Written by A.J. Brown

Is It All Just a Scam?

The more I study the markets, the more I wonder what kind of shenanigans are going on behind the scenes.

Here’s an example:

Before Labor Day, analysts were saying that Fannie Mae and Freddie Mac were rock solid. They were also promoting the idea that the financial underpinnings of the world economy were stable and sound.

Unfortunately, investors believed the analysts. They started buying up stocks based on analysts’ opinions, which ultimately raised the price of these stocks.

Looking back, we can see that investor confidence was unfounded; it was based on opinions and not facts.

Here are some of the news clips that were being peddled to investors in late August 2008:

August 27th - Shares of Fannie and Freddie Mac have rallied this week on speculation that the government-sponsored enterprises might not need a bailout that could leave common shares worthless.

August 29th - The past week has brought a dramatic shift in sentiment about the viability of Freddie Mac and its fellow government-sponsored entity Fannie Mae as analysts asserted that the mortgage giants have enough capital to wade through the housing and credit muck at least until next year. The stocks responded accordingly, with Fannie up about 50% at $7.55 and Freddie up 85% at around $5.20 this week alone.

Fannie and Freddie shares have recently fluctuated with rumors and speculation over whether or not a government bailout was imminent — a development that would likely wipe out shareholders. Now that those fears have abated, it might be a perfect opportunity for Freddie to fulfill the commitment it made to the Office of Federal Housing Enterprise Oversight and raise some capital.

In the quotes above, it is important to note that “analysts asserted” Fannie Mae and Freddie Mac would have enough money to survive “at least until next year.”

Obviously, this wasn’t a true statement. Mere days later — right after Labor Day — all hell broke loose and Fannie Mae and Freddie Mac went into a tailspin.

If you look at the chart, you’ll see that Fannie Mae (FNM) had a nice run-up at the end of August. From August 20 to August 28, the share price nearly doubled. Then, on September 8, the share price plummeted from $7.04 to $0.73 per share. Freddie Mac (FRE) shows a similar pattern during the same time periods.

So here’s the question. Were the analysts lying? Were they acting as the hired henchmen of Wall Street titans? Or were only a handful of analysts lying while the others followed along blindly?

Regardless of the answer, this is proof that we cannot accept what analysts say at face value. In fact, I recommend that you NOT listen to analysts at all.

Rather, listen to charts. Price and volume don’t lie. They tell you what happened — and hint at what might happen in the near future.

Price and volume create patterns. Not all patterns are tradeable. But many patterns ARE tradeable. With the right patterns and set-ups you can be reasonably sure of a winning trade — no matter what the analysts are spouting off.

What do you think? Do you agree or disagree?

Best regards always,

A.J. Brown

15 Responses to “Is It All Just a Scam?”

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  1. A.J. Brown @ 2:58 am:

    Hey Eduardo,

    I’m not offended one bit by your question. And, surprisingly, you are nowhere near the first nor do I expect you to be nowhere near the last to ask that same question.

    Besides having been burnt myself by all the information out there that, I feel, does a better job distracting traders rather than setting them on a path to success, and not wanting others to fall in the same traps I did… I do have some ulterior motives.

    I provide for myself via the proceeds of my own portfolio. Any proceeds that come from the Trading Trainer education business, I funnel into a fledgling foundation I’ve started that will one day be a source of trading education for inner city kids. I’d like to see them taking their angst out on the markets versus seeing them popping caps in each others behinds. I’ve seen this happen on a small scale through my own work. I’d like to see it on a big scale, and I’d like to see it live on long after I’m gone.

    Also, the Trading Trainer community of traders, with the tools I have set them up with, allows us all to look over each others shoulders and see things through each others eyes. If you’ve ever heard me speak, you know I believe trading is a team sport and that it’s the “lone ranger” traders that have never graduated from treating their trading practice as a hobby, that will always fail. By me being part of the Trading Trainer community, my trading practice has exploded.

    Hope that helps explain.

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  2. A.G. McCall @ 4:44 am:

    “So here’s the question. Were the analysts lying? Were they acting as the hired henchmen of Wall Street titans? Or were only a handful of analysts lying while the others followed along blindly?”

    why is it always “Wall Street”? Why do we never mention Barney’s Frank, or Chris Dodd, or any of the other esteemed elected officials that actually caused most of the economic problems of today.

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  3. rock star @ 5:37 am:

    The market TV dudes and others know positive info helps ratings, they are sales dudes, nothing else. So much on Fannie is shocking, how Raines infalted books and made millions off tax payers, how B Wank took money and made money for his spouse, it is all a joke. What I don’t get is how it was ever a traded company????? If Tio Sam was going to back up there ass, is it not a govt agency?? Raines should be in jail with B Wank next to him.

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  4. Alma @ 10:09 am:

    Hi A.J.,

    Common sense advice such as this is why I will always have a Trading Trainer membership. Keep up the “good blogs”. :)

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  5. Nancydee @ 9:30 am:

    AJ,

    Great advise! Thanks for giving us an alternative to just blindly following the analysis! After all it’s only a bunch of people with “opinions” and we know how that saying goes………”We all have One”.

    Nan

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