Last week I reiterated;
"I believe investors will continue to play a cat and mouse game with the Fed. On one hand, if a cut in the discount rate is good enough to cause a sustained rally in the stock market, the fed will have no incentive to lower rates for the consumer."
"My argument is a very simple one. If the stock market continues to rally, the fed may take this as a sign that market confidence has improved, and there is no need to lower the fed funds rate for consumers."
Yesterday's sell-off was nothing more than a tactic that some unruly children like to use on their parents. It's the old "I'll show you what will happen if I don't get my way" theory.
In short, the market seems to be telling the fed, "if you don't cut interest rates at the September 18th meeting, we will sell-off the markets." Okay, fine. At least we know where we stand. This has been my prediction all along.
The markets are not very complicated if you understand the psychology.
Yesterday's 280 point sell-off occurred on below average volume. It will be interesting to see what happens next Tuesday when senior traders return to their posts. Right now these movers and shakers are enjoying what is left of their vacations in places like Martha's Vineyard.
Until September 18th, expect the same wild gyrations until the fed rate decision.
Let's get back to the psychology.
To understand the psychology of the people running the markets, you have to understand whose backyard you are playing in. The pure and simple explanation is the stock market is the playground of the rich. We, the small investor, are just invited servants who are always kept at arms length.
I don't care how many "Booyah's" you yell or hear, you are not in control of anything related to the markets other than your emotions.
Here is how the markets are designed, and who they are designed to benefit;
1) Investment Banks, Bankers and their Analysts.
- Investment Banks- take companies public and collect fees when they underwrite securities that are eventually sold to investors (mutual funds & individuals).
- Investment Bankers- use their knowledge to sell and put together deals for the Investment Bank. They get these bankers from elite business schools across the nation- The Wharton School, Kellogg School, The University of Chicago, Stanford, etc.
Personally, I like the Thornton Melon School of Business. At least you know what your getting with Thornton Melon.
-Analysts- are basically "bird dogs" for the Investment Banks and their Investment Bankers. They build personal relationships with the companies they are suppose to analyze. As the analyst builds a personal relationship with a company CEO or Chairman, when an investment banking need arises, the analyst with the best relationship is contacted about the business.
Once the analyst gets the heads up for new investment banking need, they contact their Investment Bankers who meet with executives to put together a deal (merger, buyout, new debt or equity issues).
Once the deal is done, the Analyst receives a finder’s fee, the Investment Bankers get their fee, and the Investment Bank makes a profit.
Analysts are hired to issue unbiased opinions on the companies they cover-LOL. It must be a tough thing to do since they have personal relationships executives, and receive bonuses for whatever investment banking they bring to the table.
Every morning on the financial channels, analysts have a delivery system for their opinions on the companies they cover. You've seen it; Merrill Lynch upgraded "XYZ", Goldman Sachs downgraded "ABC".
This delivery system gets mutual funds and small investors to react to the opinions issued.
2) Corporate Executives Are Issued Stock (For Free!)- Most of us are aware of the ridiculous pay packages of CEO's, so we won't get into that. But, the most irritating thing about their pay is the issuance of company stock/ options.
Personally, I believe CEO's and executives should only be paid a salary, and not "given" any stock or options. If these people really believe in their company, they should be made to buy stock like the rest of us.
When executives are "given" stock, they are getting rich on the backs of people like you and I. Here's the drill;
1) An Analyst who is attempting to acquire investment banking from a company, issues an "unbiased" buy rating on the stock.
2) The delivery system (financial channels) picks this up and begins to report it.
3) Stock begins to climb due to investor buying.
4) Corporate Executives sell the free stock they are issued and get rich.
5) Corporate Executives are happy and give more investment banking business to the Investment Banks who made them rich.
Well, this is how the system works.
In a nut shell, you can be a successful investor if you can acquire the mindset of Warren Buffett. Buffett is well aware of how the system works, and only buys bargains. He does not listen to analyst opinions; in fact, his method of investing is very simple.
1) Buy companies that dominate their industries.
2) Wait for a 50% off sale.
