Why You Should Never Trust Wall Street Again by Ron Ianeri

Why You Should Never Trust Wall Street Again by Ron Ianeri
Monday, February 22, 2010

Many of us are now managing our own money in the stock market. So, we are looking for signals from multiple sources to try to gain perspective and, ultimately, clues to the future direction of the market.

When all is said and done, there are basically four sources of information we look at. The first is Wall Street itself. The second is the government. The third is the media. The fourth includes independent analysts.

Each group can provide valuable information; however, each group can also provide erroneous information as well!

Our job as individual investors is not just to figure out where to find information; it is to evaluate information.

The evaluation process is not solely limited to determining if and how the information will affect the market but, also, to determine the legitimacy of said information.

If the News Seems Too Good to be True ... it is!

There are several factors that should be considered when weighing the legitimacy of information.

Our first source of information, and the one we will focus on today, is Wall Street.

Wall Street has analysts who give us their opinions about several fundamental aspects of a company’s financial situation.

The most commonly followed piece of information they provide is earnings estimates.

For a long time, a company’s earnings were compared to the earnings of the prior quarter. Then, seasonality became a factor -- a worthy factor, in my estimation -- and earnings for a specific quarter were then compared to the earnings of the same quarter a year earlier.

In either case, when comparing quarter to quarter, or the present quarter to the same quarter a year ago, we were looking at real numbers ... real growth or real contraction.

Technology Changes the Fundamental Landscape

Then the Internet came along. Brand-new companies with brand-new technologies burst onto the scene.

There were so many of those new companies, and they appeared so quickly, that most went public with very little earnings history. Most were spending big money to fund undeveloped ideas in the hopes of future success.

No one knew whether or not these companies were on the right track or not. Some would go on to be among the biggest, most-successful companies we know today. Most, however, would disappear as quickly as there appeared.

Most of the latter companies consistently reported losing quarters. The problem was how to judge which of the then-losers stood a chance to become a winner.




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So, with this new situation developing, Wall Street decided to usher in a new era of determining how to analyze earnings ... and lo and behold, we have earnings estimates.

Now, a company’s success or failure is no longer determined by how it is doing based on real numbers. Its success is determined by how Wall Street thinks it is doing based on arbitrary numbers determined by Wall Street!

Looking back at it, the introduction of earnings estimates was probably the right thing to do at that time, when so many companies had very little to no earnings history ... especially with so many brand-new start-ups. Wall Street had to give some guidance.

Were Wall Street's Intentions Ever Good?

However, like many ideas that start off good, greed has a way of making them turn bad. Remember the saying, "The road to hell is paved with good intentions!”

Suddenly, the indications of whether a company was doing well or not was defined by Wall Street estimates and not determined by real performance.

Wall Street had the way it needed to make companies look strong, even when they were not -- making it easy to raise money for them and, in the process, making it easier for Wall Street itself to make money.

They say that the proof is in the pudding. My bold statement needs to be backed by some fact to be legitimized.

My pudding is the latest market sell-off caused by -- or, at least, started by -- a collapse in the subprime debt market.

No 'Sell' Ratings ... I'm Not Buying it

We are all familiar with the story about how that crisis expanded and led to problems in the housing market and, finally, a full-blown credit crisis that destroyed such mainstay firms and institutions like Fannie Mae, Freddie Mac, Bear Stearns and Merrill Lynch ... not to mention the others that were brought to the brink of extinction.

Here, in what has been described as the worst condition since the Great Depression, the Dow Jones Industrial Average traded down from 14,200 to a low of just below 6,500 ... a whopping 54% drop in less than a year.

During that entire time, did you know that fewer than 5% of all stocks had an analyst’s "Sell" rating on them?

This fact seems totally ludicrous to me.

How can Wall Street, involved in this mess up to their necks -- knowing their own exposure as well as the exposure of all the major companies out there -- not know this was happening?

How is this possible?

On top of the ratings that Wall Street had on the market, how was it that these companies were still beating their Wall Street estimates while the economy was tanking ... and numerous major firms and institutions were going broke…..not to mention the smaller companies wiped out by this crisis?

Something smells rotten here.

The Street Deceives Those Who Would Eventually Save Them

Could Wall Street have been so wrong in their evaluations of the overall economy and individual companies in that economy?

I mean, how could these “experts in the market” be so wrong and leave themselves so dangerously exposed that it took the individual U.S. taxpayer to bail them out?

It is one thing for Wall Street companies to put themselves at blind, naked risk ... it is another thing to put us -- their clients -- at risk to anywhere near that level.

Why they would do it is a topic for another conversation. The "how" they would do it is what is important here.

Wall Street gets paid when you put money into the market. They make their money when you give them your money to invest.

Honestly now, are you more likely to invest in the market when it is going up or down? Although money can be made with the market selling off, the majority of investors will tell you that they invest when the market goes up.

Wall Street knows this to be true. Whether it is through brokerage or investment banking, Wall Street makes money when the market goes up!

Wall Street: Make the Markets Rise, Make More Money

It is in their best interest to see the market going up so much so that they will do everything in their power to influence the market to get moving upward ... including, but not limited to, lowering earnings estimates so companies can beat estimates and appear that they are doing well and handing out "Buy" recommendations like toilet paper.

Moral to the story: When listening to information from Wall Street or a Wall Streeter, make sure that you know that Wall Street has its own agenda ... one that can only be met by a rising market.

This can only be attained by you and me investing money into the market ... and that will only happen if we are confident that the market will go up.

(For those of us who use options, however, we know that we can make money when the market moves up, down or sideways. But Wall Street wants us to think the market is on a perpetual incline, which would in turn attract bullish investors like moths to a proverbial flame.)

Wall Street, in its insatiable quest to make the market go up, knows that this will only happen if the investor is confident. So, the news from Wall Street -- while not an outright lie -- is skewed bullish.

As an investor, we need to rely on news and information. When receiving information from Wall Street, make sure you consider the source!


Ron Ianieri
Contributing Editor
The Tycoon Report


P.S. How can you be informed without falling prey to the "news" that Wall Street is trying to feed you? It's simple: do your research, invest conservatively and profit with confidence.

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DMA 25 February 2010 - Last day of the month

Today, there is nothing much to update… as the movements are volatile but within the ranges.

/DX (USD Index)
Looks set to inch up higher today, looking to break above 81.4 Today is the last day of February, and should /DX keep above 81, it would signal bullishness in the USD in coming weeks.

/CL
Yesterday, crude dropped to 77.05, and recovered later in the day. Today, closing below 78 would be bearish for Crude in the short term. It appears likely that this would happen as the uptrend channel was broken, and now is being tested as a resistance.

/GC
Gold did a mini rally with the slight USD drop. This may mark the trendline testing level and is starting to look bullish to me. Given the USD potential to the upside, I would wait and see for the precious metals.

/YI
Silver also is beginning to look bullish and may be heading up with the other precious metals today.

/ES
Yesterday’s mid-day rally took the Emini’s further up than the last high. Today’s should likely be a mild down day.

SPX
Similar to /ES, there are conflicting signs, and I will take a mild down day as a base case scencario. This could turn really ugly IF AIG post really bad results, affecting sentiment and the PMI data coming out later tonight.
Ref:

Note: Any material posted here is my sole opinion, and the opinion may differ from others. It is definitely NOT a solicitation to do anything else as a consequence of reading this material. The material presented here is intended for educational and discussion purposes only.

DMA 24 February 2010 - day after tomorrow...

/DX
The dollar dipped and then made a nice rally... this dollar rally should last into next week, and take out the previous high of 81.43, thereby breaking out of the range it is in now. Closing Feb well above 81 would signal a longer term rally in the USD.

/CL
Crude’s rally wasn’t spectacular last night and not breaking above 80, it should be falling further down over the next few days-weeks.
/GC
Gold made several attempts to rally last night but eventually registered a gap down day, breaking down of the hourly range support. Today should close down and confirm its downtrend to somewhere near 1050 or slightly below. The indicators signal a downward bias for now.

/YI
A similar story for silver, down wave is starting…

/ES
The Emini futures look set for a down day albeit a smaller move down. An interesting thing that singaporeseeds highlighted to me last night was that there was a widening wedge… and it broke down of the wedge today in the afternoon, tested the wedge support but failed and should be heading down.

SPX
After a dead cat bounce, and registering a bullish harami at the top of an uptrend, I wonder if this double whammy actually tells more of a move down. However the indicators are mixed and looks like a milde down or mulling around the 50MA.

That’s a quick wrap from me…

The Trendspotting MadScientist

Note: Any material posted here is my sole opinion, and the opinion may differ from others. It is definitely NOT a solicitation to do anything else as a consequence of reading this material. The material presented here is intended for educational and discussion purposes only.

After the bounce - Market Analysis for 25/02/2010 by Singaporeseeds

The bounce was slightly bigger than I thought but it’s still a bounce. The market does not seem to be able to have any bullishness left to go any higher today.

Today, we should be making news lows for the week. I’m expecting the markets to end badly in the last 2 days of the week. Weekly support at 1,080 for the S&P and 10,160 on the Dow.

BREAK DAY! – Market Analysis for 24/02/2010 by Singaporeseeds

Nice failure of the 50 day moving average. It finally came when I thought it would be delayed again.

Dow daily chart


S&P daily chart


NASDAQ daily chart


Today we might see some bounces on the indexes as the tide turns. I’m not expecting a big downward candle today. We might see the Dow test resistance at 10,340 and the S&P at 1,110 before any big downward movement in the indexes. My initial target for this downward reversal over the next few days would be the early Feb 2010 lows.


I was looking at my charts earlier today and I noticed a commodity that I’ve traded a long time ago.

Daily chart of the Natural Gas ETF


It’s at the lowest I’ve ever seen. Found this when it was at $9 in Dec 09 and made a nice run from it. If I’m going to pick something to invest long term in, this would be it. Buy and hold it for the next 5-6 years and you will be a happy man. =)

DMA 24 February 2010 by MadScientist

For a second day in a row, the downdraft continues in the SPX and commodities, much more so in SPX, precious metals, less in crude.

/DX
As usual, the dollar is still leading the direction for now, and it appears to be consolidating at the upper ranges of the boundary. An intraday reversal action is about to be confirmed, at this point of analysis, but the feel is that there will be more upside to the USD although limited. Am expecting a breakout late this week Friday or next week for a couple of days before looking for a new direction analysis.

/CL
Noticed that Interest is increasing, and the daily charts are in a uptrending channel. Crude has lost some ground in opposing fashion to the dollar but has kept its fall from being dramatic. Its divergence from the USD may be beginning. Breaking above or below 79.5 or 78.5 respectively would signal its short term direction.

/GC
Gold is ranging near the lower end, with a gap down 2 days ago. Although it looks like the gap is unlikel to be closed, it is also not committed to close a gap (up) a week ago. Being trapped within ranges of these two gaps, a closing of one of them would indicate the direction. Furthermore, a down close today would increase the probability of Gold going down much further.

/YI
Silver futures charts are clearer and more committed in action. A lower high was qualified 2 days ago and breaking the previous low of 14.70 would be very bearish of silver. If it is to happen, it should happen next week.

/ES
The E-mini futures (S&P500 futures) have a daily reversal signal and hourly action are pointing down. The SPX is likely to open down today.

SPX
The SPX has failed the 50 period moving average (50MA) on daily and hourly. The long down candle yesterday confirms a lower high was qualified (see previous DMA posting for the chart outlook).

Overall, the dollar is mildly bullish but equity markets appear more bearish. Commodities should suffer a pullback due to the dollar’s advance further but Crude is looking to break that relationship.

Watch out for more volatility and downside bias.

~MadScientist~

Note: Any material posted here is my sole opinion, and the opinion may differ from others. It is definitely NOT a solicitation to do anything else as a consequence of reading this material. The material presented here is intended for educational and discussion purposes only.

DMA 23 Feb 2010

Got the down day yesterday in the SPX as well as commodities. The relationship is still not broken, and especially for Crude (/CL), I am looking for that break. The dollar rules again, and is now within a range. The SPX is hanging about the 50 day moving average and is ranging as well.

I am expecting more downdraft of SPX and commodities (USD to spike up) the later part of this week, without being surprised of a higher spike in SPX and commodities (USD to retrace a little) today if it happens.

So, game plan is still the same… for now, am just watching for some commitment.

Below is a photo of my expectation for the coming weeks/months. Some things do not click, but the picture should be sorted out soon. I still expect the downdraft of the markets with a high probability and am looking out for fundamental signals to confirm.  Breaking 1020 will trigger a trend change bias.



The Trendspotting MadScientist

Note: Do note that any material posted here is of my sole opinion, and my opinion may differ from others. It is definitely NOT a solicitation to do anything else as a consequence of reading this material. The material presented here is intended for educational purposes only.