It happens almost every quarter, especially at mid-year: If the
market trend has been up the previous 3 months in an ongoing bull
market, no matter how anemic, it needs but a small goose. But if
the previous few weeks have been flat or down, more aggressive
action is taken.
Wall Street trading houses will then enter massive "program
buys" and provide ample media interviews putting the rosiest of
slants on whatever the current news is. This provides a feel-good
rally that is typically good for a couple days to a week, anyway.
This quarter was no exception. With the Dow down 167 Thursday at
12,455, Wall Street swung into action. At 2:35 p.m. the first
program buys hit. An hour and twenty-five minutes later the decline
was nearly erased as the Dow closed down just 25. On Friday, the
Dow opened at 12,791, on its way to a close at 12,880, a swing of
428 points, or +3.4%, in just 8 total hours of open market. The
trading houses, hedge funds, mutual funds, and pension funds all
joined in the boost, but they may have begun selling by the
And what was the great news that "caused" the rally? According
to MarketWatch, investors were cheered by "EU policy makers ...
agreeing to relax repayment conditions for Spanish banks and lower
the bar to possible aid to Italy." Wait a minute. The EU decided to
relax repayment conditions for Spain? That helps the EU's fiscal
condition how?!! And they lowered the bar to giving a bailout to
Italy -- this is good news
?? But we mustn't forget that the EU has also created yet another
new agency, this one called the Troubled Country Relief Program
((TCRP)) which they (under-) funded with all of $149 billion U.S.
In plain English: they kicked the can down the road yet again.
But it didn't matter. If Wall Street hadn't spun this as good
news, they'd have just keyed on something else. More people buy
houses in the spring and summer, so that "proves" we're beyond our
housing woes, or (temporary) summer hiring is picking up so that
"proves" unemployment is declining, or whatever. But all this
raises two key questions: (1) Why do they do this? And (2) How do
they get away with it? Thereby hangs a tale ...
Why Do They Do This?
The short answer is: "Because they can." 40 years ago, mutual
funds, pension funds, and Wall Street trading houses comprised less
than half of all the trading volume in the stock market. Individual
investors take (or took, anyway, and the smart ones still take) the
time to digest the news and move rationally, not precipitously.
Sure, they could be panicked after an onslaught of bad news or
become euphoric after a plethora of good news but this all took
time to spread through the collective investor pool that was needed
to drive the markets one way or the other.
Today, institutions comprise 76% of all trading volume and
climbing. With the destruction of Glass-Steagall, what we once
called banks were allowed to bring their formidable capital into
the day-trading arena. With the more recent sweetheart deal
allowing of what are clearly brokerage firms like Goldman Sachs to
register as banks in order to get taxpayer bailouts, even more
recklessness was encouraged. The advent of technology that allows
instantaneous transmission of news further panics or incites the
average investor and facilitates program buying, dark pools, high
frequency trading, and profits from scalping hundredths of a penny
thousands of times a minute.
Their traders are not paid to select fine companies and grow the
assets of the "bank" as the American economy recovers and excels;
their bonuses depend on what they do in a single trading day with a
goal of closing most or all trades that day. Indeed, Goldman issued
a sell short recommendation on the market the week before, could
easily have bought cheap when the public acted on their
recommendation, and could just as easily now sell high!
It isn't just the usual suspects that participate, however. Your
mutual fund, your pension fund and the hedge funds also contribute
to the madness. You see, the only time they must publish their
holdings are at quarter's end. How dumb would they look if the
average investor, who only looks at their quarterly statement and
only sees the Top Ten holdings, saw that 8 of the top 10 were down
for the quarter? So mutual funds and pension funds quietly dole out
the stocks that are down over the previous couple weeks, knocking
down the prices of perfectly good companies their in-depth analysis
previously told them were the best companies to buy, then join the
feeding frenzy in buying the Dow 30 or the highest-capitalization
stocks on the S&P 500, or the most-liquid and most-recognizable
names on the Nasdaq like Apple (
), Microsoft (
) and Google (
Yes, it's smarmy, and yes, the effect typically lasts only for a
week or so before the primary trend in place reasserts itself, but
it works to keep their investors in line. As long as it appears to
the fund owner that they've held these winning stocks the entire
quarter, their investors can forgive a little underperformance;
after all, just look at the great companies they own! It doesn't
occur to the investor that those "winners" may have been bought two
days ago and may be quietly sold in the next few days in order to
buy something else. Which brings us to ...
How Do They Get Away With It?
The rational investor might at this point think, "But if they
bought these things in a buying stampede, aren't they now stuck
with these stocks? What if the market goes against them?" Ah, but
the reason it works is investor psychology. We all hate to take
losses, but we also hate to miss something big.
So the stampede may start with the bulls at the front (the
institutions). But they depend upon the excitement engendered by
the market action itself and the gushing media coverage of it to
get the rest of the cows and bulls moving. Remember, they make
money trading vast amounts of highly liquid securities scalping
pennies where they can. Once the rest of the now-stampeded cows and
bulls are clamoring to buy "before they miss the big move" the
institutions peel off and let the rest of us proceed toward the
How do they get away with it? The same way Lucy van Pelt gets
away with pulling the football away from Charlie Brown every year.
Charlie Brown is a nice kid who wants to believe in the goodness of
people. As investors, we can't imagine how anyone could do such a
thing. And before you put on your tin-foil hat and think this is
some grand conspiracy, let me say clearly that I do not believe it
is. Each firm acts individually for its own benefit and the result
may look like collusion, but I imagine it is not. It's just so
effective a tool that they all use it.
If It Works, Why Don't We Join Them? Why Don't You?
Because it isn't
. And because you and I don't have 50 traders on staff hunched over
super-computer that sells a nanosecond before or after someone else
does. And, finally, I think our clients and other sophisticated
investors aren't fooled by these end of quarter window-dressing
Besides, in the words of the great value investor Ben Graham,
"In the short term the market is a voting machine, but in the long
term it is a weighing machine." The problem is that "short term"
and "long term" may have become compressed since his day -- but the
sentiment still holds true.
Is this, then, the beginning of a brand new bull market or just
more Wall Street window-dressing shenanigans? No one knows, but for
my money, I'd rather remain hedged rather than drink the Kool-Aid
In the U.S. we are looking down the barrel of the 2nd quarter
earnings reports. Already, stalwarts like Procter & Gamble (
) and leading indicator companies like FedEx (
) have warned their earnings will disappoint. It's likely many
others will as well.
GDP growth was 3.0% in Q4 2011, then declined to 1.9% in Q1, who
knows about Q2?
Earnings might disappoint, but how about something even more
important? We must create jobs for Americans who want to work. In
Q1, job growth fell from 243,000 in January to 216,000 in March. By
May, that number was down to 69,000. Not an attractive trend. It
may have reversed in June -- or it might only be a one-month
How about housing? While housing
finally rose in selected markets, what kind of dent did that make
in the overhang of foreclosures, short sells and other inventory?
Add in the fact that factory orders, retail sales and consumer
confidence are all falling, and the summer outlook doesn't appear
to be brightening in the U.S.
In the eurozone, every time they encounter a structural problem,
they paste over it with a short-term fix, creating new layers of
regulation and new names for old (failed) approaches. $149 billion
for the new TCRP? They already gave Ireland and Portugal $116
million and Greece and Spain even more. Will $149 billion be their
In the rest of the world, the BRICS and Asian economies are
showing both economic and stock market deterioration. How could
they not, given that their outsized sales of resources, commodities
and finished products went less to their own people than to Europe
and the USA?
Yet, with all this on the short-term horizon, I remain an
optimist on American ingenuity and hard work. I think it may take
the entire summer, but I see a powerful end to 2012. But for the
short term? We'll stay safely hedged. If you agree that end of
quarter window dressing is a poor reason to rush precipitously into
the market, you might want to do the same!
Finally, giving at least my answer to my headline question, is
window-dressing a crime? No. There may or may not be collusion
among a few of the major players (that would be a crime) but no one
has ever proved it. In fact, it is rather more pathetic. It's just
individual institutions that all have the same goal: to not look as
dumb in a particular quarter as they actually were, and to make a
few bucks at the expense of the latecomer bulls and cows if they
We remain hedged in this volatile market. I have no positions in
any stocks mentioned, and no plans to initiate any positions within
the next 72 hours.
The Fine Print:
As Registered Investment Advisors, we see it as our
responsibility to advise the following: we do not know your
personal financial situation, so the information contained in
this communiqué represents the opinions of the staff of Stanford
Wealth Management, and should not be construed as personalized
Past performance is no guarantee of future results, rather an
obvious statement but clearly too often unheeded judging by the
number of investors who buy the current #1 mutual fund only to
watch it plummet next month.
We encourage you to do your own research on individual issues
we recommend for your analysis to see if they might be of value
in your own investing. We take our responsibility to proffer
intelligent commentary seriously, but it should not be assumed
that investing in any securities we are investing in will always
be profitable. We do our best to get it right, and we "eat our
own cooking," but we could be wrong, hence our full disclosure as
to whether we own or are buying the investments we write
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