside positions two weeks ago.

I may be wrong. It wouldn’t be the first time. But the fact that Wall Street says it’s not worried, and is still recommending retail stocks, financial stocks and emerging markets to investors, even as they plunge lower, is no reason for me to think so.

 

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beating the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

 

BY MICHAEL WEBSTER: INVESTIGATIVE REPORTER Sept 18, 2008 1201 PM PDT

U.S. government law enforcement agencies including the SEC, FBI and DOJ are on alert and are believed investigating terror and other related short selling illegal manipulation of the market place.

It was reported that between August 26 and September 11, 2001, groups of speculators, including Middle Eastern country investors, some reported connected to terrorist such as Al Qaeda and the Ben Laden family, these groups were believed connected to predicting the demise of certain airline and buildings including the New York Trade Center. Still others were identified by the American Securities and Exchange Commission as Israeli citizens, who sold “short” a list of 38 stocks that could reasonably be expected to fall in value as a result of the pending 911 attacks. According to the reports these speculators operated out of the Toronto, Canada and Frankfurt, Germany, stock exchanges and their profits were specifically stated to be huge. Apparently none of the suspicious transactions could be traced to bin Laden because this news item quietly dropped from sight, leaving many people wondering if it tracked back to American firms or intelligence agencies

The feds have seen a possible similar trends operating on Wall Street recently and no end to the panic selling on Wall Street. US corporate regulator, the SEC, is seeking to ease the terror by implementing emergency rules relating to short selling.

This possible action will be stronger than the recent use of the emergency powers that the SEC invoked in July to slap a temporary ban on “naked” shorting of 19 companies, including the mortgage insurers Fannie Mae and Freddie Mac, and a number of major investment banks and commercial banks. The new aim will be to stop “unlawful manipulation” of American companies and their stock and to hopefully help to maintain orderly markets. Just how much damage has been done is not known but is believe catustrafic.

Short selling of stocks involves the opportunity to gain large profits by passing shares to a friendly third party, then buying them back when the price falls. Historically, if this precedes a traumatic event, it is an indication of foreknowledge. It is widely known that the CIA uses the Promis and other cutting edge software to routinely monitor stock trades as a possible warning sign of a terrorist attack or suspicious economic behavior. A week after the September 11, 2001 attacks, the London Times reported that the CIA had asked regulators for the Financial Services Authority in London to investigate the suspicious sales of millions of shares of stock just prior to the terrorist acts. It was hoped the business paper trail might lead to the terrorists.

The US Government as a result of the recent falling market has now nationalized Fannie Mae and Freddie Mac, by investing American tax payer’s money to hopefully bail them out. US Government has also nationalized the world’s largest insurer, American International Group, (AIG) which was not on the SEC’s list. That so far has cost the American tax payer an additional 80 million for an 80% ownership of the shares. This nationalization of Massive American institutions is a socialization of America. The government claims by placing them in what it dubs as “conservatorship” will give the American people the opportunity to make money should the government be able to turn it around. However even should they make money on the deal it is hard to see how the American people could benefit from it, according to Wall Street insiders? All this while two of the major investment banks on the SEC list have now disappeared — Lehman Bros and Merrill Lynch. 

Naked” short selling practice is technically not illegal, but dealer-brokers are required to have “reasonable grounds” to believe the securities can be borrowed to enable settlement.

The SEC has long held the power to make emergency orders, but it is only now that they are invoking orders that will be unprecedented. Such orders may become permiant.

The SEC has also adopted a rule that makes it fraudulent, and a violation of the law, if short sellers deceive broker-dealers or any other participants as to their ability to delivery securities within time for settlement.

The new rules apply until October 1 unless further extended. Their introduction follows strong lobbying by the American Bankers Association to clamp down on short selling amid concerns that the price of their stock was being manipulated.

“We are concerned about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers, exacerbated by naked short selling. Our concerns, however, are no longer limited to just financial institutions,” the SEC said.

“In addition, we have become concerned that some persons may take advantage of issuers that have become temporarily weakened by current market conditions to engage in inappropriate short selling in the securities of such issues,” it added.

In regard to the few remaining Wall Street financial institutions lift, like Mogen Stanley, Goldman sacks may have fallen victim to such practices. The feds are worried and have become concerned about “sudden and unexplained” declines in the prices of securities, which could create questions about the underlying financial condition of an issuer, which in turn could create a crisis of confidence without a fundamental underlying basis. This crisis of confidence could impair the liquidity and viability of an issuer “with potentially broad market consequences”.

Washington Mutual and other deposit banks are in jeopardy. Other sectors still American car makers and other and related industries are all venerable to short selling techniques and the SEC is committed to stop this dangerous type of maneuvering.

The real controversy over naked short selling, however, concerns price manipulation. Here the fear is that a maverick trader could spread false rumors about a company while massively shorting its stock. Such aggressive actions would allegedly push the price down, allowing the trader to reap a guaranteed profit from his self-fulfilling prophecy.

 

The matter of 911 is still under investigation and none of the government investigating bodies -including the FBI, the Securities and Exchange Commission (SEC) and DOJ -are speaking to reporters about insider trading. Even so, suspicion of insider trading to profit from the September 11 attacks is not limited to U.S. regulators. Investigations were initiated in a number of places including Japan, Germany, the United Kingdom, France, Luxembourg, Hong Kong, Switzerland and Spain. As in the United States, all are treating these inquiries as if they were state secrets.

Given all of this, at a minimum the government regulators who are conducting the secret investigations have known for some time who made the options puts on a total of 38 stocks that might reasonably be anticipated to have a sharp drop in value because of an attack similar to the 9/11 episode.

 

The silence from the investigating camps could mean several things: Either terrorists are responsible for the puts on the listed stocks or others besides terrorists had foreknowledge of the trouble that was about to strike Wall Street or may have even contributed and used that knowledge to reap a nice financial harvest from the instability of the market place.

Federal investigators are continuing to be so closed-mouthed about these stock trades, and it is clear that a much wider net has been cast, apparently looking for bigger international fish involved in dubious financial activity relating to the world stock markets.

There was unusually heavy trading in airline and insurance stocks several days before September 11, 2001, which essentially bet on a drop in the worth of the stocks. The same is suspected being done o
n some recent failures and weakness like Lehman Brothers Holdings, Inc., Morgan Stanley and others.

 

In reference to 911 just a month after the attacks the SEC sent out a list of stocks to various securities firms around the world looking for information. Many of the same firms who failed this go round were also on that list. At that time the list included stocks of American, United, Continental, Northwest, Southwest and U.S. Airways airlines, as well as Martin, Boeing, Lockheed Martin Corp., AIG, American Express Corp, American International Group, AMR Corporation, Axe SA, Bank of America Corp, Bank of New York Corp, Bank One Corp, Cigna Group, CNA Financial, Carnival Corp, Chubb Group, John Han*** Financial Services, Hercules Inc, L-3 Communications Holdings, Inc., LTV Corporation, Marsh & McLennan Cos. Inc., MetLife, Progressive Corp., General Motors, Raytheon, W.R. Grace, Royal Caribbean Cruises, Ltd., Lone Star Technologies, American Express, the Citigroup Inc. ,Royal & Sun Alliance, Lehman Brothers Holdings, Inc., Tornado Reality Trust, Morgan Stanley, Dean Witter & Co., XL Capital Ltd., and Bear Stearns.

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Each individual has a risk tolerance that should not be ignored. Any good stock broker or financial planner knows this, and they should make the effort to help you determine what your risk tolerance is. Then, they should work with you to find investments that do not exceed your risk tolerance.

Determining one’s risk tolerance involves several different things. First, you need to know how much money you have to invest, and what your investment and financial goals are.

For instance, if you plan to retire in ten years, and you’ve not saved a single penny towards that end, you need to have a high risk tolerance – because you will need to do some aggressive – risky – investing in order to reach your financial goal.

On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement, your risk tolerance will be low. You can afford to watch your money grow slowly over time.

Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there is a lot in determining your tolerance.

For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do?

Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!

Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly.

Your risk tolerance should be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together.

As a relatively new investor I am always looking for those who have more experience in investing. I recently found two computer geeks, one of whom is a former major stockbroker, actually he wrote the software for a major investment firm. The stocks they have recommended thus far have been good ones.