Smoke and mirrors on Wall Street
After the famous 666 bottom on SPX, markets have surged, but has during the past month proved to be somewhat shaky. Bail outs, too big to fail, qe’s and other expressions are becoming part of every day life. The question is, if we start correcting, and we are not talking some 10-15% from the highs, who is long the market this time? Has smart money, like thetrader has suggested (Glencore IPO etc) already left the longs to the small investors, who will suffer losses from a correction? We have argued for the TOP to be in, and we expect the market to start correcting big time, but that should occur later this summer/autumn. Below some thoughts from Reich;
The Dow ended the week below 12,000 for the first time since March. This is the sixth straight week of downs for the Dow. It’s almost as bad over at the Nasdaq. All the gains racked up in 2011 have now been erased.
What’s going on?
The real economy is catching up with the financial economy, as it always does eventually. Wall Street is built on smoke and mirrors, while the real economy is based on jobs and wages. Smoke and mirrors can only take you so far – as we learned so painfully three years ago.
Jobs and wages stink, if you haven’t noticed. They’ve been bad for months, even before this week’s data made it fairly clear the recovery has stalled.
Stock prices had been rising nonetheless. That was partly because big corporations were enjoying big sales and fat profits from their foreign operations. But foreign sales are slowing. Chalk that up to the European debt crisis, Europe’s insane austerity measures, Japan’s tragedy, and China’s concerns about inflation.
Meanwhile, other companies have been busy restocking inventories in the hope American consumers will be in a mood to buy. But that hope is coming to an end, as the reality dawns that American consumers can’t and won’t buy very much, given their shrinking home values, high debts, and job worries.
Stock prices were also rising because of Wall Street’s certitude that it can make loads of money from the gullibility of millions of small investors. Here’s where the smoke and mirrors come in.
Over the past year, the Street lured small investors back into the market on the smokey promises that the worst is over and stock prices are bound to rise. The lure became a self-fulfilling prophesy. As investors re-entered the market, they bid up stock prices. Hence, the mirror.
Insiders on the Street are always the first to bail when they sense they’ve been overselling, as they started to do a few weeks ago. This gives them a second opportunity to make money off small investors — by selling short.
The nation’s second-largest financial redistribution in history (the largest, on a percentage basis, occurred in 1929) came in 2007 and 2008 – from small investors and their pension funds to the Street’s savvy traders who shorted them. Now it’s been repeated, although on a smaller scale.
And Washington? Completely clueless. Our representatives in the nation’s capital continue to obsess about future budget deficits and games of chicken over raising the debt ceiling — neither of which has anything at all to do with the stalled recovery and the carnage on the Street.
Otherwise, the airwaves are filled with Weiner’s tweets, Gingrich’s implosion, and Palin’s emails. When times are tough we look for entertainment.