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1/20/03


 

TAKING CANDY
FROM STRANGERS

 

By David Podvin

A rally of twenty percent in the major indexes confirms that a new bull market has begun. That is the all-clear signal for investors to buy stocks for the long term.

This old investment maxim has been endlessly repeated over the last three years by the smiling, avuncular malefactors who are employed by Wall Street to first win your trust and then ruthlessly violate you. Like almost everything else in the predatory world of finance, the maxim is a seductive lie designed to separate you from your hard earned money.

The financial community has proclaimed that the October 2002 low was the beginning of a new bull market. Major brokerage firms have taken out ads urging the public to rush back into stocks. One analyst wrote in Time Magazine that investors should mortgage their homes and use the money to buy equities and mutual funds. The inspiring message from Wall Street is that happy days are here again.

The bear market is over. Don’t be afraid. We are the experts. Trust us.

The S&P 500 began 2002 at 1148.08, and every major strategist on the Street predicted it would be higher by the end of the year. Here's what they were forecasting at the start of 2002:

STRATEGIST                                               

Jeff Applegate (Lehman Brothers)

Rich Bernstein (Merrill Lynch)

Abby Joseph Cohen (Goldman Sachs)

Doug Cliggot (JP Morgan)

Steve Galbraith (Morgan Stanley)

Tom Galvin (Credit Suisse First Boston)

Ed Kerschner (UBS Warburg)

Tobias Levkovich (Salomon Smith Barney)

Tom McManus (Banc of America Securities)

Ed Yardeni (Prudential Securities)

Source: CNN/Money

2002 S&P TARGET

1350

1200

1300-1425

950

1225

1375

1570

1350

1200

1300

The S&P 500 ended 2002 at 879.82.

The list above contains the crème de la crème of forecasters who are on the Wall Street payroll, and their collective performance was pathetically incompetent. Or was it? For the second straight year, Cohen estimated that the market would finish fifty percent higher than it actually did, which would seem to be a breathtaking example of ineptitude that merits immediate dismissal. Instead, she was given a huge bonus. It’s almost as though she is being generously rewarded for suckering the public into the market.

Capitalism is the engine of innovation. As always, the new bull market will be driven by consumer demand for exciting new products and services.

In this “new bull market”, which innovative and exciting product or service has led the way off the October lows? Which undervalued sector gained over 75% in less than two months?

The Internet stocks! This is the very same highly speculative and incredibly dangerous group that was used to entice the public into the market right at the top in 2000. The insanity that marked the all time high is alive and well. Wall Street is still audaciously peddling the same garbage, and the public is still eagerly buying it. Fool me once, shame on you. Fool me twice…

Yahoo! (which when you subtract all outgo from all income earned Nothing!) more than doubled in seven weeks. Just like the good old days.

Moving on down the Internet food chain, Red Hat – which has never earned a penny, but once traded above $150 per share – rose 109% in 51 days. Easy money! After you mortgage your house, maybe you should seek out a loan shark in order to obtain additional investment capital.

And then there is CMGI, which Merrill Lynch recommended for the long term at $160. This money-losing machine masquerading as an Internet conglomerate rallied from thirty-one cents to $1.74, a gain of 461% in 54 days.

Here is an easily obtained annualized rate of return of over THREE THOUSAND PERCENT! Those of us on Wall Street could keep all these sweet gains for ourselves, but don’t you want some, too?

Nothing has changed. This is not investing; it is the same old swindle that results in excruciating pain. The public is being coaxed into yet another nightmare. What always starts as a breathless promise of untold riches repeatedly morphs into widespread investor agony.

In May 2001, Wall Street was telling you to buy stocks for the long term because all of those interest rate cuts had to make the market rise.

In January 2002, Wall Street was telling you to buy stocks for the long term because – in the aftermath of 9/11 – it was the patriotic thing to do.

In August 2002, Wall Street was telling you to buy stocks for the long term because corporate earnings were so low that there was nowhere for them to go but up.

And now, Wall Street is telling you to buy stocks for the long term because the market never drops for more than three years in a row, so it can’t possibly go lower in 2003.

Right now is the ideal time to buy and hold! The stock market is almost always up in the third year of the presidential cycle. Look at how far stocks have fallen – they’re not going to zero. January is a great time to buy stocks; typically, investors who buy in January have a profitable year.

The airwaves are currently being flooded with Wall Street verbiage that has no value in a bear market. The third year of the presidential cycle is usually up. However, after the last speculative bubble burst, the third year of the presidential cycle was down hard. And while it is true that most stocks you buy won’t go to zero, this is an investment goal that redefines the term “modest expectations”.

Insofar as the “January Factor” is concerned, that disingenuous siren song is now echoing throughout the financial media. Buying stocks in January is a good idea – during a bull market. During a bear market, buying stocks in January is not such a good idea:

The brokerage industry’s endless list of phony reasons for you to invest in stocks is reminiscent of Johnnie Cochran’s smorgasbord defense of O.J. Simpson: He was playing golf on the front lawn. And if you don’t like that one, he was packing his suitcase. And if you don’t like that one, he was on the cellular phone with Paula. And if you don’t like that one…

The deception has worked. According to Sindlinger & Co.'s weekly survey, fifty-six percent of U.S. households now own stocks, the same percentage as in 2000. The Wall Street propaganda campaign has succeeded in keeping the public invested all the way down. Ominously, previous bear markets have not ended until investors became so disenchanted with equities that the percentage of American households still owning stocks dipped below twenty percent.

It doesn’t matter that three times as many Americans are invested in stocks as they were at the end of past bear markets. It doesn’t matter that price earnings ratios are still at levels consistent with a bull market top. It doesn’t matter that dividend yields are lower than at the pre-crash high in 1929. It doesn’t matter that investors have gotten slaughtered every single time the market has been this overvalued. The lessons of history do not matter. Don’t worry your pretty little head about it. This time is different.

The greatest speculative bubble in history began to deflate in 2000, and history suggests that stock price deflation will not end for the long term until price earnings ratios are much lower than they are today (see: 1932, 1974, 1982). The market has had four big up moves since the mania ended, and it will have others. However, statistics confirm that Wall Street insiders have been using rallies to sell the shares that Wall Street hucksters have been urging you to buy. It seems uncommonly nice of the big boys to now sacrifice their upcoming profits so that a stranger like you can get rich. However, America’s titans of finance want you to rest assured that – after having recently been given a stern warning by the New York Attorney General for stealing billions of investor dollars - all they really care about is your happiness.

Come over here, little girl – we have some candy for you. Let’s go for a ride.

Wall Street Treachery Series

Podvin, the Series

 


Last changed: December 13, 2009