Tuesday, August 22, 2006

How Smart Money Toys Around with Dumb Money

One of the most disturbing facets of the cable TV investment channels are the amount of influence they can wield on a uninformed public.

Some CNBC journalist will tout a stock, or sector, on television. Then, it suddenly jumps a few percentage points in value based on that pundits recommendation. Oftentimes, this recommendation is based on nothing but heresy or an opinion that can neither be proved or disproved. It's just "push marketing."

My cynical self tells me that this is ultimately a game of "hide the ball". Smart money is influencing their brokers to come on network investment shows to push a investment. The smart money investor then takes this opportunity to sell as the market heats up. This investor will reposition their holdings without losing market valuation that would typically follow a major selling spree by smart money investor. Dumb money, who where persuaded to buy a stock or sector, is left holding the bag when the investment eventually drops. The smart money man is happy with his earnings, the TV pundit/ broker is happy to help a long time client and the common man investor is left scratching their heads wondering, "how did I make such a bad decision." It's a cycle that happens more than you can imagine.

Bill Cara points to a time when it recently happened to the home builders.

"Throughout the cycle top, CNBC encouraged traders to buy these home-builders. They went on a cross-country tour; they hosted receptions; and they interviewed ad nauseum the leading CEO's of these home-builders and the money-grubbing real estate agents in the hottest markets who seemed intent on proving the notion that pigs can fly over and above the slaughterhouse.

In a word, it was journalism at its worst.

I even remember Kudlow on Nov-16-2005 telling us how stupid we were to be buying the goldminers because commodities were going to hell in a handbasket, but, he said, the better play was in the home-builders, which his guest Neil Hennessy echoed.

From the chart I published that day and the ones above, just look at the prices of the stocks in those two groups since mid-November.

What in fact was happening was that BIG MONEY (aka the gnomes) was selling real estate and buying gold, and the "Help" was telling you to do the opposite.

That's how the rich get richer and the rest..."

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