Stock Market Reality Bites – Sentiment can Move Markets either way

Brokers are now saying things are overdone. The sentiment is too negative and it has taken the markets down too far. Stock Market Reality is now biting the hand that feeds it. Stock Brokers and Fund Managers are feeling the pinch as the stock market drops like a stone. Through their over-trading and market manipulation they have destroyed their own wealth machine – the stock market. In so doing they have hurt us all and Baby Boomers are the ones who can least afford this down-turn right now.

Here is an extract from an article written by an Australian Broker:

* Babcock Brown was up 47.9 per cent. This year down 79.7 per cent.

* Minara Resources was up 199.6 per cent. Now down 73.1 per cent.

* Perilya, up 82.8 per cent last financial year is now down 87.5 per cent.

* Paladin was up 100 per cent and is now down 41 per cent.

* Zinifex is 61 per cent off its high despite a bid.

* Toll Holdings was up 80.5 per cent. Now down 58.5 per cent.

* MFS was up 47.8 per cent but is now in discussions with its bankers.

* Macquarie Group was up 23 per cent. Now down 50.7 per cent.

* The banks fell 36.4 per cent.

* The property trusts fell 50 per cent.

* NAB, up 16.7 per cent last financial year, is 37.4 per cent off its high.

He goes on to claim these results are not based on fundamentals, analysis or any thing we can call rational. But I respectfully beg to differ.

I won’t deny there may be some over-sold but this is reality biting. We have a financial wealth money machine at work manned by the financial planners, the fund managers, the brokers and the stock market.

It is very simple. The brokers and fund managers get someone to do research on a company they want to promote and write a fancy report saying what an excellent investment it is and rate it as a buy. The brokers and /or fund managers who paid for the report then promote the stock and either the fund managers buy it for their investors or investors buy it based on the recommendation. The stock goes up in price and everyone is happy.

The problem is there is no independent research. The research is created for the sole purpose of promoting the stock and then the brokers and fund managers buy it because their research department recommends it.

So what is the real value of these stocks and what is the pumped up value created by the financial markets in order to generate profits for their funds? Maybe this is what is unravelling now.

The weight of the money these financial institutions control guaranteed prices kept rising.

Then along comes a credit crisis that make the money they have in their control dwarf in comparison. Their money is no longer enough to move the market but just gets gobbled up by the credit crunch and they lose control. This results in the markets falling and fund managers suddenly see the writing on the wall and panic sell stocks, wanting to take profits in order to keep their bonuses. The more they sell the more they need to sell.

The press tell us, the poor mutual fund investors, not to panic and not to sell. We are not the ones doing the selling. Our money is controlled by the fund managers and they are the ones who are selling. Why can’t the press report what is actually taking place and stop blaming us poor investors.

The Australian banks are a classic example of this. The financial industry keep reporting they see the Australian Banks as being sound institutions and cannot understand why they are down 30-40%. Who do they think sold the banks down? It wasn’t you or me or private investors. It was the big professional funds that sold down those stocks. Only they have the power to move the markets like this. Most funds probably had plenty of profit in the banks so could afford to sell them down in order to book some profits. The problem is they all sold at the same time which resulted in the large drop. But that doesn’t help us Baby Boomers who need to avoid large losses.

So these incredible reversals are the result of their own folly. They pumped and dumped the stocks and have to accept responsibility for that. It may be correct that the stocks are oversold but these people pushed the stocks into overbought territory and using bogus research reports made it all look normal.

It’s the fund managers that are panicking and selling whilst all the while telling you to buy and hold. Their rationale now will be they can buy the stocks much cheaper now and hopefully show a profit in the next quarter. Remember their bonuses are more important than avoiding large losses on your money.

It was manufactured sentiment that pushed up stocks to unreasonable levels and now it is real sentiment that is taking them down too far. Reality bites but it will hurt us poor Baby Boomers more than our fund managers or our financial planners.

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