The End of Wall Street As They Knew It ShareThis
by New York Magazine

And as the world becomes deleveraged, money has been pouring out. In October 2011 alone, hedge funds saw $9 billion go out the door. The London-based Man Group, the largest publicly traded hedge fund in the world, saw its stock dive 25 percent over the course of one day in September, when it shocked the market by announcing that $2.6 billion had been redeemed by clients over a three-month span.

“We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told me. “but with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers—too many funds with fewer dollars chasing too few trades—many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

In October, a thousand protesters stood outside John Paulson’s Upper East Side townhouse and offered the hedge-fund billionaire a mock $5 billion check, the amount he earned from his 2010 investments. Later that day, Paulson released a statement attacking the protesters and their movement. “The top one percent of New Yorkers pay over 40 percent of all income taxes, providing huge benefits to everyone in our city and state,” he said. “Paulson & Co. and its employees have paid hundreds of millions of dollars in New York City and New York State taxes in recent years and have created over 100 high-paying jobs in New York City since its formation.” The truth was, Paulson was furious that the protesters had singled him out. Last year, he lost billions of dollars on bad bets on gold and the banking sector. One of his funds posted a 52 percent loss. “The ironic thing is John lost a lot of money this year,” a person close to Paulson told me. “The fact that John got roped into this debate highlights their misunderstanding.”

It’s certainly true that Wall Street’s money played an important part in New York’s comeback, helping to transform the city from a symbol of urban decay into a gleaming leisure theme park. Consciously or not, as a city, New York made a bargain: It would tolerate the one percent’s excessive pay as long as the rising tax base funded the schools, subways, and parks for the 99 percent. “Without Wall Street, New York becomes Philadelphia” is how a friend of mine in finance explains it.

In this view, deleveraging Wall Street means killing the goose. The next decade or so will answer the question of whether a Wall Street that’s built on a more stable foundation—and with smaller bonuses—can sustain the city the way the last one did. But as banks cast about for a new business model, the city’s economy will need to find new sources of growth (this is why the Bloomberg administration has aggressively courted the tech and science industries).

Questions about how the banking industry—and the New York economy itself—will reconstitute are being widely debated amid a grudging new consensus among financial types that the past decades represented a distorted type of capitalism. Partly, they acknowledge, the profits of past years were a function of highly specific policies—the repeal of Glass-Steagall, Alan Greenspan’s expansionist monetary policy, the government’s headlong push to encourage home ownership—that allowed Wall Street compensation to explode.

Like an addict, Wall Street is now taking its first step toward recovery by accepting its failings. “TARP led to a lot of this anger,” said Jamie Dimon. “People said, ‘Well, you got bailed out and you would have failed.’ It’s not true in our case, but I can understand why people are upset about that.”

And Dimon acknowledges the issue highlighted by Occupy Wall Street. “I do think we’ve become a less equitable society,” he told me. “So I’d ask the question—let’s say we agree it’s become less equitable—what would you do about it?”

This brand of self-criticism is clearly smart politics. But it also appears to be somewhat sincere. In recent months, a parade of financiers have jockeyed to get on the side of the Occupiers. At a public forum at UCLA’s Anderson School of Management this past November, Bill Gross, the co-head of the massive bond giant PIMCO, told the audience that he shares “sympathy for labor as opposed to capital.” Gross, a registered Republican, articulated the view that finance, and Wall Street compensation, had become disconnected from the real economy. “It’s been several decades when money and finance have dominated at the expense of labor and Main Street. How can one not sympathize with their predicament?”

Lately, you may have noticed the volume in the markets has been lower. No one seems to know why. It seems the “retail investors” (you and I) have been staying out of the market and the “pros” (not you and I) have been doing very little also judging from the returns they are producing. This is giving us a strange market. One wonders why this is happening.

……here’s an interesting observation from UBS floor guy Art Cashin.

Apparently yesterday was weird and low volume even by the latest standards.

Monday’s comatose action. We projected that final volume might be 100 million shares better than Monday. When the closing bell finally finished ringing, it was only 50 million more than Monday.

“So what,” you say. “No big deal.” That’s probably right but when you study the tape daily for decades, you wonder – what changed?

Tuesday’s anomaly was caused by two somewhat unusual things. The first was a slight slowing of the trading rate between 2:00 and 3:00. The run rate between those two hours is normally very consistent. Any changes are almost always the result of some news event. Yesterday, there was no news that we could find. A bit strange.

The other anomaly was not quite as rare. It was simply a disinterest in market on close orders. The normal runoff in those orders averages 100 to 150 million shares. Yesterday, it was barely 50 million. Trading geeks (like yours truly) follow such things.

DOUG KASS: SELL EVERYTHING! EVEN ROUBINI IS BULLISH!
by Joe Weisenthal

Hedge fund manager and writer Doug Kass just sent out a blast titled SELL EVERYTHING.

Why?

Because Roubini is bullish.

From CNBC:

The perennially negative Nouriel Roubini – nicknamed Dr Doom for his usually critical views – is turning bullish. You read that right, Roubini is betting on additional stock market gains.

“We’re a believer; we’re celebrating. We think the rally has legs,” explains Gina Sanchez, Roubini’s director of equity and allocation strategy.

You’ve been warned.!!

13 Things That Everyone Believes
by Joe Weisenthal

Conventional wisdom is probably useless from a direct investment standpoint, but there is value to knowing what conventional wisdom is. After all, that’s how you can identify the deviations from it.

So, real quick, we thought we’d slice up the main nuggets of conventional wisdom right now based on what we’ve been seeing:

The ECB, via the LTRO, has successfully backstopped European banks, and so a financial crisis now unlikely.

Greece may or may not hard default, but either way, they’re a lost cause…

… And after Greece comes Portugal. They’re screwed too.

But nobody else is in huge trouble, really.

The biggest risk this year is in the Mideast, especially in dealing with Iran.

Obama is the favorite to get re-elected, provided Europe doesn’t blow up the US economy.

The US economy will grow this year, but at a mediocre pace — just like 2011, probably.
China will slow a little bit this year, but won’t crash.

The US is staging the most impressive growth right now, as Europe/Asia still disappoint.

There’s a big risk of hard fiscal retrenchment in 2013…

…But Congress will step in and avoid the hard pain at the last second, like it always does.

The US will basically have low rates forever.

US equities are still in a secular bear market, and are priced for low returns.

4 Smart Ways To Make Lemonade When The Market Gives You Lemons
by Brian Reed, Investing Answers

When the market heads south, many investors panic and make irrational choices.
They might buy and sell stocks on a whim, for example, trying to buy at the ideal price.
But this behavior indicates that they’re asking the wrong question: when should I invest?

Many investors try their luck at timing the market.

And while they’re busy making random trades and trying to win big, they’ll most certainly rack up large transaction costs and management fees.

Other investors might react by pulling all of their money out of the market completely, missing out on bargains.

The people who make the most of a down market don’t freak out when things get hairy. They don’t try to predict every single little move the market makes. And they don’t take all their marbles and go home, either.

Here are some guidelines and investment suggestions that can help you weather the storm during a down market:

1. Keep Investing Slowly and Steadily

In a down market, people tend to hold off on investments or wait “until the time is right.” You might be surprised, but that isn’t the best approach. In the current economic climate, every day is volatile, which is why the best method is to invest in regular intervals – an investing method known as dollar cost averaging. By doing this, you absorb the volatility and take advantage of share prices while they’re on sale.

For example, let’s say you have $5,000 to invest in a mutual fund that was priced at $10 per share but has recently fallen to $8. If you go “all in,” at $8, you might be getting an immediate deal compared to the guy who bought at $10.

But what if the price falls to $5? You’ve used all of your money and can’t get in on the better $5 deal, plus your $8 per share investment has dropped in value. The big assumption here is that the stock will eventually rebound to $8, $10, or better.
Rather than trying to predict the market, the key is to gradually move your money into the market by investing quarterly, or better yet, monthly. That way if stock prices move down, you’ll pick up more shares “on sale” over the months, and when stock prices go up your returns will be magnified.

2. Diversify

Having your portfolio diversified is more important than ever in a down market.

An investment porftolio with proper asset allocation doesn’t have money tied up in just one type of investment. Instead, it has a mix of investments which may include stocks, bonds, real estate, cash and other asset classes.

By rebalancing your portfolio, you’re effectively spreading your investment dollars across different asset classes to reduce risk — so you’re not putting all of your eggs in one basket. That way no one poor investment in your portfolio has the power to take you down in a down market.

3. Cut Your Fund Manager’s Salary

When you invest in mutual funds, make sure to choose ones that have low expense fees. When money is already tight, the last thing you want is to spend more money on fund managers and expenses.

Look for funds with the lowest trading and management fees — you’ll find the fees listed on each fund’s prospectus. A good ballpark expense fee is below 0.75%.

If you don’t mind investing in index tracking funds, exchange-traded funds are an even lower cost alternative to mutual funds.

4. Ditch Some of Your High-Risk Investments

If you have a long time before retirement, your portfolio probably doesn’t contain a lot of bonds, treasuries, money market funds or certificates of deposit, which are famously low-risk.

But if you have less than a decade before retirement, a down market could be a good time to invest in some of these safer, more reliable investments.

They might not offer huge returns, but their stability can help you move toward your long-term goals by avoiding losses as retirement approaches.

Short-term bonds are one low risk investment currently in the spotlight because they are less likely to be affected by interest-rate shifts. And despite the government’s recent credit-rating downgrade, government bonds such as Treasury bills, bonds, notes and inflation-protected securities are still a relatively safe way to invest money.

In a down market, you also want to grow the cash allocation of your portfolio. The easiest way to do that is by investing in money market funds or obtaining certificates of deposit — both low risk ways to grow your money.

Investing Answer: Down markets are inevitable, but by maintaining a solid financial plan of consistent investment and diversification and by choosing low-cost and risk-appropriate investments, you can come out prepared for the bull market that’s just ahead.