The stock markets have been soaring higher since March 2009 when the S&P 500 Index traded as low as 666.78. Today, the S&P 500 Index trades above 1800.00 and continues to rally higher nearly every day. How could the stock markets go up so much in less than five years, yet the economy is still so sluggish? The answer is open to debate, however, most will agree that global central bank intervention has been the primary catalyst for higher equity prices.
Below are three things that Wall Street doesn’t want you to know:
1. The banking system around the world is still very fragile. The derivatives market that nearly destroyed our financial system in 2008 has grown even larger. It is estimated that the over the counter (OTC) derivatives market is now around $700 trillion. In 2008, the derivatives market was estimated to be around $500 trillion. The big banks are the primary traders in the derivatives market and these banks have grown exponentially larger since the 2008 financial crisis. So there are fewer players in the game now, it remains to be seen if that is a good thing or a bad thing. Countries such as China have been facing liquidity problems over the past year. This is not a healthy sign, especially since China is now the second largest economy in the world. Either way, banks around the world are still very fragile and that is why central banks around the world such as the Federal Reserve, Bank of Japan, Bank of England, and others continue to keep the easy money policies intact. They simply have to pad these large banks with liquidity. Why do you think the accounting standards were changed from mark-to-market to mark-to-model. Mark-to-Model accounting refers to the practice of pricing a position or portfolio at prices determined by financial models, in contrast to allowing the actual market determine the price.
2. Financial reports can easily say anything when magic accounting is involved. Just think about how many companies beat their earnings estimates by a penny every quarter. How is that possible? It is possible because the accounting standards allow certain charges, item exemptions, and other accounting tricks. This has been going on for years. It is still amazing how a company can beat its earnings estimate by a penny, but miss on revenue. We see this every earnings season. This is one of the reasons why traders and investors should use charts and technical analysis instead of news. Price action in the stock does not lie, while the earnings report can be full of misleading statements.
3. Beware of upgrades and downgrades at extreme highs and lows. Please understand, large financial institutions move stocks, not individuals with a 401k or an online account. In September 2012, I cannot tell you how many people in the public were buying Apple Inc (AAPL) stock between $600 and $700 a share. The stock was being upgraded by financial institutions every day. Some firms were upgrading the stock to $2000.00 a share. Obviously you all know that AAPL stock topped out around $705.00 a share in September 2012. While the public was jumping into AAPL stock the institutional money was selling the stock to the unfortunate public. As a rule, when everyone loves something you should start to look the other way and perhaps begin to hate it. The same thing happens with almost everything in life, when everyone owns the popular toy, clothing item, car, or anything, it is usually the time that particular item has run its course. The stock market is really no different, but you won’t hear this from Wall Street.