The Wall Street Con Job

Today’s blog has a tad bit of math involved.  But don’t worry, I have provided the answers.  All you have to do is follow along.

The stock market took an October “correction” the other day. I like that word — correction.  What were they correcting and who was it that was doing the correcting? I’ll explain. But first a simple premise.  The stock market has NOTHING whatsoever to do with our economy. If you think it does, you’re investing your money in the wrong place.

Now the questions: Who is correcting the market and what are they correcting?  The answer is quite simple.  The Seven Large Investment Banks and the one hundred super large mutual funds correct the market.  And by that I mean they are not making enough commissions so they move money to cause the market to go up and down. While doing so individuals and institutions will buy and sell shares accordingly, creating commissionable or “load” revenue for the financial institutions.

Take for example two stocks. Stock A was trading for $56.25 a share on Tuesday when at 11:00 am the correction took place.  Wednesday morning it opened at $44.00.  This is a huge international company that makes and sells large equipment around the globe.  What did management in that company do between 11:00 am on Tuesday and 9:00 am on Wednesday to devalue their worth of their company by roughly 22%?  The answer is nothing.  In fact they probably didn’t even have time to react to the shift in stock prices, other than call the director of investment relations and tell him or her to get a memo ready for legal to sign off on.

Now here is another real world example.  World’s largest oil and gas company announces the highest earnings of any company in the history of recorded finances. Let that sink in for a moment. They made more money in one quarter than any company ever did. And the next day their stock dipped five (5) points.  Really?  I don’t remember the percentages but 5-point swing in less than 24 hours on the biggest, most positive financial news ever and your stock price takes a nosedive!

See where I am heading.  The market, over all, is not a good indicator of a company’s worth.  Period.  Not in today’s electronically traded, high volume market. Not by a long shot.  Today the market is its own poker game.  The chips happen to be called Hershey or ExxonMobil or GE or IBM or Apple…but the real players and the real money are the Wall Street investment banks that you and I propped up with our hard-earned dollars starting in 2008.

Now remember that an investment bank makes its money when you buy and when you sell a stock. Which means that the ebb and flow, the ups and downs of the market make it most profitable for an investment bank.  So you see Stock A at $44 and you think, “Hey that’s a good deal.” You shell out your cash and add some sweetener to the deal for the commission for the honor of buying the stock. The stock runs up to $105. You’ve made money like a bandit.  You sell.  You get your money back plus some and les some sweetener called commission for the bank. And you are as happy as a clam.

One problem. The real worth of that company didn’t really double in that time. Not unless it was truly a start up and they discovered the cure to cancer. The market itself causes the inflation in that stock price.  There are millions upon millions of Baby Boomers trying to force as much cash as they can into the market for their retirements.  Only now, they are getting near the end of their push and they are soon going to be pulling money out of the market.  They are going to take that money and go to Belize or Switzerland or to Palm Springs.  As they do, the market needs to constantly readjust itself to keep correcting its volume.  That is a euphemism for the investment banks to move it up and down to make money for themselves. As long as they can manipulate the pressure on the market like this, it will show growth.

But it is not real economic growth.

It is a game.

In some states they call it gambling. But for the most part we turn our back on it and shrug and say, well that’s just how the market is.

So the next time someone points to the stock market as an indicator of our economy, remember this: five analysts (average age was 32) thought that the world’s largest energy company had not made enough money when it claimed the largest quarterly earnings of all time. And they maneuvered the company into a sell position.  They brought the stock price down. The company is still doing fine and hasn’t changed a thing in the interim.

That’s how the game is really played. It’s a con job. And sooner or later it has to stop.