Market manipulators have not yet made any movement besides the failed attempt to use the European creditworthiness downgrade to start a sell-off. As market crawls back to the peak when market manipulators started to unload the portfolio and then used the US rating downgrade to short the market, the scenario of a market collapse looms large among market participants. However, since cash or equivalent remains a large portion of the portfolio, traders and speculators are reluctant to sell the stocks on hand at cheap price.
The recent sell-offs and rallies since May 2011 in the stock market illustrates the wealth transfer mechanism in the finance market. The 2008/2009 financial meltdown vaporized a lot of wealth and only a fraction is recovered. But in this cycle, the whole market capitalization is restored back to May 2011 peak. This means that the aggregate wealth of market participants remains roughly the same as May 2011. But the current distribution is different. Market manipulators are the biggest gainers although they are not benefited from the 2012 rally. They have sold stocks around the peak in May 2011 and made additional profit in shorting the market upon US debt downgrade and European sovereign debt crisis.
The performance of hedge funds and institutional investors varies. The 2012 rally enables some investors to recover the loss in 2011, especially those with asset re-allocation of increased stock holding in the portfolio.
Individual investors are lagging behind. Market manipulators are making large profit at the expense of panic selling from market participants. Individual investors make similar mistake as in market bottom in 2009. The herding behaviour during panic sell-off drives investors to dump the portfolio thinking that the sold stocks can be purchased later at a much cheaper price. When smart investors begin to grab the bargain, fear of market collapse makes panic investors to stay on the safe haven of cash and watch the rebound.
The speculative trading portfolio is also suffering significant loss due to the massive sell-offs. However, the loss is largely because of over-leveraging rather than fear. During the period from market peak in May 2011 to the time before the US rating downgrade, the portfolio value stayed within a range. But the US rating downgrade was exploited by market manipulators to trigger panic sell-off. Since the speculative trading portfolio was holding stocks with over two times leveraging and market dropped significantly for several days, the portfolio value fell down to only one third of the initial value and resulted in forced liquidation. If the portfolio can hold on from the sell-off, it would be making profit instead of losing more than one third of the value at present.
As mentioned in an early post, leveraging can be destructive to a portfolio against strong headwind in unfavorable market condition. On the other hand, leveraging can magnify profit. In addition, the portfolio is relatively small and the overhead cost of broker commission and buy/sell spread can eat into any profit or worsen any loss. Since the portfolio is not for savings but speculative trading, borrowing may be needed at present but risk mitigation is necessary.
The outlook for equity stock market remains optimistic. However, it is inadequate to perform speculative stock trading based on macro economic condition. Stock market is highly manipulative. A panic sell-off can almost wipe out entire highly leveraged portfolio in a few days as in the US rating downgrade experience. In order to survive in an environment full of predators, investment decisions should be based on short term market participants behaviour.
The speculative trading portfolio does not perform satisfactorily with respect to tracking market movement. Market will remain turbulent as market participants have diverse speculation. Trading skills may be improved through learning and practice.
Robert Shiller: A Housing Bottom? What Are They Thinking?
One of the key attributes of most bubbles is that, when they finally burst, prices tend to "overshoot" on the downside, crashing well below fair value until all the exuberance is wrung out of the system.
BLODGET: A lot of people have just called the bottom in the housing market in the United States, and there's been some okay data recently. Is that your take? That finally housing prices are bottoming?
SHILLER: When people phrase is that way, they say 'we've reached the bottom.' That suggests that we have the expectation of a major turning point right now. But I don't see that. I don't see any reason to think that prices are going to start heading up dramatically now. We do have some good news. Permits are up. Notably, the National Association of Homebuilders Housing Market Index is up and that's a forward-looking index. But it's not up very much. If you look at the rate of change it looks dramatic but it's still at a low level.
BLODGET: And what about price-to-income and price-to-rent?
SHILLER: Those things have come down a lot. I don't know exactly where the middle is but it's not like we're overpriced anymore. Now the question is whether we'll overshoot, which is a common thing that happens after bubble burst.
BLODGET: Part of your argument there is that profit margins tend to regress to means and right now we're at an all-time high profit margin or very close. Do you think that profit margins can continue going up for U.S. companies?
SHILLER: Profits have been very volatile over the last ten years. They look much more strongly mean-reverting than in the past. So that suggests that the current strong profits might turn out to be misleading.
BLODGET: When you think about smoothed earnings as a way of predicting prices, do you think about it as a predictor of what the price is going to do or is it better to think about it as the likely ten year return for the market is 'x' at this particular price?
SHILLER: You could go either way... I think that the returns that we could see going forward are not lousy, they're low...
S&P Warns of Cuts; Another US Downgrade Coming?
Concerns over the size of United States debt reared their head once again as ratings agency Standard & Poor's warned that health care costs for a number of highly-rated Group of 20 countries, including the U.S., could hurt growth prospects and harm their sovereign creditworthiness from the middle of this decade.
"Is the U.S going to be downgraded again? We think so," he told CNBC on Tuesday. "Our general perception is it won't have a material impact. It could even lead to more money flowing to the U.S in the way we saw following the initial downgrade."
S&P's first downgrade has not driven up the United States' borrowing costs and the dollar appreciated relative to other currencies in the months following the cut as investors sought out safe havens to escape the European debt crisis.
"The U.S. [dollar] is a reserve currency. It's able to retain all the confidence of international investors," Owen said.
Barry Ritholtz: Yes, The Economy’s Lousy, But Stocks Still Look Good
The stock market got off to a surprisingly strong start in January, posting the best first-month results in more than a decade.
But Barry Ritholtz, the chief investment strategist at FusionIQ, isn't surprised by this. Having come into the year "fully invested" in stocks, he has been looking for reasons to sell, and he just hasn't seen any yet.
All the free money the Fed and the European Central Bank are pumping into the system is flowing straight into asset prices. And for now, anyway, this ocean of cash is drowning concerns about fundamentals.
Take Profits Now: Richard Suttmeier
Richard Suttmeier, chief market strategist at ValuEngine.com says the market's mighty rally is reaching the point of exhaustion, suggesting it's time to use the nascent euphoria to take profits.
Before scoffing, recall that Suttmeier famously told Breakout he was looking 1,000 point drop in the Dow Jones Industrial Average last May 18th. Over the next 4 months the Dow dropped nearly twice that amount before bottoming just under 10,500 last October 4th.
"My thinking is we will not trade above the 2011 highs in the major averages," he says, pointing to the 2011 highs just under 13,000 on the Dow. According to his work, 2012 is going to "stay for most of the year in the trading range" between last year's highs and the October bottom at 10,400.
Suttmeier incorporates fundamentals into his work as well, screening thousands of stocks on a valuation basis. On that front he sees 65% of the market as undervalued, not bad but nothing compared to his view last Fall when that same number was 93.5%. "Stocks remain undervalued," he says, but quickly cites the ever-daunting global uncertainties as a reason they will stay that way.
Stocks jump on strong jobs report for January
A drop in the unemployment rate to its lowest level in three years propelled stocks higher Friday. The Dow Jones industrial average jumped more than 130 points, drawing the average to its highest mark since before the financial crisis hit in 2008.
The Nasdaq index reached levels last seen in December 2000.
Romney's ‘Very Poor' at Highest Percentage in 35 Years as Safety Gaps Grow
Republican presidential candidate Mitt Romney's statement that the "very poor" don't concern him comes at a time when the portion of Americans living in deep poverty is the highest in more than a generation while assistance varies widely and is often inadequate.
More than 20 million Americans live in a household with income of less than half the federal poverty rate, the level social scientists often use as a category for the very poor, according to census data for 2010. Last year that meant an annual income below $11,057 for a family of four.
The portion of the population in that category was the highest in at least 35 years and has almost doubled since 1975, from 3.7 percent then to 6.7 percent in 2010.
"The social safety net has great big holes in it," said Candy Hill, senior vice president for social policy and government affairs at Catholic Charities USA. "In real time on the ground, we're seeing exponential increases of people coming to our door for basic needs: emergency financial assistance, food, housing."
Zedlewski said assistance for the poor may be reduced as state budgets contract and with the loss of billions of dollars of federal assistance for welfare and job programs that were included in the stimulus package.
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