Who Rules the Trading Markets?

In today’s issue of the Market Slice, we discuss who rules the trading markets with insights into big investment players and news-driven markets.

Who Rules the Markets?
In the 1976 film All the President’s Men, the whistleblower named Deep Throat gives reporters Woodward and Bernstein a piece of advice for unraveling the Watergate conspiracy: follow the money.

This timeless adage has entered the popular culture as a catchphrase for figuring out the whos and whys of current events.

While this is not a political newsletter, when we look at the macro factors that drive markets, it can be helpful to understand the forces behind the events that impact our investments.

It is a well-known fact that the wealth of America’s wealthiest individuals has grown explosively over the past two years. Regardless of one’s opinion on lockdowns and vaccinations, this simple fact speaks for itself. COVID has been very, very good to the super-rich.

This is not a question of billionaire-bashing. It just points to two really important considerations for market-watchers.

  • How does the increasing concentration of wealth effect the average investor’s personal finances and domestic tranquility, and;
  • What happens if (when) the holders of massive equity positions decide to liquidate their portfolios and move into safe have assets?

 The elephant in the room of today’s markets is the extreme fragility to markets represented by this unprecedented wealth concentration. More than ever, markets are subject to the actions of a very small number of players, whose investments are – here’s that word again – concentrated in a tiny number of stocks (the so-called FAANG companies, plus Tesla and a few others.)

The volatility we’ve been talking about here for the past several weeks is rooted in this concentration, which in turn contributes to increasingly fragile markets.

There has never been a more important time to protect long equity positions. For many investors, a trading strategy that responds quickly to sudden developments in the markets. Soon FFR Trading will be announcing a new program for trading options, based on world events. Market Slice readers can get a sneak peek at the details… call (800) 883-0524 for details.

Bigger than the billionaires: the trillion-dollar asset managers
When we start looking at who really calls the shots in corporate America, however, we have to look beyond the relatively small influence of super-rich individuals. Because concentration of wealth and power has another dimension. It’s called asset management.

The largest asset management firms in the U.S. are Black Rock and Vanguard. With $13.5 trillion under management (almost 10 times the total net worth of the top 15 billionaires), these two firms alone exert an incredible influence over markets and government.

Two of the most telling uses of this incredible wealth are illustrated in the chart below, from Children’s Health Defense.

Who Owns Big Pharma + Big Media? You’ll Never Guess

https://childrenshealthdefense.org/defender/blackrock-vanguard-own-big-pharma-media/

When we consider that the corporate media and Big Pharma are both owned lock, stock, and two smoking barrels by these wealth management giants – and motivated solely by profit – the pandemic measures come into sharper focus.

Given the lack of transparency with these market behemoths and the intertwined board memberships and private conversations that take place beyond the eyes and ears of regulators – who are ineffective and housebroken, in any case — the average investor is at a decided disadvantage when it comes to trading based on current events and sudden market moves.

How do we level the playing field?
Well, for one thing, we have the agility that comes with being small. Big organizations take time to pivot… too many layers of decision-making tend to slow things down.

This ability to make and implement quick decisions can be a significant advantage… but we also need a superior information strategy. Decisions based on commonly available public information is less likely to provide the basis for quality investing and trading decisions.

 

An Example of News-Driven Market Events
We got a good example of how news events can drive market moves when the Fed released their most recent minutes on Jan. 5.

Despite a widespread expectation that interest rates will be increased in 2022, the market fell out of bed with the announcement that these increases could begin sooner than previously believed.

Chart courtesy of ZeroHedge.com

Understanding why the threat of rising interest rates would drive a sell-off hinges on a recognition of the relationship between stock dividend yields and interest rates. Here is a good explanation from DataDrivenInvestor.com:

“Right now the financial markets are flooded with ‘free’ money at zero cost. And that’s not a bad thing per se, given how that was necessary to keep businesses and stimulus programmes running last year, but it’s now starting to become a problem as the economic situation improves. The biggest sign of this is obviously the highest inflation in decades. 

The problems with this excess liquidity are essentially two. The first one is that everyone seems to think this free money will be there forever, which is obviously not going to happen. The second one is that the price of financials assets has skyrocketed because of negative real interest rates (and therefore lack of investing alternatives).

 Valuations are so high that the market is currently requiring just a 1.25% dividend yield from the S&P 500. In other words, everyone is fine with receiving $59 a year for every $4700 invested into it. 

That is a historically low number for the US stock market, almost the lowest. The historical average of the index is close to 4.25%, more than 3x what it is right now.”

S&P500 historical dividend yield // multipl.com

“But what would happen if the FED decided to raise interest rates [in 2022]? Two things: 1) people would partially disinvest, due to the higher attractiveness of those alternatives, and 2) the market would go back to demanding a higher dividend yield from stocks (due to both the higher cost of capital and the opportunity cost).

 That’s when the S&P 500 would inevitably fall, because all of a sudden nobody would be buying the index for the 1.25% yield it is now offering.”

While this analysis is not by itself a reason to go short (we’ve discussed that in the past… check our website to review previous Market Slice issues), it points to the importance of being ready to respond to unexpected developments in the markets.

With FFR Trading, you have a research and strategy partner dedicated to your trading success! This week’s issue contains numerous links to help you go deeper in your own market analysis… now, for help is sorting out what it all means for your trading, call (800) 883-0524 and speak with our Strategy Team.

Stay in the loop with more frequent investment and trading updates to have the tools to better manage your investment portfolio! Make sure to check us out on Instagram, Facebook, and Twitter! Happy trading, everyone!

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