Sunday, September 19, 2010
Even the Little Guy Now Realizes that the Stock Market is Gamed, And Many Are Pulling Out Entirely
As I noted in January:
Joseph Stiglitz says that Wall Street is hyping up the economy to sell more stock.
Has it worked?
Well, the stock market certainly has rocketed up from its March lows.
But many investors are still avoiding equities.
As Vincent Deluard - a strategist for TrimTabs Investment Research (25% of the top 50 hedge funds in the world use TrimTabs' research for market timing) - says:
We've never seen this before – such a huge rally, and the little guy is out.
In other words, the stock market rally is due almost entirely to hedgies, pension funds, banks and other institutional investors, and not every day investors.
It is even possible that the government itself has been propping up the stock market. And Bill Gross and Nouriel Roubini say that we have a Ponzi style economy.
TrimTabs notes that small investors pulled out $14 billion net from stock mutual funds from the beginning of last year through mid-December, on top of a net $245 billion withdrawn in 2008.
Given that, at the end of September, individuals held 80% of the $19 trillion in stock in U.S. companies, both private and public - according to the Federal Reserve (see this, for example)- recovery will not happen so long as the little guys are sitting on the sidelines.
TrimTabs notes that most of $592 billion taken out of money market mutual funds last year has gone into bond and bond-hybrid funds instead.
The little guy has not gotten back in since then.
Indeed, AFP notes that high-frequency trading and other scams by the big boys has so obviously destroyed a level playing field that the little guy is getting out of the stock market entirely:
Michael McCaslin is wary of investing his retirement funds in Wall Street. Its volatility and cryptic trading techniques make him feel lost and unsafe, he says.
"I tried to watch the market over the past couple of years, and you're just lost. I look at the market now and it's like Las Vegas, it's a gamble," the 65-year-old pensioner said.
Yet the extreme instability that has characterized the markets since the 2008 financial meltdown, often blamed on highly speculative trading, and the increased use of super-fast automated trading systems make Wall Street a tough environment for small investors.
And as a result, more Americans have fled the stock market in recent months.
"I don't have that ability, I am at the mercy of these people and with their automatic trading and the other things they can take advantage of, I don't know what can happen to the market because, you know, it can happen in milliseconds with the automatic trading," he said.
Often known as high frequency trading (HFT), the ultra-fast algorithms buy and sell millions of shares a day, executing deals within split seconds. They today account for more than 50 percent of daily trading volume.
HFT has come under increased scrutiny and criticism following the May 6 "Flash Crash" which saw market indexes dive by more than nine percent in minutes, only to rebound again after seconds.
The stock exchange's extreme volatility and complexity leaves average investors scared.
Even savvy traders find it almost impossible to master the stock market as trading increasingly becomes dominated by machines and fractured by a myriad of highly specialized and often little-known markets called black pools.
"How can I compete with a computer system that can put in 200, 300 trading orders in a second?" asks Troy Hanninen, a professional individual investor who works from his home in Missoula, Montana.
If Hanninen wants to buy stock at 35 dollars a share, computers will get them a fraction of a second before him at 34.999 dollars, he says.
"Ever since the domination of the computers came out, you have many individual traders like me struggle because of the ability of high frequency traders to sub-penny us... that issue has driven liquidity from the market."
"Retail broker-dealers have told us that their customers -- individual investors -- have pulled back from participating in the equity markets since May 6," she said.
The SEC's website has been flooded by letters from angry and frustrated investors in recent months.
"I recognize that there may be a variety of reasons for reduced participation in the equity markets, but the trend is troubling, particularly if concerns about equity market structure are playing even a small role in investor decision-making," [SEC head Mary] Schapiro said.
Tyler Durden - who has done more than anyone to expose high-frequency trading and related scams - has documented the recent outflows from the equities market in a series of essays. See for example this, this, this and this.