Thursday, August 14, 2008

Why Stocks, and Why Now?

One often wonders what people are thinking when they make investments such as buying stocks. Simply put, when a trader buys shares of stocks, they are getting in on a piece of a company, in effect, becoming an owner of a sliver of that company, ostensibly without any of the day-to-day headaches that come with actually operating it.

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Nowadays, most people, including supposedly really, really smart people managing hundreds of millions - or even billions - of dollars, think that what they are buying will actually increase in value over time.

In theory, it's not a bad idea. In reality, it's often horrible.

What investors do is finance companies' operations. Usually, money invested in publicly-traded firms does nothing but change hands in the marketplace. For every buyer, there's a seller, and sellers have vastly different rationales than buyers.

Thursday's trading can be taken as an example of more people believing that their purchases will be worth more soon. Stocks were up.

Why? More buyers than sellers, for the most part, but where their money went is an important feature. Largely, money went into financial firms today, on the premise that these companies have gone through a rough period, but have put their problems behind them and those shares should continue to appreciate due to lessons learned.

Wow! If people are buying that whopper, I've got bridges and airplanes to sell you.

The financial firms have committed the most egregious kinds of money mismanagement imaginable over the past few years and are paying the price. Are people so gullible to believe that these very same people will handle other people's money better than they have in the past?

You bet they are.

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Fools. Giving these bankers, brokers and financiers more money is like giving a crack addict another snort, or an alcoholic a bottle of whiskey. One suspects that the money flowing into financials is from other financials - people who share the same addiction and can't - or won't - handle their own money themselves. It's a recipe for disaster and we've bought right into it.

Dow 11,615.93 +82.97; NASDAQ 2,453.67 +25.05; S&P 500 1,292.93 +7.10; NYSE Composite 8,385.97 +10.58

Well, maybe they're right. But, judging solely by the overall volume - the lowest in months - they seem to be out on an island in their perceptions. Foreclosures are up, as is unemployment, and inflation. Meanwhile, home prices are down and going lower. Wages continue to contract. The basic measure of wealth for the average American is going lower by the day. Economic conditions are generally horrible. But the banks... they'll make money. Sure.

Advancing issues on Thursday overwhelmed decliners, 3888-2356. New lows, however, continued to dominate new highs, 172-110.

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Oil lost 96 cents, to $115.03. Gold gave back all of yesterday's gains and then some, losing $17.00, to $814.50. Silver also traded lower, dropping 62 cents, to $14.36.

As much as I'd like to believe that the economic problems caused by, and now being handled by, Wall St. financial firms are abating, the massive day-to-day drops in gold and silver are telling me a decidedly different story. We've turned a corner, for sure, but the street we're headed down doesn't look so friendly.

And there's no going back...

NYSE Volume 1,008,494,000
NASDAQ Volume 1,867,483,000

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