Friday, October 9, 2009

When Will the Fundamentals Trump Trading?

As I sit here and watch the insanity of the markets I continue and ask myself the question seen above in the title of this post.

The relentless rise in the market has fooled even the best traders on Wall St. Many of them have taken a time out at this point and sit on the sidelines. I say why shouldn't they? We haven't really seen any meaningful pullback since the March lows.

The economic disconnections seen today are beyond belief: Bonds continue to rise even though we are issuing $100 billion a week at times. Something of note: Yields were up sharply today, but overall, they are priced far too low when you look at the risk of treasuries as the government relentlessly continues to dig itself into unfathonable levels of debt.

The rise in bonds in relation to the massive treasury issuances really makes you wonder if the world has gone mad. Has the law of supply and demand now been thrown out the window? In today's wacky world, does extra supply mean prices go higher? Insanity! Where are the trillions of dollars going to come from in the long term that will be needed to mop up all of the bond supply?

The answer in the short term is two fold: Either the Fed is printing like crazy ,or some very wealthy people(including FCB's) don't trust this rally and continue to hide in bonds.

Gold and the huge drop in the dollar tell you that the world is losing confidence in the US. The dollar is about the only thing that's trading rationally.

As the rally rolls on, I sit here and ask myself why the market moves higher as the economy continues to show zero signs of zero growth. Don't be fooled folks, Alcoa earning a measly .04 a share hardly represents a robust recovery. Earnings estimates have been dropped have been dropped to practically nothing.

If a company earns a profit or just breaks even, the market treats the stock like it's the next Google. The raves around Family Dollar's impressive quarterly beat cracked me up this week. Like that's a positive for the economy! The fact that we are forced to shop at a dollar store speaks volumes where we are today economically.

Despite the obvious, Wall St continues to effectively spin the "recovery" web. How this happens at a time in which the unemployment rate in Detroit hits 29% is any one's guess.

The only answer I have when it comes to explaining the craziness on Wall St is speculation. I believe that the traders have overwhelmed the long term investors in the stock market. "Buy and hold" in this new world means holding a stock for a week versus the old days where long term investors held a stock for a generation.

The quants at Goldman, day traders, hedge funds, and the rest of the trading desks on Wall St have pretty much taken over the trading volume each day in the market. As a result, the market from a fundamental standpoint means nothing. It's all about the short term price action.

The Bottom Line

Too many people keep looking at the market like its a trading mechanism versus a place to invest for the long term.

Anytime a stock, oil, or the dollar makes a big move higher or lower, the first thought is "Wow! There are too many people on one side of the trade!".

The thinking in a traders market like this then becomes"lets take the other side" because its overdone.

This mindset is why I believe you have seen insane moves to the upside on stocks. I mean how many insolvent banks are up 300% since March?

The same price action has been seen in the broke broke REIT's that have doubled since the lows?

I mean granted: The market loved all of their capital raising, but all it has done is allow the REIT's to pay off bad debts on their balance sheets. They are not putting this money to work. This money will not lead to future profits. All this will do is prolong the agony of the inevitable collapse of commercial real estate.

My point here is way too many people have become obsessed with becoming a "trading" contrarion/speculator versus looking at the actual fundamentals!

As a result, the market has gone haywire. The problem with the trader"contrarions/speculators" is they only hold positions for hours or days. This is a big negative for the market longer term.

I say this because the result of such short term trading does nothing scare long term investors out of the market because no longer makes any sense fundamentally. Just look at treasury yields if you don't believe me.

I think it's time that we all stop looking at the markeCheck Spellingt as a speculative casino. The longer we treat the market like MGM Grand, the more distorted the price action will become. The problem with this of course is at some point, the fundamentals will return because they always do.

When this occurs, there will be a lot of people caught with their pants down.

The time to own stocks is when they are trading based on fundamentals. You are asking for a beating if you continue to speculate. Don't believe me? Go find a house flipper and ask them how they are doing

Buyer Beware!


opportunistic said...

This whole thing is really depressing. It's like watching a bully beat up a little kid and not being able to do anything about it. Then the bully sues me because he hurt his hands beating the little kid and wins, so I have to pay him.

Then I watched Bill Moyers last night and I felt worse.

The fact that we live in a country\world where lies and deception are the rule\norm is truly sad.

opportunistic said...

For those that don't watch the interview above, think about the term:
Financial coup d'etat

That sums it up.

Jeff said...


It is depressing.

How do you trade a market that is based on nothing but fraud and manipulation by buyers that are larger than you are?

I think Wall St is realizing there is only one way to make money right now and that is trading.

The rest of the economy is dead.

I am really seeing a lot of desperation out there. I am sure many of you see the same thing.

I have had more friends and families lose jobs in the past few weeks then at any time during this meltdown.

Rome is definately burning.

getyourselfconnected said...

"The economic disconnections seen today are beyond belief"
-that was how I named my blog way back when their was a similar disconnect in the market!

Barry Ritholtz said this week that the market does what it wants and need not reflect fundamentals at all. Great to know the vehicle you are trying tos use to save for retirement has no moorings in reality. Its great on the way up, not so hot on the way down.

I am as confused as the next guy about all this wackiness.

Jeff said...


I thought of you when I typed that.

Great name for your blog.

I totally share your thoughts. Nothing like taking your 401k and throwing it onto the craps table.

The alternative is to sit in treasuries with 0 return.

WAs great options! NOT!

So frustrating.

Jeff said...

"Don't believe me? Go find a house flipper and ask them how they are doing"

Depends on when they started. My brother got into this heavily last year when he said the fundamentals were way out of whack "to the downside". I told him he was crazy as I thought the housing market had alot more to fall.

In the past year hes sucessfully done 9 flips. He says the fundamentals are getting back into balance so he quit doing it - with an extra 352K in his pocket!

Jeff said...


Hats off to him.

He is smart enough to walk away after making some coin.

There will always be profitable flips as long as the price is right.

flipdippy said...

Interesting video, but at this point, I guess it's more curiousity than anything to invest around:

Jeff said...


Great Video

I am going to throw it up on the site.

Financial Advisor in CA said...

Hear! Hear!

FA in CA