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Market Manipulation and Dumb Money Ready for Slaughter!

Article Image 01 - B (Dec-01-2017)
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Last July, we exposed one of the largest corporate schemes to pump up markets using the Federal Reserve’s quantitative easing to fund stock repurchases.

Part two is now about to unfold, as all markets are fully loaded with corporations dumping their stock into the hands of small investors.

As equity prices rose on the wave of one of the strongest bull markets seen in decades, regular investors slowly made their way into the markets, not realizing that markets were being upheld by corporate stock buybacks.

As we reported last July, most households have not yet entered the markets; most retail investors, as shown in the image above, were still on the sidelines.

But the second half of 2017 paints a different yet predictable picture: retail investors bought the hype--in this case, they bought into the corporate “pump up” scheme.

Now, household investors have jumped into the bull market--albeit late in the game. According to JPM, a historical pattern that characteristically emerges toward the end of every bull market seems to be forming:


The main point is that all markets appear fully loaded.

As equity prices continue to push upwards, the “appreciation” of asset values have given investors an illusory sense of “wealth,” enough to make them feel comfortable in purchasing big ticket items such as houses, cars, expensive vacations, etc. This, of course, gives rise to GDP numbers.

But real economic wealth is created by producing and adding value to the economy, NOT by taking on more debt, inflating value, and then “spending” the paper wealth.

Let’s take a second look at this phenomena from a different angle. Here’s the correlation of stock repurchases to S&P prices:

Now here’s what’s happening with corporate stock buyback activity:

What is this telling us? Corporations have been fueling equity prices for years, slowly coaxing retail investors to get out of cash and into stocks, only to hand investors assets whose real values rest more on illusion (created by the buybacks) than on the production of “real” wealth.

Dumb money just got sold a load of watered stocks.

If you’re not familiar with this term, it stems from an old fraudulent practice in the livestock market where some cattle drivers would bloat their cattle with water to increase weight prior to sale, thus increasing the perceived value of their cattle. In principle, the current stock repurchasing scheme isn’t all that different.

Corporate stock buybacks are done! The “bold” (and/or foolish) investor is now left holding the bag.

Media pundits seem excited about this influx of retail capital. Are we witnessing yet another instance of irrational exuberance?

(CNBC) – “The level of enthusiasm about the market … has been building. We’re seeing more individuals come in,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.”

“I think it’s finally starting to suck people in … emotionally, and actually it’s hard to judge why now all of a sudden, but maybe it’s because of how persistent the move has been with so little volatility on the upside and on the downside,” Sonders said. “This year has been different. This kind of year pulls people in.”

Consider the following:

  • In the third quarter alone, Charles Schwab reported it had opened more than 100,000 new brokerage accounts a month!
  • TD Ameritrade noted that its asset inflows are currently at the highest since the 2008 financial crisis.


Everyone is jumping into the markets...NOW...AFTER A NINE YEAR BULL MARKET...the masses just decided that it was “safe” to jump in!

This is a pattern that repeats itself time and again to the point of predictability.

We can forecast the likelihood of the markets continuing to rise--the household investor being the main catalyst--but we can also forecast the even stronger likelihood of a crash. The exact timing cannot be predicted.

If it took dumb money nine years to identify a bull market, then it certainly won’t see the collapse which, as history has shown time and again, strikes with great speed and brutality.

Right now, smart money has already begun hedging; for months they have been positioning themselves by purchasing precious metals. Note how gold has been rising above key technical levels, and how silver has been solidly basing above its bottom levels.

To recap:

All markets are loaded...

 Corporations have stopped their repurchasing program...

 Dumb money just now identified the fact that we’re in a bull market...

 Corporations are handing off their shares to dumb money...

 And smart money is buying gold and silver to brace their assets from the impending crash…

 Which crowd will you follow?



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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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