The sell-off may extend longer as individual investors are taking profit or stopping loss and day traders selling on the rebound. Aggressive market participants may even initiate short stock positions ignoring the associated risk. Investors should mitigate risk or wait on the side line until market stabilizes. Speculators find opportunity in this market environment.
5 Reasons to Stop Whining about Stocks
--1. "Eleven years, no profits in stocks." That's a long time to go without making any gains in stocks whatsoever. Not stunningly long, but comparable to the equity slumps of the 1930's and 1970's. Rob has gone back even further than that and found the same data. The market is due for a breakout higher if American history is our guide.
--2. "Huge cash pile in retail and institutional coffers." $2.7 trillion as of May, and it seems unlikely folks were pouring into stocks in June. This is roughly $1 trillion more than there was in cash in 2005. A trillion remains a big number, even by Capitol Hill standards.
--3. "The whole country is playing defensive." Money is pouring into bonds yielding nothing and dumping out of stocks that usually have some upside. Combine the lack of enthusiasm with the huge cash, and you've got kindling loaded up with gasoline. If and when we get a spark, the markets are going to heat up in a hurry.
--4. "Housing affordability." This is the highest it's been in almost 40 years. OK, I rent and have no plans to own a house in this lifetime. Still, you have to admit most houses are cheap relative to a few years ago.
--5. "Valuations of equities today are very attractive." You've heard the stats. Stocks are somewhere in the low teens in terms of trailing and forward P/E. You know the reason why is nobody believes earnings will come within a par-5 of estimates. You should also know the second part might, just might, be wrong. If it is, stocks will go higher without the bears.
Is the Bull Market Over?
TrimTabs Investment Research estimates that, following net outflows of $46.9 billion and $51.9 billion in 2009 and 2010, respectively, this year (through June 8) there has been a net inflow totaling $28.8 billion. So we no longer have the strong wall of worry that the bull market last year was able to climb.
Dow 10,000 and $60 Oil Coming Soon: Futures Trader
"You've got global tightening happening at exactly the wrong time," this Chicago-based former bond trader says, as well as "the removal of fiscal stimulus and monetary stimulus just when the market needs it most."
Feuerstein's outlooks are for sure the boldest I have heard anywhere, as he predicts "the Dow Industrials will trade decisively below 10,000 again by November 1st(that's just 4 1/2 months away, folks!)." And he's looking for the price of crude oil to tumble to $60 a barrel in the next 12 months.
3 Ways to Trade Stocks in a Volatile Market
Traders should brace for more volatility as June 30 approaches, given the state of confusion many market participants are in.
As a trader, you should always look for profitable opportunities based on probabilities and your own judgment. Here are three strategies to consider using whenever a market-changing event is looming:
1. Stay on the sidelines
If you're new to the stock market, you may want to stay safely on the sidelines when QE2 ends.
2. Fade the gap
Erik Swarts, an independent trader and creator of the research site Market Anthropology, has been actively shorting the market, "and it's been exceptional," he said.
Specifically, he has been "trading the gap," or shorting the market after it gaps up in the first few minutes following the open. "Although I'm skeptical of the market, I'm reluctant to get dogmatic on the bear side," Swarts noted.
Yet this strategy is not for beginners. "If I was inexperienced with this kind of market, I'd probably stay away and paper trade it," Swarts said. "There are too many cross-currents to navigate for the novice trader."
3. Use the options market
You can turn to the options market for protection or profit. For protection, buy protective puts on stocks you already own. If you want to speculate, buy puts on individual stocks or indexes. Although buying puts is less risky than shorting, it's still possible to lose your entire investment if you get the timing and direction wrong.
Even with the market's current weakness fueling pessimism, Baumohl said he believes the major U.S. stock indices will be higher at year-end.
The lesson for traders — rookies and veterans alike — is always be prepared. QE2 is going to create a big wake once it docks. If you use any of the above trading strategies, cut back on share size. Given the likelihood that the market becomes even more volatile this summer, this is not the time to take unnecessary risks.
How Low Can the Market Go?
With the stock market getting whacked yet again, technicals confirm that investors will be facing a tough summer. But even as the economic news gets uglier, now is the perfect time to identify the conditions that will signal an end to the decline in the months ahead.
For the current decline, a combination of support and waning momentum should be a good sign that the market is ready to bottom. This week, many indexes reached support but downside momentum was still strong. Further, some indexes, such as the Nasdaq, are flirting with downside breaks of their respective 200-day moving averages.
In other words, the stage is not yet set for a rebound. But when a bottom does draw near, chances are the market will give us several clues. It pays to know what they are before they happen.
QE3 may not be cure for economy's woes -- The Buzz
Investors will be watching for any clues about what the central bank plans to do now that its controversial bond purchasing program is about to wind down at the end of the month -- just as the economy has hit a rough patch.
The Fed wanted inflation. It got inflation. The $600 billion in new bond purchases through QE2 has been one reason why the dollar has weakened and commodity prices have surged.
Sure, the Fed talks a good game about wanting to keep interest rates low to stimulate the economy.
And companies still seem more willing to use all the cash they've got sitting on their balance sheets -- which is earning next to zilch thanks to Fed policies by the way -- on mergers, stock buybacks and dividends. They are not using cash to hire enough workers to make a noticeable dent in the unemployment rate.
And the pathetic job market is also not ringing any inflation alarm bells either. As long as wage growth remains stagnant, inflation in a classic economic textbook sense won't rear its ugly head.
Make no mistake. The Fed probably won't sit idly by if the economy continues to stall. But more bond buying might not be the answer.
At a bare minimum, the Fed will keep interest rates near zero -- where they have been since December 2008 -- for the foreseeable future.
"I think at some point if the data continues to worsen, the Fed will have to do something," Fitzpatrick said. "The Fed may not call it QE3 but there will be more tools to get implemented. It's likely there will be more stimulus."
The Fed may even try new programs that could more directly impact job creation. Garett Jones, an economics professor with the Mercatus Center at George Mason University, argued that the Fed could cut, or even outright eliminate, interest payments on excess bank reserves as a way to get financial institutions to lend more.
Jones argues that banks have no financial reason to lend out excess reserves as long as they get paid to sit on that cash. But if banks no longer are rewarded for being misers and actually lend more, particularly to small businesses, that could help stimulate job growth.
Derivatives Disaster Deferred -- For Now
The SEC and CFTC have given themselves a nearly six-month extension to work out how financial reform will be implemented. Whether that's enough is one question. The more basic one, posed by JPM's Dimon, is whether the benefit is worth the cost.
Jim Rogers: Dollar Is Doomed, Own Real Assets
When it comes to the U.S. dollar, Jim Rogers is "incredibly pessimistic about the long term, or even the intermediate term future." He's also long the dollar and feels there are "plenty of reasons that the U.S. dollar could rally."
How can he reconcile the two? Easy: he's a trader.
Where can a non-trader turn? Gold and hard commodities. Rogers regards both as a way to play Asian growth and avoid being stuck in dollars when the inevitable day of reckoning for the dollar arrives. Gold isn't a bubble, he says, despite being likely to end in a bubble blow-off, as so many long-term rallies do.
Shiller: Housing Could Fall Another 25% But Is Harder to Predict Than the Weather
The housing bubble of the early 2000s was "unprecedented" and the "biggest in U.S. history," according to Yale professor Robert Shiller.
As a result, he says "it's very hard to forecast" where housing goes from here, now that it has officially fallen into double-dip territory, based on the S&P Case-Shiller Index.
Housing "might fall [another] 10-25% in the next few years," but forecasting housing today is harder than predicting the weather, Shiller says. "I don't see how anyone can quantify a forecast because it's such an unusual event."
But the idea of the "American Dream" does have merit. "Home ownership pays a dividend in self respect," he says. Indeed, the idea of owning your own home has personal and societal benefits; the problem was the widespread misconception that housing was the path to wealth and financial freedom.
The Real Scandal at Goldman Sachs: The Stock Price
So imagine a bunch of senior Goldman executives hired an expensive portfolio manager and tasked him with creating positive returns. Next, imagine that the manager came back year after year and informed the executives that the best he could do was flat returns — but that he nonetheless deserved a multimillion-dollar payday. They'd laugh.
And yet while Goldman's returns have been subpar, CEO Lloyd Blankfein is getting paid like he's crushing the market. As the Financial Times reported this week, Blankfein "was paid $14m in 2010, more than 15 times his 2009 earnings, as senior bankers collectively shed their hair shirts." That' s just one year's compensation.
This highlights the real problem with Goldman Sachs. Like other investment banks, it isn't run for the benefit of its clients, or for the benefit of public shareholders, despite what its business principles say (#3: "Our goal is to provide superior returns to our shareholders.") No, Goldman and other publicly traded Wall Street firms are really ingenious machines for spinning revenues into compensation for insiders. If that means other stakeholders do poorly while executives make out great, that's just the way it goes.
This is really nothing new. In 1940 Fred Schwed, Jr., published the classic book on how brokers prosper while investors suffer. It was entitled Where Are the Customers' Yachts? Goldman Sachs stockholders might rightly ask Where Are the Shareholders' Yachts? The returns provided to them under Lloyd Blankfein in the past five years aren't enough to buy a ride on the Staten Island ferry.
Will Generous Pay on the Street Hit a Wall?
With Wall Street facing a lower-return future, the battle is on between employees and shareholders. At stake: Who gets the bigger slice of a shrinking pie.
So far, shareholders look to be getting the short end of the stick. Although there is growing angst on Wall Street about pay and job cuts, overall compensation ratios haven't dropped hugely when compared with long-term averages. And they have fallen far less than returns on equity at firms like Goldman Sachs and Morgan Stanley.
This wouldn't be such an issue if investors felt returns were likely to soon rebound. That isn't the case and is likely why investors have dragged down shares in both Goldman and Morgan this year. The two now trade at lowly levels of 1.14 times tangible book value for Goldman and 0.89 times for Morgan.
Since the crisis, some have started to see Wall Street as a compensation machine rather than an engine of capitalism. To change that, compensation ratios, which now typically range between 40% and 45%—compared with 45% to 50% before the crisis—may have to fall yet further. Shareholders can't be expected to settle for table scraps forever.
As Profits Wane, Wall Street Braces for New Layoffs
Wall Street plans to get smaller this summer. Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs.
The cutback plans are emerging even as Wall Street firms have mostly recovered from the financial crisis and are reporting substantial profits again. But those profits are not as big as they were before the crisis, and it is expected that in the coming months it will be even more difficult for firms to make money. Worries about debt in Europe and the shape that the Dodd-Frank financial overhaul rules will ultimately take, combined with the usual summer doldrums, are prompting banks to act.
For those firms that depend on trading, it is clear how much the engines of Wall Street have slowed. Return on equity, the amount a firm earns on its common stock outstanding and an important measure of financial performance, has decreased significantly in the years since the credit crisis. Industrywide return on equity was 8.2 percent in 2010, down from 17.5 percent in 2005, according to Nomura.
Pawlenty's super-rich tax cuts
Hey rich folks, Tim Pawlenty wants to cut your taxes. A lot.
Under the terms of his recently revealed economic plan, Americans in the top 20% of earners would see their taxes cut by an average of $23,500, an 8.6 percentage point drop in their tax rate, according to an analysis by the nonpartisan Tax Policy Center.
And the top 1% would get an annual average reduction of $261,000, a 14.8 percentage point drop.
Meanwhile, Americans in the lowest 20% of income would see their taxes drop by an average of only $23, a 0.2 percentage point change in their tax rate.
"The revenue yield makes it an implausible tax system to implement," Rosenberg said.
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