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Let’s Get Back to Earnings

Prying the Market From the Short-Sellers

 Kenneth S. Janke During the 49 years I’ve been involved in the stock market, I have observed that it’s always one of extremes. Never, however, have I seen one as extreme as in the past year. There seems to be no logic in some of the stock prices we’re seeing today. Regardless of the gloom and doom that many are predicting, stocks in many cases are selling at less than 10 times estimated earnings for 2009. Dividend yields are at historic highs, at least in my lifetime.

Years ago NAIC co-founder George Nicholson,quoting some unknown source, said markets go up because of greed and they go down because of fear. “Our job is to instill greed,” he said. George was joking, but the comment made a lot of sense.
Both individual and institutional investors are consumed with fear today. Earnings don’t seem to mean anything. Companies that report profits increasing 10 percent to 12 percent are overlooked and their stock prices decline with the market averages.
My observation is that current prices aren’t reflecting the potential of companies. Instead, many of the institutions have decided that the way to make money is to sell stocks short, forcing prices lower. It makes no difference these days if a company expects to continue strong growth — as long as the company’s stock price remains under pressure, institutions can make money by selling the stock short.
The volatility we’re experiencing in the stock market is tied directly to the institutions. I have no idea how much of that volume is from hedge funds, but my guess is that it’s a substantial percentage. Hedge funds are highly leveraged; they borrow money either to buy stocks or to sell short. If stock prices go the wrong way according to their decisions, they have to come up with cash, and that means sales of fundamentally sound stocks to cover the margin calls.
Someone has to convince me that we need hedge funds. Individual investors have about 40 percent of the shares in this country. Yet institutions account for over 90 percent of the daily trades. Consider that individuals also own the assets in institutions, whether we’re talking about mutual funds or retirement accounts, but have no say in how they’re managed.
In my opinion, what we need are a few consecutive days of the market going crazy on the upside. This would force the shorts to cover their earlier sales, and the result could be even higher prices. It just might return the market to being earnings-oriented. It also might help to close the doors of some hedge funds. That wouldn’t be welcome news to investors who put all their money in those funds, but it could bring back some logic to people who have to make their own investment decisions.
It’s time for President Obama to direct the Securities and Exchange Commission to enact some rules that will stop the institutions from controlling our investment destiny. There’s too much at stake to have a few individuals dictate how the stock market will react to the whims of a few decision-makers.

Kenneth S. Janke, Sr., was the long-time president of BetterInvesting and a member of the magazine’s Editorial Advisory and Securities Review Committee for many years.

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