Stocks a sucker bet

With corporate profits in the records of the U.S. breaking, Wall Street anxiously anticipating the return of individual investors to the stock market. It can be a long wait, because the little boy may have concluded the investment in shares is a sucker bet.

Investors, unlike traders, buying stocks in companies whose profits are ready to go. Conventional wisdom says that stock prices follow profits, but in the last two economic cycles, which simply did not happen.

In February 1998, the first S & P 500 closed above 1,000. From the first quarter of 1998 to the third quarter of 2010, business profits have increased by 203%, but the average daily close of the S & P 500 rose by only 7% - about half of one percent per year.

purchases of stocks does not seem to pay more because most of the greater value created by increased profits was captured by hedge funds, traders electronics, private equity funds, and aggressive mergers and acquisitions (M & A) stores - free-standing and major investment banks - which have mushroomed over the past two decades.

Their activities, in essence, are divided into two categories. aggressive trading - for example, by exploiting the possibilities complex short circuit, quickly identify and exploit their intentions in negotiating large mutual funds and other tactics often associated with exotic and ambiguity of e-commerce. Direct purchase of assets - buying companies underperforming, in whole or in part, to force managers to pay large sums to reorganize their businesses through mergers and divestitures, or exploit business opportunities unattended town manager have been lazy about pursuing.
Not everything was negative for stock prices or unfair.

Cleverly summarizing public information to identify the value in the company before other investors is the way in which stars such as Warren Buffet has become legend. The permanent increase in stock prices in the wake of their actions, and that's good for the ordinary investor in the stock already collect.

Shaping up underperforming companies probably started even before the first greek shippers bought out the rival captains to discharge incompetent and reduce the risks of the sea, spread overheads and get more leverage with the potters, weavers, farmers, and foreign merchants.

However, too much of a good thing - the e-commerce and aggressive coverage - can be disruptive. Watch the costs imposed by the May 6 "Flash Crash" defensive tactics by managers or company besieged by unjustified short circuit. And, often regarded as private equity and M & A shops acquisition of companies and load them up with debt, make large payouts for business, and then disappoint investors and creditors.

Through the above information, fast execution and aggressive marketing, traders and businessmen to capture a large amount of potential increase in value created by new and expected corporate profits before the value is recognized in share prices. This translates into lavish compensation for traders and speculators and stock prices that do not increase profits.

Instead of ordinary people get a decent return on their retirement accounts, real estate prices in the Hamptons and luxury goods sales rise best shopping in Manhattan.

Hedge funds, electronic traders, private equity and M & A in the shops you act on information that is obtained through a careful, legitimate research, but as the ongoing investigations by the Securities and Exchange Commission into insider trading and has published voyeuring electronic reports indicate critical competitive information is obtained through immoral means, and perhaps illegal. The data from unwary corporate officers snooping through electronic espionage and disadvantages of further opportunities for gains by individual investors and traditional mutual funds and pension funds.

It seems completely absurd, but consider that JPMorgan and Bank of America has gone through the entire quarter, third, without a negative trading day - no day to lose on trades of property. Unless you believe in perfection, something stinks about the information they are using.

If someone is winning all the time, then someone else is losing. This is the common investor. Stocks have become a rigged game.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.