Favorite Myths of Stockbrokers

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The world’s
stock markets are in freefall. Why? Here is the universal explanation:
investors are worried about a U.S. recession — a recession that
the mainstream forecasters insisted in December was not going to
happen.

Here is a rule:
"No economist ever got fired for predicting u2018no recession.’"

Virtually all
institutional economists always forecast "economic growth will
continue." Growth usually does, so it is safe to predict it.
I cannot think of a recession in my lifetime when even a quarter
of the institutional economists had predicted a recession in the
previous year.

The
following assurances were published in December, 2007
.

Washington,
DC — Despite a relatively uncertain economic cycle, the leaders
of America’s top companies showed a slight uptick in their expectations
for the economy over the next six months, according to Business
Roundtable’s fourth quarter 2007 CEO Economic Outlook Survey,
released today.

The CEO Economic
Outlook Index, which indicates how CEOs believe the economy will
perform in the six months ahead, improved moderately, rising more
than two points from last quarter’s 77.4 to 79.5 today.

"This
quarter’s survey suggests that CEOs, as a whole, still see the
economy as steady and that the vast majority expect their sales,
capital spending and employment levels to either increase or remain
steady in the first half of 2008," said Harold McGraw III,
chairman of Business Roundtable and chairman, president and CEO
of The McGraw-Hill Companies. "These latest results demonstrate
tempered CEO confidence with a slight rebounding of expectations
since last quarter."

December
5

By Alex Veiga,
AP Business Writer

Forecast
Sees No U.S. Recession in 2008 Despite Housing Woes

LOS ANGELES
(AP) — The nation’s housing doldrums will drag on at least through
2009, dampening U.S. economic growth and job creation, but the
slowdown won’t push the economy into a recession, according to
a new economic report.

Despite plunging
housing values, rising oil prices and credit problems that continue
to plague Wall Street, the nation’s job market is unlikely to
suffer the kind of steep losses that would tip the economy into
recession, according to the quarterly Anderson Forecast by the
University of California, Los Angeles.

"We
still think an official recession is not in the immediate future,"
concluded Edward Leamer, director and co-author of the forecast
set for official release Thursday. . . .

In addition,
the U.S. unemployment rate would have to soar from the current
4.6 percent to nearly 6 percent by the end of next year, the equivalent
of a loss of at least 2 million jobs, Leamer said.

The
Great Recession of 2008?

By Diana
Furchtgott-Roth

December
21, 2007

It probably
won’t happen, says DIANA FURCHTGOTT-ROTH, and even if it does,
we may not know until 2009. . . .

On balance,
it is not likely that the United States will experience a recession
in 2008. Most economic forecasters expect growth to continue in
the 2.5 percent range. Employment and personal income have remained
strong through October and November of 2007, so consumption spending
should continue, buoying the economy. The weak U.S. dollar makes
American exports more competitive, thereby fueling economic growth
and employment. Even if the economy dips in 2008, its slowdown
may not last the requisite "several months" to be designated
a recession by the NBER.

Stock markets
around the world are giving their collective judgment on the accuracy
of these forecasts.

I told my Website’s
subscribers to get out of the stock market on November 5, except
for (maybe) energy stocks, if they did not want to hold U.S. T-bonds,
and a defense industry fund. To cover for the possible fall in these
stock sectors, I told them to short the S&P 500. The rest of
their portfolios were to be in foreign currencies (CDs), an international
bond fund, gold bullion, and an FDIC-insured bank account.

I had been
recommending gold since October, 2001, so this was no surprise.

I specifically
recommended against foreign stocks. In my December 14 issue of Reality
Check, titled "Bubbles and Levitation," I wrote:

There are
some investors who think that they can find safety and even profit
by purchasing stocks in developing nations like China and India.
They think these nations are somehow insulated from the Western
economies and the business cycle that has created the real estate
bubble. But there is no insulation.

So, I address
the following to readers who still are invested in stocks.

STOCKBROKERS

Did your stockbroker
call you in December and suggest that you short the U.S. stock market?

No.

Did he tell
you to sell all of your shares in your tax-deferred 401(k) and IRA
accounts and move to cash?

No.

Did he tell
you last year that there is going to be a recession in 2008, and
that shares will fall in anticipation of this recession?

No.

In good times,
stockbrokers tell you to buy and hold.

In bad times
they tell you to buy on the dips and hold.

Stockbrokers
are like barbers. For a barber, you always need a haircut.

The stock market
is now giving a "haircut" to millions of investors.

If you have
read my warnings that this would happen, you are at least not surprised
by what is happening. Maybe you did not believe me late last year.
Maybe you still own stocks. But at least you read the opinion of
someone who doesn’t make a living from commissions, which in turn
are earned by selling shares and stock mutual funds.

I have repeatedly
commented on the fact that the mainstream media refuse to recommend
the obvious investment defense: short the stock market. I do not
recall even one time over the last four decades when I read a mainstream
economist or forecaster say, "Get completely out of stocks.
Then use this money to short the market."

Instead, they
tell you to buy more stocks: sectors that will resist a falling
stock market.

I say, "Don’t
fight the ticker tape," to use the terminology of Thomas Edison’s
ancient technology. Get out.

If you are
truly convinced it’s going down, use a short fund or a short ETF
to short the S&P 500.

The reason
I included energy shares (maybe, though T-bonds were my first choice)
and defense industry stocks in my November 5 portfolio was that
it was for retirement accounts. Some people simply will not sell
all of their shares. They cannot bring themselves to get 100% out
of the stock market. So, I had them short the market to cover what
I thought was risky: holding any stocks at all.

FAVORITE
MYTHS OF BROKERS

Stockbrokers
have a list of myths — also known as lies — to tell clients. Let
us consider some of them.

"A broad
index of stocks goes up by 7% per annum, long term."

To assess the
accuracy of this statement, let us look at the performance of the
Dow Jones Industrial Average from February 6, 1966 to August 12,
1982. On February 6, the Dow made an intra-day high above 1,000
for the first time, but closed at 998. On August 12, 1982, it closed
at 777. Take
a look at the chart.
You can use your Adobe Acrobat reader to
enlarge it, so that you can see this 16-year period clearly.

That’s the
good news: a "mere" capital loss of 22%. But we must adjust
for price inflation. Go to the
inflation calculator of the Bureau of Labor Statistics
. Choose
the dates 1966 and 1982. Insert "1000." Click. Presto!
The investment lost two-thirds in purchasing power, after deducting
for the 22% loss.

Anyone who
bought and held the Dow in early 1966 until August 12, 1982, had
his head handed to him.

In September,
1982, I announced in my Remnant Review newsletter that I
thought 777 was the bottom, and that stocks would move up. I had
no idea how high and how long they would move up.

In February
and March, 2000, I announced that the U.S. stock market was close
to a mania-driven peak, that it could not go on much longer. On
March 24, the S&P 500 peaked at 1555 intra day and closed at
1527. It
fell below 800 in 2002.

The NASDAQ
had peaked at 5040 earlier in the month. I warned against it, with
its insane P/E ratio of 198. It fell to just above 1000 in 2002.
Investors lost 75% of their value, plus losses due to inflation.

The hottest
stock sector was the dot-com sector. This fell by 90%, but many
firms fell to zero.

Yet nobody
in the mainstream media was warning in late 1999 against the stock
market. The tech stock mania was rampant. It was a new era.

No, it wasn’t.

Since 2000,
the dollar has fallen in purchasing power by a little over 20%.
Add this to any losses you have sustained by adopting "buy
and hold."

THE BOOMLET
IN NOVEMBER

On
November 27 and 28, the Dow rose by 540 points.
Things looked
rosy. The market’s recovery was here. The woes of August were behind
us. So the experts thought.

In my November
30 report, "Grasping at Stock Market Straws," I ended
with these words: "This is not going to turn out well."
It hasn’t. Yet for two weeks after the late November boomlet, the
market continued higher.

Happy days
were here again! They weren’t.

That reversal
is what speculators call a bear trap. The stock market looks like
the worst is over. The optimists come roaring back in. They then
get hammered when the bear market resumes its fall.

This leads
me to the next beloved myth.

"Buy on
the dips."

People who
do this are called "dips" — at least by stock market bears.
Sometimes they are called "dipsticks." Or worse.

Stockbrokers
need commissions. Say that the stock market is falling. The sensible
strategy for the investor is to sell. A risky strategy is to sell
short. But sell.

A commodities
broker makes money both ways: long and short. What makes him money
is volatility. Wild swings are his cup of tea. Long, slow moves
don’t lure in the suckers, 95% of whom lose. He needs volatility
to excite people. He needs them to replace the 95% who lost money
and who will not return for another shearing.

A stockbroker
sells to people who are not traders. They are investors. So, investors
want to get rich by buying and holding. No muss, no fuss. That is
why volatility is bad for stockbrokers. It scares away the average
investor.

The retirement
fund managers don’t sell short except to hedge a position briefly.
If they guess wrong when short, they can get fired. Nobody ever
got fired for going long if every other fund manager was also long.

So, the brokers’
sales commissions are structured for long-term investors who keep
putting in their tax-deferred investment funds. A broker tells investors
to buy on the dips because he needs the commission money.

A discount
brokerage firm that offers no advice does not care. It sells to
all comers: bonds, money markets, foreign bonds and stocks. It offers
no advice. It provides services for on-line traders. But brokers
who call people are looking for commissions.

Also, media
advertisers need buyers of stuff. Bear markets scare investors.
Then investors stop buying stuff. So, the media are always bullish.
Advertisers pay for bullish sentiment only.

CONCLUSION

If you are
still in the stock market, you are suffering a lot of pain.

You
think, "But should I really sell?" You have been taught
the myths by your broker. You have seen these myths reinforced on
TV. You hesitate.

You must decide:
Is the fact that all of the American stock markets are lower than
they were in March of 2000 a relevant fact? Does this fact tell
you anything regarding "buy and hold" and "buy on
the dips"?

January
23, 2008

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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