Facebook Is this Year's Flash Crash

 | Jun 12, 2012 | 7:17 AM EDT  | Comments
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You could feel the pain yesterday, the pain of no players whatsoever except in some of the higher yielders. We have reached some new level of post-Facebook (FB) indifference where stocks have become a laughingstock for most Americans.

You know, I feel that stocks are terrific wealth creators. You find high-quality stocks, as defined by consistency, growth and good management, you reinvest their well-above-Treasury-rate dividends and you stay in touch to be sure you don't have a Kodak or a Washington Mutual on your hands and you let the money be made.

You throw in a growth stock or a junior growth stock, add some gold and stay diversified and you will be able to ride out pretty much anything including 2008-2009, which I think will stay the benchmark of bad times for years to come.

But days like yesterday remind you that just owning stocks is a sordid and, at times, ridiculous affair if you bother to look at them. That the stocks of great American companies can just roll over in a couple of minutes time with no bids underneath, overwhelmed by ETFs and high-frequency selling, makes owning bonds more palatable than stocks because bonds can't be worth much less the moment you buy them.

Now, of course, I am not speaking of Bristol-Myers (BMY) or AT&T (T). But I am talking about most of the industrials.

They can swing on a couple-of-a-billion-dollars buy or sell program as if they are suddenly worth much less than they were hours ago. Same with the oils, which seem to trade wildly as if they are small-caps. In fact, the whole place trades like a small-cap as non-real buyers or sellers who don't care what they are trading and are just using them as proxies for commodities with bad charts.

In this environment we need long-term individuals actually bidding for stocks more than ever. But fewer than ever are involved.

Which brings me to Facebook, which is this year's version of the flash crash. We had something here, something exciting, something with growth that attracted so many of the people who have stayed away from the markets.

It was such a terrific opportunity for everyone to win, from the venture capitalists who got in early to the funds that somehow were able to get around the law and were buying it like a stock before it came public to the public itself.

Now the sordid tale of mispricing by Morgan Stanley -- they deny it -- and horrible execution by Nasdaq -- they don't admit to it -- has come and gone and with it a whole new lower level of confidence in the actual process of buying and selling stocks have been reached.

Not only are stocks viewed as some assets that can drop 10-15-25-30% in minutes as they did in the flash crash, they now don't even tell you what you own and won't let you sell into a down tape to get out, even as so many apparently are. Notice it was the batched retail orders that fared the worst in this business.

That, coupled with the hard-to-swallow comments from Morgan Stanley CEO James Gorman that basically told the retail investor that he or she can't handle or understand stocks and Nasdaq CEO Bob Greifeld getting on a plane because he is so confident that the chaos that is individual investors panicking as the exits are locked and a fire rages have beaten it into the heads of small investors that stocks just aren't even an asset class. They are just a play thing for rich people who have bandied together on the playground to have a stock pick-up game.

Sometimes I wish there were two different markets: a virtual market for the hedge funds to play with each other, knocking up and down virtual securities with impunity using ETFs, derivatives, and whatever else they can get their hands on to move and manipulate stocks and the actual stocks of companies themselves in a real exchange that can be used for individuals.

That would clear up so much of what is going on. You want to own individual stocks, you go to the real exchange where you buy pieces of individual chunks of companies.

You want to play with rich sophisticated investors who want to trade risk, as they insist on calling it, you trade on the virtual exchange.

Yes, we are that far gone. The fact that the regulators don't see it through this prism is the real joke here. They believe in financial innovation and engineering as gospel. They think you can slice and dice anything and borrow against it and it will have no impact on the underlying companies, or mortgages or commodities.

They are fools.

I am to the point where I feel I am a one-man band trying to stem a secular and a cyclical decline of individual stock owners.

I know that I am right empirically about the stocks I am talking about buying. They are the most immune from the virtual traders.

But I also know that there are going to be occasions like Facebook that are going to bring in new people and introduce them to this concept of owning stocks for dividends and capital appreciation once they are in the door and see what it is like to buy and sell stocks.

What I didn't count on was that we were simply leading people to a slaughterhouse, a slaughterhouse where the executioners don't think they even executed anyone, and, yes, think they actually executed fairly well.

It was the cows' fault. They went in to the slaughterhouse. What the heck did they expect?

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