During the last pullback, long term investors unload portion of the portfolio. But the shares are quickly absorbed by investors waiting with cash on the sideline. The news push market to advance further. After only a few days, long term investors realize that they have sold the shares cheap and are not willing to sell more shares even though at a considerably higher price.
Although market reaches highest level in four years, there is no symptom that market manipulators are going to short sell the market. Back in last year, market manipulators loaded up with stocks and began to dump stocks after reaching year peak. But currently market manipulators are sitting on mostly cash with little stocks to dump. It seems that short selling is prone to high risk of short covering rally. Therefore the risk of market crash is significantly reduced as market manipulators are used to be the initiator of panic selling.
Institutional and individual investors see that the threat of market crash is decreasing and investors are attracted by higher return of equity stocks. Since the pullback in the previous week, capital is flowing into equity stock market and moves broad market index to multi-year high. The flow would continue as investors are herding on speculation.
Although market manipulators have not successfully created any panic selling in this year, there are still uncertainties in the economy. While market is buoyed at a level within a few percent of record high, market participants remain very cautious and cash or equivalent and corporate bonds are still preferred over equity stocks in the wealth portfolio. However investors are holding large amount of cash and are worry about the shrinking purchasing power of paper money. Therefore the pool of hot money looking for return is increasing. Besides the core portfolio, traders are holding stocks only for short term gain on market speculation.
Earnings Growth Has Peaked But Stocks Can Still Do Well: Liz Ann Sonders
One of the big fundamental concerns about the stock market right now is the level of corporate profit margins, which are at a 60-year high.
Thus, some investors are concerned that today's super-high margins will soon correct to more normal levels, taking earnings down with them. And if earnings drop, the theory goes, stocks will tank, too.
Liz Ann Sonders, the Chief Investment Strategist at Charles Schwab, has looked at this question in detail.
She found the following:
•U.S. corporate profit margins are indeed at nearly 60-year highs
•Part of the reason for this is that American companies are now getting a big percentage of their profits from international operations, so the profit-margin-to-US-GDP is less meaningful than it once was
•Domestic profit margins are also high as a percentage of GDP, but not as stretched as overall profit margins
•Most importantly, stocks can still do well even when earnings growth rates are falling and margins are peaking
Sheila Bair: More Fed Easing Won't Make Banks Lend
Additional easing from the Federal Reserve won't result in more bank lending, Sheila Bair, the former chair of the Federal Deposit Insurance Corp., told CNBC's "Squawk Box" on Monday.
"If I had any confidence [that] it would help lending support real economic activity, I would say go for it, but there are significant risks," Bair said.
She said central banks have become the only game in town in both Europe and the U.S., but "QE is not resulting in more lending."
Instead of the Federal Reserve, Bair said it's Congress that should be working on policies to address unemployment and the country's fiscal issues.
Without congressional action, the Fed is in a difficult position, Bair noted, adding "I don't think QE3 is going to help, and I think there's a risk to it."
She also sees issues with big banks being able to substitute long-term funding with cheaper insured deposits. "I want the big bank funding costs to go up, because they had implied subsidies before the crisis," she said. "But the problem is the Fed is letting them roll out the long-term debt onto insured deposits which are explicitly guaranteed by the government."
Markets' Next Bogeyman? Looming Inflation
Creeping inflation could be the next big swing factor in equity markets, particularly if central banks continue to inject more liquidity into the markets, a number of economists and strategists have warned.
Food price fears have been heightened around the world after extreme weather affected farming in the U.S. Midwest.
In China, there are also worries about foreign companies moving production back home, rather than outsourcing it to China because of the country's rising wages.
The blame for rising inflation has been placed squarely at the feet of central banks' and governments' response to the financial crisis, particularly the focus on additional liquidity and bailouts of troubled economies and companies.
"The central problem is that there is $8 trillion of excess leverage in developed markets and $10 trillion more government debt today than in 2008," analysts at Credit Suisse wrote in a research note.
According to Credit Suisse, this could have a positive impact on equities, "given that inflation expectations are the main drivers of valuation multiples."
The bank believes that equities could function as a "hedge on inflation" - until expectations rise above 4 percent.
Saxo Bank's Jakobsen argued that the U.S. Federal Reserve should not announce the expected third round of quantitative easing.
"The Fed don't need to do QE3 but I think they will. Doing nothing is what we need now," Jakobsen said.
"They've done too much and got entrenched in the macro. We're forgetting that the micro is doing well."
Moody’s, S&P fighting last, wrong war
To hear Moody’s Investors Service tell it Tuesday, if Congress and the White House don’t get their act together, the risk of holding U.S. debt will intensify.
Of course, one can argue that a struggling U.S. economy would lead to less tax revenue for the American government, therefore worsening the fiscal condition of the U.S. government. Yet no serious expert is actually making that case. The CBO, for instance, says the budget deficit would shrink by nearly $500 billion in just the first year if the fiscal cliff is triggered. From a current 7.3%, the budget deficit will shrink to just 0.4% of gross domestic product by 2018 if the fiscal cliff path is taken.
So triggering the fiscal cliff is actually a better, not worse, way of reducing the deficit.
Now, Moody’s notes that the fiscal cliff actually would be preferable to a deal that doesn’t stabilize, and then reduce, the ratio of federal debt-to-GDP. (By preferable, it says it would keep the Triple-A rating with a negative outlook rather than downgrading to Aa1.) But the rating agency isn’t willing to acknowledge the simple math that, in fact, the fiscal cliff is the best way of doing so.
Stung by their failures in assessing the risk of mortgages, the rating agencies seem to be taking it out on sovereign governments. With a yield of 1.68% on 10-year bonds, the market already has given its verdict: Wrong.
Wall Street rises before Fed, Dow near first-year high
Stocks rose on Tuesday and the Dow industrials climb to the highest in nearly five years on expectations the Federal Reserve will offer more stimulus to prop up a sagging economic recovery.
Some investors have concerns, however, that a lot of the good news has already been priced in, exposing markets to a decline should the Fed disappoint. In addition, action by the Fed could distort market prices and would not be beneficial.
Investors are keeping an eye on big-cap bellwether technology names because of their role in global business spending. Techs fell on Monday following Intel's warning last week that reduced demand will hurt its third-quarter results. Shares were up 1 percent Tuesday.
Markets Doubt More Fed Easing Will Boost Hiring: Survey
Markets overwhelmingly are looking for the Federal Reserve to announce a new program of asset purchases as soon as Thursday to try and boost the US economy, according to the latest CNBC Fed Survey.
But Wall Street is expressing considerable skepticism that the Fed's actions will do much good to bring down the unemployment rate.
On the other side of the Atlantic, however, actions by European Central Bank President Mario Draghi have eased at least somewhat the European financial crisis.
Despite expectations for QE, investors are fairly pessimistic that it will help the job market. Chris Rupkey at Bank of Tokyo-Mitsubishi, notes that the stock market is rallying "on hopes for QE3 even as investors believe QE3 will have virtually no effect. The market does not seem to know what it wants, but the Fed is going to give it to them anyway."
Amid the considerable skepticism about Fed policy, recent pledges by the ECB to purchase the bonds of troubled nations under certain circumstances look to have calmed market nerves somewhat.
That Threatened Moody’s Downgrade… Somebody Else Made That Happen
As markets coldly blow off Moody's threatened downgrade of its AAA credit rating on the U.S., it's easy to see why investors and politicians might not be all that motivated to develop "specific policies that produce a stabilization and then downward trend in the ratio of federal debt" that the rating agency is looking for.
In fact, that apathy alone, is what Michelle Girard, senior economist at RBS, considers to be the one of the most ''worrisome'' aspects of this looming credit cut, in that politicians have not only seen it all before, but the last time, doing the wrong thing actually worked in our favor, as borrowing costs went down.
The New Tycoons: How Private Equity Owns the World
If you think private equity is a secretive industry that operates in the shadows, just look around: Companies from Dunkin' Donuts, J. Crew, Dominoes, Del Monte, Toys R Us, Miramax, Michael's Stores, Burger King and countless other 'household' names are either currently or were previously operated by private equity firms.
What is clear is that when private equity firms get involved "it does tend to have an impact on workers," he says. "Things are going to change if a private equity company buys the firm you work for. They don't tend to do nothing."
Sometimes that "something" means layoffs or even shutting companies down; but it can also mean expansion and more jobs created. Kelly says it's "maddening" but there's no definitive data on the industry's track record when it comes to jobs. Many private equity firms don't even keep track of the jobs created or lost by their investments, he notes.
For Investors, Information Overload Creates New Risks
Advances in information technology and the proliferation of open networks are having a profound impact on the world, ranging from transforming communication and commercial marketing practices to enabling political change.
There is a compelling part to this story, however, that has garnered less attention: that these same technological forces are decentralizing and democratizing financial markets, where traditionally a select few institutions have dominated in large part because they had unique access to information and trading platforms. By expanding access, this process is revolutionizing how transactions are executed, information is processed and disseminated, and capital is allocated. This shifting landscape carries with it significant risks to market stakeholders, including individuals, corporations, and governments — but also opportunities for those who adapt.
All of this may sound like unalloyed good news as investors will be able to make reasoned and informed investment decisions without paying hefty service and transaction fees. Upon closer inspection, however, the view is not quite as rosy. For individuals and regulators alike, this new world will create major headaches as trading platforms, services and opportunities are unbundled and decentralized. Retail investors now have access to complex investments and hybrid assets without necessarily understanding the risks to which they are exposed.
Consider, for example, the failure earlier this year of the VelocityShares Daily 2x VIX Short Term Exchange Traded Note (TVIX) — an ETN created by Credit Suisse to return two-times the movement in the VIX (the Chicago Board Options Exchange Market Volatility Index). When Credit Suisse ceased issuing and redeeming TVIX shares -- a process that helps to keep the share price in line with the share net asset value -- its price became unmoored from the underlying VIX index. The price of TVIX was cut in half.
Consider, too, that in a low-rate environment, many inexperienced investors empowered with new trading technologies are able with the click of a button to chase yield by investing in high-yield bonds, dabbling in volatile currency markets, trading options, assuming short positions, and (soon) investing in high-risk startups through securities crowdfunding. Meanwhile, the proliferation of algorithm-based, automated, and high-speed trading, which now accounts for more than half of all daily trading volume, pose additional risks to market stability and investment strategies that are not yet fully understood.
In the brave new world of electronic investing, those investors who understand the new risks will be the best positioned to capture new rewards.
Credit Swaps in U.S. Fall to Five-Month Low After Fed Decision
A gauge of U.S. corporate credit risk dropped to the lowest level in more than five months after the Federal Reserve said it will expand its holdings of long- term mortgage securities in a bid to boost growth.
The measure declined as the U.S. central bank said it will make monthly purchases of $40 billion of mortgage debt in a third round of quantitative easing. Steps to boost the economy may curb investor concern that companies will have difficulty repaying debts.
The Fed needs to find new methods to encourage companies to take risk, as "the transition mechanism has been severed for some time," Noel Hebert, chief investment officer of Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, said in a telephone interview. "It has not really been translating into the real economy."
Stocks likely to fizzle Friday, history of big 'Fed days' suggests
It was fun while it lasted.
The Federal Reserve's announcement Thursday got the big thumbs-up from investors, as both the Dow Jones Industrial Average and the S&P 500 soared more than 1% to late-2007 highs.
History -- as much as it's any guide -- suggests investors will take those profits and run Friday.
Bespoke Investment Group calculated that the average change on the day after "big up Fed days" has been negative at –0.32%. The S&P 500 turns in a gain less than 50% of the time, according to the firm, which crunched data back to 1995.
"Overall, though, the near-term returns aren't great following big upside moves on Fed Days," Bespoke concluded.
Why Traders and Investors Can Coexist in ETFs
One of the great things about ETFs is that short-term traders and long-term investors can peacefully coexist, unlike mutual funds.
The ETFs appeal to the retail investor, as they give them access to special niches in the market, access to several stocks at a decent price and trade with the ease of one transaction. Further, institutional investors like them because of their tradability, and use of shorting or hedging the market.
In this two-sided market, retail investors are the buy-and-hold investors and traders and market makers are getting their jobs done. After all, ETFs are a favorite tool of institutions that short the market, since it is easier to trade a basket of share rather than 50 different stocks.
The benefits of ETF investing must be taught and investors need to be further educated by financial advisors so that the risks are known.
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