AIG Bonuses and the Greatest Wealth Transfer in a Generation

The country is outraged at the $165M in taxpayer money paid out as AIG executive bonuses. The blame game in Washington DC is in full swing. But what is $165M in the big scheme of things? Once again, the crowd is missing the big picture.

Stocks are at or below 1997 levels. Unless they bought in the 80s, the sellers are selling at a loss. Who is selling and why? These things defy generalizations but I think there are some broad strokes we can use.

Some are selling because, having lost 50% or more, they are afraid to lose everything. They just want OUT. NOW. Financial sales professionals also know that distress and upheaval are good times to prospect. Nothing motivates a person more to switch than dissatisfaction with the current advisor. What happens when you switch? The new advisor has to earn a commission. First, he sells you out of whatever you’ve got to “save what’s left.” Then he proposes a new plan which may include dollar cost averaging. End result? More sales not fully offset by buying.

But who’s buying?

Stocks don’t go down because “there are more sellers than buyers.” There is a buyer for every seller. Stocks go down because sellers are more eager to sell than buyers are to buy. Buyers will buy from you if the price is right. At a discount. So, who’s buying?

Again, buying, like selling, defies generalization. But in very broad terms those who need the money sell, those who don’t - buy. If we exclude bottom fishers (who become sellers when they, in turn, are down 20%), the rest of the buying must be coming from people with really deep pockets who may not need the money next year or even next decade. The wealthy.

Now, think about it. What happens when you sell a stock? You relinquish the ownership of an asset. The buyer gains it. If current transactions constitute a flow of stock from the hands of the many into the hands of the few, then this country is busy transferring wealth from the middle class to the rich at an unprecedented rate. Since stocks rebound as certainly as they go down every three or four years, and businesses are the greatest creators of wealth, then when the economy recovers, along with profits, current assets will be worth a lot more than they are fetching at fire sale prices now. That wealth will be in the hands of fewer people who have the resources and wherewithal to be buying now. Will the $165M in bonuses matter in the big theme of things? I don’t think so. What will, in my opinion, is a society more polarized along asset ownership lines. Do I need to tell you who the net beneficiaries will be?

Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of timely stock picks in small caps based on proprietary selection methods. http://www.tradingzoom.com/

Article Source: http://EzineArticles.com/?expert=Slav_Fedorov

Interest rates cut

A day after the biggest one day drop in nearly seven years on the TSX, interest rates have been cut in both the U.S. and Canada. The interest rate cut was an unexpected move on the part of the Fed, in the hope that a 75 basis point drop might stave off a sharp decline in coming off the Martin Luther King Jr. holiday, but U.S. shares still declined. Some related headlines:

Canadian stocks rebound, U.S. slides

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