Should Investors Boycott the Stock Market?
by ilene - June 3rd, 2010 10:03 pm
Should Investors Boycott the Stock Market?
Courtesy of Frederick Sheehan of AuContrarian Blog
Investing in stocks is marketed as believing in America. Imbedded is the assumption that buying stocks is a fair deal. An investor might make or lose money, but the same chance was taken by all participants.
Although they have received little notice, the recently released 2004 Federal Reserve Open Market Committee (FOMC) transcripts show how the Fed was channeling its attention and distorting markets for the benefit of favored institutional investors. (See AuContrarian.com "blog" The 2004 Fed Transcripts: A Methodical, Diabolical Destruction of America’s "Wealth".) The 2004 Transcripts were not so much a revelation as a confirmation. The Fed’s valiant attempt to prevent the economy from deflating (its claim at the time) by inflating asset markets is now a matter of public record. FOMC members explicitly stated they were working with hedge funds and pushing housing prices up.
We know how this ended. The Fed’s policy was successful until 2007. Then all asset prices collapsed, along with the institutions (banks and brokerages) that believed the Fed could prevent prices from ever falling. The backstop was known as the "Greenspan Put:" the belief that Chairman Greenspan’s Fed would always prevent market prices from falling.
A put option gives the buyer an option (a choice) to sell a security at a price previously negotiated with the seller. A put option is valuable if prices fall below the level of the negotiated price. An investor can buy a put with the right to sell the S&P 500 Index at 800. If the Index rises to 1100, the option is worthless. (Why sell it for $800 when it can be sold in the market for $1100?) If the S&P 500 Index falls to 600, the value of the put option is worth at least $200 to the owner of the put: the Index is trading for $600 but can be sold for $800. The put option is an insurance policy against a stock market collapse. The need for the average investor to understand such instruments will be discussed below.
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The Greenspan Put begat the Bernanke Put, once the latter became chairman in 2006. Believers in the Put have reason for such faith. The 2004 transcripts show the FOMC toiled to fulfill this zeal. The zealots ignore the failure of the Put in 2007 and 2008.
The credit collapse of 2007 and…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.