How to Make a Rigged Market Work for You

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The Daily Reckoning | Saturday, June 2, 2012 How to play a rigged stock market to your own advantage, Readers weigh in on all things catastrophic...and then some... Plus, all this week’s reckonings archived for your hunkered down reading... --------------------------------------------------------------- Europe is the last place your attention should be right now... When Greece’s debt crisis first shook the world in 2010, people were so preoccupied by headlines about Europe many of them missed out on the big early gains being generated by America’s explosive shale boom... Now that same distraction could cause them to miss out on an even bigger moneymaking opportunity. Forget about France, Germany, Greece and Spain for a moment — something far more unexpected, important and life changing is about take place right here at home... Click here now to see what it is. Joel Bowman, checking in today from Buenos Aires... Joel Bowman What’s going on this weekend, Fellow Reckoner? Well, Argentina is falling apart. As always. We arrived back from our trip to Uruguay during the week to the sound of banging pots and civil unrest... “I suspect we may be near or at least very soon approaching the peak,” opined a friend over lunch a few days ago. He wasn’t talking about the much-ballyhooed Eurozone or the obviously moribund developed market model of consume, consume, consume... Our friend was talking about a moment in time here in Argentina. The proverbial excrement is about to hit the fan here...which is why we spent part of the week in Uruguay’s capital. More on this next week as the story unfolds. For now, check out how to make the most or pre-rigged markets in your own backyard. Chris Mayer has the week’s feature article, below... [This article first appeared in these pages on Wednesday, May 30, 2012] The Daily Reckoning Presents The Stock Market is Rigged Chris Mayer The stock market may be rigged...but not always against you. Lots of people believe the stock market is a playground for well- connected insiders. This is an old complaint...but it is one that seems to hang particularly thick in the air these days. The Facebook IPO only confirmed people’s suspicions that the game is unfair. Here was the biggest IPO in the history of US markets. And we learn that big banks and hedge funds got the early dope that Wall Street analysts dropped their estimates for Facebook’s earnings only days before the IPO. The small investors, who were not in the know, were led like pigs to slaughter. Facebook’s stock is down 29% since it opened at $42.05 per share on May 18. This grim result is causing a lot of howling about the IPO process and those “damn Wall Street banks.” Of course, you could take the view that investors who fool around with hyped IPOs get what they deserve. My sympathies lean in that direction. If you play with fire, you might get burned. Regardless, I agree with this comment in yesterday’s Wall Street Journal: What could have been a model example of the market’s strengths — an eight-year-old company with 900 million users raising billions of dollars from a cross-section of the investing public — ended up as a case study of the power wielded by insiders over outsiders. In short, Facebook is another black eye for a market that already has a lot of black eyes. In the last dozen years, we’ve suffered through two 50% drops from peak to trough, plus a long list of scandals and shenanigans. Facebook just added to the feelings of disgust and revulsion people already felt toward the stock market. You can see that revulsion in what people do. They’ve been yanking a lot of money out of the market — something like $1.4 trillion since 2007 and record amounts last year. This year, the outflows continue with gusto. Some people cite these outflows to say the market can’t or won’t rise. I think that’s a lot of baloney. Michael Santoli of Barron’s had a good column about this over the weekend: Bears, who claim that broad investment flows are needed to hold up stocks, should note that the US market just doubled in three years with retail selling into the move. Stocks, as an asset class, then, perhaps are getting a bad rap. People remember the headline-grabbing stories about certain stocks that “blew up.” But meanwhile, there are many stocks that just keep plodding along. There are many, many companies with good managers and decent businesses that give a fair shake to their owners. On a portfolio basis, such stocks can make the little guy a lot of money over time. But you have to know where to fish. IPOs, such Facebook’s, are not an ideal fishing hole. In my investment letter, Mayer’s Special Situations, we look for opportunities that are off the beaten path, where the odds clearly tilt in the investor’s favor. Two classic Special Situations are “spinoffs” and “thrift conversions.” A spinoff is when a parent company decides to carve out a business and give stock in this business to its shareholders as a standalone entity. Much research over the years shows that such stocks outperform the broad market. A thrift conversion occurs when a little savings and loan (S&L or thrift) goes public. It does so by offering shares in its IPO depositors. These are not typical IPOs where the money raised goes to the selling insiders. Instead, all the money raised (less underwriting fees) in a thrift conversion goes back into the bank. At the end of the day, shareholders own the cash they put in plus a bank. Again, research shows that thrift conversions are consistent winners over time. I have recommended five different thrift conversions to my subscribers and, so far, all five are in the plus column. Are thrift conversions boring? Yeah, kind of. But then again, they come with a lot less risk than many stocks. Thrift conversions are for patient people who like to make money patiently... and hate losing it. The process of how these particular Special Situations come to be almost guarantees that the odds favor you as an investor. Nothing works 100% of the time, of course. But it’s like poker. If you start with aces, you have the odds in your favor. These are just two examples, but there are other investments — like “stub stocks,” for example — that routinely deliver the goods. So is the market rigged? Yes. But it’s not always rigged against you. Regards, Chris Mayer for The Daily Reckoning World oil production is about to be shaken to its core... You won’t believe which nation analysts at Wall Street’s biggest banks expect to become the world’s biggest energy producer by 2017 — or the effect it will have on America... our economy... our future... Click here to see who is set to become the new king of oil — and how you can use the news to go for big profits as early as this MAY! ALSO THIS WEEK in The Daily Reckoning... “Arise and Walk!” — A Miracle Cure in the Works By Severine Kirchner Laguna Beach “Arise, take up thy bed,” Christ commanded a paralyzed man, according to the Gospel of Matthew. The man “arose and departed.” Healing a paralytic is miraculous... But it may soon become an everyday miracle of science, rather than a rare miracle of faith. In April 2011, the Washington Post reported that the first patient to receive a human embryonic stem-cell treatment for paralysis from a spinal-cord injury had regained some feeling in his legs. Live Long and Prosper — Nutraceutically By Patrick Cox Marco Island, Florida More and more frequently, I’m finding “too good to be true” technologies that are, in fact, very true. It is, I think, the hallmark of our era. Things we thought were impossible are coming to pass on a regular basis. To prosper, we’ll all have to re-examine practically everything we thought we could take for granted. I realize that the economic situation created by our feckless ruling class tends to cast a cold pallor on the world. It is depressing, I admit, but it will pass. The real story going on behind the scenes is that an unbelievable number of technological breakthroughs are emerging. These are not hypothetical breakthroughs. They have already occurred, but are not yet fully deployed. They will, in turn, drive astonishing progress and growth, as well as enormous wealth for those with the vision to help it along through investment. The Z-Shaped Recovery By Dan Amoss Jacobus, Pennsylvania The recovering US economy is not recovering...and neither are the economies of Europe and China. As the chart above shows very clearly, manufacturing activity in the Eurozone has already slumped to recessionary levels, while US manufacturing activity is merely muddling along. Spain’s Housing Crisis Will Be Good for Gold By Dan Amoss Jacobus, Pennsylvania Like a zombie in a horror movie, the Eurozone crisis just won’t die. Instead, it keeps lurching at investors from different shadows on the European continent. This same zombie that has been terrorizing the Greeks for months is now terrorizing the Spanish...and all of Europe is shuddering with fear. Triple the income, even in a down market? This little-known “loophole” could give you three times the income most stocks or bonds pay. And it’s got nothing to do with sinking your money into stocks or bonds. Rather, it was Ronald Reagan who made this possible — over 25 years ago — yet, it’s almost unknown to most Americans today. Click here for the full story. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, Reckoner Gordon C. writes... Back in 1968, the world was using more silver than it was producing. I bought 10,000 ounces and took delivery at ~$1.80/oz. warehouse cost was ~$50/month... All I had to do was wait :-). Then the Silver user’s Assoc. and friends got the US government to sell its 200 million ounce of “strategic” stockpile. The rate was a million or 2 per week for several years! The painful axiom I learned was “Never underestimate the government’s ability to postpone the inevitable!” Pass this on to B.B. et al with carte blanche. Next, Reckoner Bob L. chimes... The economic conditions in these countries continue to plague the world markets. Why doesn’t the EU suggest an organized and controlled bankruptcy process, one country at a time? The proceedings would liquidate debt and provide a basis for establishing a new foundation that would be balanced budgets and entitlements based on a balanced budget. Would be tough sledding for the people for a while but over time they would be ok. Iceland is a reasonably good example. Why spend baseless Euros and US $ that will not fix the problem. Spain and Greece need to do it on their own. DR: Excellent! And for the US...? And finally, Reckoner Steve G. writes... Having worked for college textbook publishers for close to 20 years now, I see no slow-down in increasing alarm on the part of college faculty over the lack of preparedness of freshmen to do anything that remotely resembles college-level work. I have also been disheartened as the same faculty continue to face ever-increasing pressures by administrators to lower the bar for students to pass their courses and graduate. I cannot help but remember a conversation I had in an airport just a few months after I entered the publishing industry. I found myself speaking with a fellow who had recently sold his insurance business to a larger outfit and was enjoying the role of consultant to his former employees and partners. I asked him what he saw as the major differences between the college graduates he had hired over the last few years of running the business, as compared with his first hires some 30 years before. His answer astonished me; he said he had not hired a recent graduate in more than five years, even though his business had continued to grow dramatically over that period. Seeing my clearly shocked response, he said, “Don’t misunderstand, I’ve hired almost exclusively college graduates for more than 20 years, I just stopped hiring them right out of school. I don’t have the time to teach them how to work. I let someone else fight those battles and then hire the best ones away from the competition. “I want new hires to know that when we say we start work at 8:30, that doesn’t mean 8:45; an hour lunch doesn’t mean an hour and twenty minutes; if you finish one task, you should be able to find another to keep you busy, you shouldn’t just sit and wait for someone to point out the next thing that needs to be done. And I expect every employee to be able to write a coherent business letter and respond intelligently to any inter-office communications. Apparently, they don’t teach any of that in college anymore.” And this was in about 1997. --- As always, we welcome your thoughts. Email them to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Who’s Really Holding US Treasury Bonds? Were it Not for Dumb Money... Dead Presidents Stay Dead Dollar Bugs Beat Up Risk Assets Brazil Cuts Rates and Signals for More Cuts! EJR Downgrades Spanish Debt The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. 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