Whether or not the market was up significantly last week may depend largely on which sectors of the market your stocks were in. Financials rebounded nicely (post death knoll of Bear-Stearns), and in general so did the Dow, and to lesser degrees the other indexes. But, I am not playing indexes, I am playing to beat them. And, last week, I got soundly trounced. Ok, the month before, I soundly trounced the others, so maybe things are just evening out, but I think I lost on that deal. And that is sad because many of the stocks I hold have been best of breed for their industries for some time, and likely, I am not the only one suffering here.

Ok, I violated some of my own investment rules, and I am paying the price for it. The first rule I violated was the diversification rule. I am well diversified in a few sectors, not the broader market. Hence when time for the beatings in my sectors, I absorbed all of the losses, and benefited from virtually none of the gains in other sectors. That may be OK, if the beatings do not continue. I have little assurance that the beatings will not come more often, and more severe though, than other sectors. Still I have some faith in my sectors, and strategy, so while I may shift some from losers to gainers, I don't plan to change that much else in the portfolio. Keep in mind, I am a long term investor. There will be volatility, and some weeks your sectors will not perform as well as other sectors. With proper picking, your stocks will outperform over time.

The second rule I violated, was in a bear market, as we have had lately (despite some people
saying we are not there yet officially), I had some stocks with P/E's over 15. Those are just stocks lining up for a beating in a bear market. The losses I took there, well, I have nobody to blame but me.

The third rule I violated, was "know your limitations". This is true especially in two separate instances. I have kept some under-performers longer than I should have. Most of them I thought had upside when the stock price was much higher. Failure to listen to Mr. Market, has cost me more than I should have let it. Some stop-loss transactions could have saved me several thousand dollars. Normally, I don't feel the need for them, but a bear market is not "normal". The other failure I made in this category deals a lot with the shipping stocks I have. I firmly believe there is a lot of money to be made in shipping stocks, largely just by playing the volatility of it. But, there just have been far fewer up days than usual in the shipping day rate indexes, and in truth, I did not make sells and buys when I should have to make all of that work.

OK, that is the shame on me. Is it going to get better? Well, I try to mange towards it. Truthfully, I don't think we are ready for it to get better yet. Last Monday, I looked at current vs forward P/E ratios across my entire portfolio plus a few more. It was frightening. Something like 45 out 50 stocks had forward P/E's less than current P/E's. So, essentially, either earnings have to go up significantly, or prices are not at bottom yet. Or possibly every Wall Street analyst has it all wrong. Wouldn't that be nice, but I doubt that many are all wrong. Since earnings only come out about four times a year, likely some stock prices are still mostly in drop mode. But, if there is a positive side, I have seen a few stocks start to bounce off of recent lows. All stocks do not bottom at the same time. Some of the rebounders, are some of the same that have taken the worst of the beatings too.

Now for the shame on us.

Personally, I think it has become abundantly clear that financial institutions/ investment brokerage firms have way too much pricing power over stocks. If there were just a housing bubble, most of that sector would be down, but it would not have had the impact across all sectors as we have seen. That overall downtrend has almost certainly been due to the mis-management of financial institutions. Yes, they may be covering for the failed mortgages, which may be related to the housing bubble, but they are also suffering from making bad decisions on loan qualifications, and security pricings to clearing houses. These financial institutions typically have large volumes of stocks in their portfolio's also. What we have seen a great deal of lately is these institutions being forced to sell off large volumes stocks to cover margin calls, and to gain liquidity. It is this group of volume sales which have caused the market prices of virtually every stock to fall.

Secondly, these same institutions have "tools" at their disposal which "disadvantage" an average investor. By using computerized trades, multiple buy orders can be generated, each with a successively lower bid price. So essentially, when they submit the sell order, there are enough "buys" to get back a substantial number of the stocks being sold at a now reduced price. If they can maintain roughly the same number of shares, through repeated buy and sell transactions, by forcing the stock price down, they have essentially freed up capital without losing any market share in any of the stocks. Now, one could argue that companies have been bitten by use of the computer generated trade programs, but I think software has been improved to the point now that much of the risk here has been removed. Yes, I do think they have some pricing power, and it is based more on the volume of stocks that they have than the tools which they are using that may cause stock prices to drop, but coupling that volume power with technical computing power does give them significant pricing power. And, I think that is what we have seen lately. The trend on lower stock prices across the board is likely more to do with financial institutions forced into "fire sales" on individual stocks (of which they own many). But, I find some issue with being able to maintain a roughly equal percentage of shares, with only the price being forced down. I am pretty sure that is a good percentage of what the market has seen going on here lately too.

And, things are worse than that. I truly hate to pick on a sector, as I feel compelled to today, but I see no choice but to state the obvious. The recent actions of the Fed have virtually proved the market is a system of "of banks, by banks, and for banks". Technically, you can substitute "financial institutions" where I said "banks" in the previous sentence, and it might be more accurate. The so called relief of the "credit crunch" (created by financial institutions mis-management), and implemented by the Fed via reductions in prime interest rates and taking over "risky" assets as security for loans to "banks", has acted only in the interest of banks. It has devalued the dollar, weakened the economy, thrown scare tactics into the markets, and in general assisted almost nobody except "banks" that should fail anyway for mismanagement. Yes, the Fed says they are staying out of that arena, and allowed the recent sacrificial lamb to be Bear Stearns, to provide the ILLUSION that they are not in support of financial businesses, when in truth they are doing virtually everything to sacrifice the consumer, and ultimately, the taxpayer (you and me). Yes, someone has to pay the bill for all of this. "Banks" reaped rewards in the "good times", but it is "Everyday Joe" (you and me) that will pay for it in bad times.

So, in short I do think our market system is "broken". I do think financial systems need more controls on the kinds of transactions they can generate, which may involve anything from volume control, pricing of transaction fees, frequency of allowable trades, to who knows what. It needs fixed, but I do not claim to have the answers to what all that fix might entail. But, it is abundantly clear to me, the system is "broken", as we have allowed too much pricing power, by a few. And we have allowed it to go on, and done nothing to fix it. For that alone, Shame on Us!

This is not a simple issue by any means. These same institutions are also supporting the retirement savings in many cases, of large volumes of citizens. But, in the end, the price controls they are implementing, are affecting stock owners world wide, and well beyond the scope of a managed portfolio.

And in defense of these same "financial institutions", and in their impact on our "American Stock Exchanges" (which are truly global in utilization), I am not sure the fix is in "banking", as they are just trying to compete on a more global level too, as they possibly should.

Remember the "good ol' days" when the price of a company's stock depended on the performance of the company, and not on the ailing financial institution the company may have heard of?

If I was to make a speculative guess on where to start to fix the problem of too much control on stock prices, I would guess, there should be a significant premium charge on sales of large blocks of stock. I don't think it would hurt to have a limited number of buys and sells on a single stock by a single investor within a short time frame of 1-3 days. Maybe the answer is to put the SEC to work. Those that don't want to could join the ranks of the unemployed. I am sure some of the unemployed would love a crack at what they have not wanted to address too, and some of them may even be better at it
.
It is hard to put such a large topic into such a small space and do it any justice at all. I have listed the highlights only. Some is my opinion only, some would seem to be glaring facts. But, in short, I have not seen much to be proud of lately, in my portfolio, or the market as a whole. And, as long as banks are in danger, so is everyone else. That to me, is just wrong. So, until we fix it, or at least recognize it as a problem we need to address, Shame on US All!

Government of, by and for a few, has never been what America is all about, even if it only relates to financial government. We do regulate other monopolies, and the financial systems have collectively become just that. A monopoly, strong enough to impact the overall stock market (especially relating to stock price), wealth and future of investors world wide, and ultimately to the consumer, and especially, the taxpayer.

And, a quick note on the George Bush proposal to "give" tax rebates back this year as an "economic stimulus package". Are we so nieve, as to believe we will not be paying for that too?

So, while we are taking things "up the pooper", will someone please pass the toilet paper (from a company I own stock in please)?

Comments: View Comments |  Wednesday March 26, 2008