OK,. Time for a serious talk.
I have watched and studied the Stock Market for years. Even in school the teachers would suggest things like if you don't have your money in the Stock market you are losing money. Of course they did not mean you were losing principal you were losing the gains they felt necessary to outpace any other investment. These teachers were giving what they thought to be good advice, but what they were really doing is passing on their personal perception (not knowledge).
After my years of study of this market I feel the Stock Market is currently in a very dangerous position. The reasons are many, but one of the most oblivious, to me, is that the majority of stock is held by people that feel obligated to put their money in the Stock Market all based on perception. Not reality. In this case reality has become facts. Allow me to present some reasons I feel the Stock Market bubble is not far from bursting.
First go back to a recent period, 1987, just over 30 years ago the market took a huge plunge. It was so big that the Government was stepping in to bailout Wall Street just as they have done with the housing industry. History has shown Government intervention works the opposite of what it is intended it becomes a bigger problem than the event. The news that accompanied this collapse made it very clear, to me, that the media was not as informed as we would like. As a matter of fact they were least informed than most sources, and very likely losing money like the others that had followed into the perception trap of , if they didn't own stock they were losing money.
A leading network had a program called, "Night Line", hosted by Ted Coppell. They did not spare any expense to bring all the top analysis they could find to appear on one show to answer the many questions about the cause of this massive collapse. I am sure they felt if they understood the cause it would soften the blow of money lost.
The majority of talking heads were focused on the trade deficit. Side note today the trade deficit is much worst than at that time. However back to the questions from the people calling. They took a question from a lady that said she was a housewife on a farm in Iowa. Her question was right on target. Why, if the trade deficit figures were known in advance like most of the talking heads had point out. Then why was it such a surprise, and have such an impact on the stock market. It put a damper on the whole show, someone was asking a question that was common sense, and made all the claims of the experts, and media look shallow.
I was only 7 years old at the time, and mainly focused on how to defend myself against a older sister and brother. Later on in life I looked at this event and the impact it had on the investment community.
Many lawsuits came out of this decline, and the member firms had large exposure because many of their brokers had been giving trading advice that was beyond the scope of their license. But these brokers were doing what they needed to earn a living on commissions generated from trading. The member firms quickly realized their legal exposure and put a stop to their brokers giving trading advice to clients. Still the brokers had to be paid for bringing in clients to the firms so the brokers were encouraged to sell mostly all managed funds through professional money mangers, and mutual funds. This took the legal exposure from the member firms to the fund managers, hedge funds, and mutual funds.
I found it interesting the way fund managers earned their income compared to brokers. The managers were paid based on a small percentage of the funds managed. This gives a new incentive to the handling of client's funds. The new incentive is to keep them IN the market, and little attention is given by the fund managers as to risk of ownership. The method the managers or brokers earnings have a direct impact on how the client's funds are handled. Remember the fund manager'spay come from a percentage of money invested. Different than brokers trading to earm comminsion. Still for the client, my opinion, bear all the risk.
I visited with many of these fund managers, some handling billions of dollars, and I was surprised the majority gave the same answer to the question of how they managed RISK. This answer is why I became so concerned with what happens if the market would experience another 1987, decline. The way they handle risk is buying of good quality stocks, and they should outperform the indexes that measure how well they are doing. I ask the question so if the market indexes dropped 80% and your funds dropped 75% you would consider that good? That's it.
The positioning of funds in the market is mostly directed by the technical trend of the market. This is where it becomes dangerous, and why the declines often go lower than would be expected based on fundamentals.
Adding to the confusion of large price swings are the talking heads that will explain it all. Meaning they have a story for about any move that will sound good, but NOT factual. Think about a scenario where the market has a large break. Remember the funds want to see evidence the market is moving higher before they buy, which comes from a "technical signal". If the buyer that controls the majority of buying is on the sidelines the market drops deeper until the selling volume dries up, and only requires a small amount of buying to lift the market. The market will move up easily because the selling, controlled by the funds, does not hit the market. This gives false impressions to the "talking heads" interviewed on TV, so they explain the move with a "sound good story", rather than facts.
The risk, as I see it, is if the time comes that people that have their funds tied up in the Stock Market decide they want OUT, for whatever the reason there is NOT enough buying power to handle the huge amount of supply that has grown larger, and larger over the years.
Unlike supply that has been purchased, and then consumed the supply of stocks NOT consumed so the supply just gets larger as new IPO's are introduced into the market. Years ago there was a problem meeting the demand because once a stock was purchased, especially by funds, then it is not sold limiting the amount of available supply. The solution to feed the demand IPO's were created.
I asked one of the larger fund managers what would be his indication of the market moving higher. You gotta love his answer. He said, when the market makes a new high. Scary but true. Since then I have paid attention to the trading volume as the market makes a new high, and sure enough the volume expands.
OK, this means the inventory of stock, over the years, has continued to get larger and larger, and if or when the market turns and the client's feel the loss of funds and want to liquidate it will be worst than the housing market there is a large inventory for sell with very few qualified buyers. Not a market I want my money exposed to.
The number of people that have their entire retirement in the market would be wiped out, as would everyone else. Our country is so far in debt I don't see a bailout of Wall Street as something that would happen. Most seem to not to like Wall Street anyway, especially our Government.
Well I am a little older now, and I make my own decisions of how to handle money. Putting it in the Stock Market is not one. If the market trades higher, and I hope it does, it will not bother me that people point out the flaws of my thinking. I don't want to earn money then watch it slip away because I attempt to trade what I can not control. No, No, Not Me... hey that could be a song.
For those that listen to the Talking Heads on most TV Networks, let me recommend you read about "Backyard Syndrome", and it will help you better understand the condition of the Stock Market. Backyard Syndrome truely defines the Stock Market.