Speculation Pushing Major Stocks Higher

By: Alex Harris

Warren Buffet once said, “Don’t buy a stock unless you plan on owning it for 10 years.”  That mantra has all but gone out the window.

If you’ve been paying attention to market action over the last couple of months, you’ve recognized that certain companies continue to dominate trading volume on a daily basis.  The four names that should ring a bell are Citigroup, Bank of America, and mortgage behemoths Fannie Mae and Freddie Mac.  Taking a step back, if you haven’t been paying attention you’re most likely wondering, “Why would anyone want to own any of those companies?”  The sad part is, it seems as if investors aren’t thinking as they have in the past.

When an individual purchases an equity stake in a company, they’re essentially owning a percentage, albeit minute, of a publicly traded corporation.  However, now it’s as if investors are dumping their money into speculative plays in order to make a profit, and then retreat immediately.  Of course there will always be investors that take that approach, but when a majority of players are staying off the sidelines, as well as staying out of blue chips in an attempt to make some “easy” cash, the fundamentals of this recent rally need to be questioned.

Those aforementioned companies accounted for 37% of trading activity on the New York Stock Exchange on Tuesday, and today’s edition of the New York Post reported that hedge fund manager, John Paulson has been purchasing shares of Citi in recent weeks with the belief that his stock of choice should be trading around its book value, or anywhere from $5 to $7.  As I’m writing this, Citi is trading at $5.03, up nearly 9% on the day.

In my opinion, what seems to be happening here is that hedge funds and mutual funds, whose top priorities are to provide exceptional returns for their investors, are investing in cheap stocks in order to reap the benefits of a volume-induced rally.  Citi and Bank of America may return to $20 levels in the future, but for now the market needs to understand that mere speculation is pushing these big names higher.