Wall Street’s Fake Out

banker xThe market is in the midst of a correction, something that hasn’t happened for some time. In fact, last year we did not see a correction at all. Stocks did fall a couple of times here and there, but a true correction, a fall of 10% or more, did not occur. And, when corrections don’t occur, Wall Street bankers are very unhappy.

Contrary to public belief, Wall Streeters make money from trading stocks and making bets on the market. The big bets are almost always to the short side, meaning that they are constantly betting against you and against the market. Why? Because they know that investors will sell in a panic and the market can move down a heck of a lot faster that it can move up in a short space of time. Panic selling is always more popular than panic buying. To see how upset Wall Street is that there was no correction all you need to do is to look at Hedge Fund performance in 2013. It was dismal.

In 2014 the S&P 500 gained 30% – an amazing rally. Hedge Funds, which make their money using various strategies, returned only 7.4% on average. What that tells you is that they were mostly short or betting against the market in 2013. They did even worse in 2012, returning just 6%.

It’s no surprise then that the market’s fall in recent days looks like “Hedge Funds gone wild”. It has all the hallmarks of a common correction and not “the big one”. I say that because of the ‘piling on’ effect. When hedge funds see a move down, they all tend to pile in to be able to exact the biggest toll. They know that individual investors are predisposed to pulling the trigger first and asking questions later, both on the upswings and the downswings. And what better way to prod you to sell than to make it look like a massive panic is ensuing. Of course, there has to be a catalyst that can be pointed to. In today’s case, that catalyst is Emerging Markets.

Over the past few weeks there has been turmoil in markets like Turkey, Egypt, Brazil and especially Thailand and Argentina. You may be asking what these markets have to do with the US markets, and you would be right on the money with that question.

The market capitalization of four out of five of those markets, combined, is less than that of Apple (AAPL). They are of little to no consequence. But they do carry a lot of headline value. When you see headlines like “Thai opposition leader killed” or “Argentina devalues peso by 35%” splattered all over the headlines, it makes you pause as an investor and rethink buying shares that day. In fact, you may think that it’s time to sell because past emerging markets issues became “contagions”, spreading to developed markets. That is not the case this time and paying attention to events in places like Thailand and Argentina while 99% of your investments are not in those types of places is the wrong thing to do.

Instead, you should be ignoring the punditry, which by and large are connected to Hedge Funds in one way or another and focus on the real story, and that is fundamentals of the companies you own or you want to buy. The stock market should be renamed anything but a market. Think about it. When you walk into a real market, you’re looking for opportunities and deals. When the prices are lower, you buy more. The stock market is the opposite for some reason. When prices are higher people are more confident and when companies go on sale, they are reluctant to buy them.

The current move lower is a correction, not a crash. Fundamentals in North America are getting better, not worse, and Europe and Japan are beginning to pick up steam as well. That accounts for almost 70% of the world’s GDP. So instead of falling prey to the hypesters who want you to sell your stock, you should be taking this opportunity to buy cheap shares of companies you like. You can bet the Hedge Funds are doing just that…at your expense.

To your wealth,

Banker X.

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