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Wall Street, in the end, is a promotion machine. I didn't understand this concept at all when I got to
in the early '80s. I thought that you went to Wall Street to pick stocks. Wrong! You went to Wall Street to get people to buy and, occasionally, sell, stocks. That's the business of Wall Street.
Before the mutual funds became such a force in the markets, this process simply consisted of passing on research and trying to drum up orders. But in the last decade a fabulous synergy has developed,
buy-side mutual-affection society where the promotion machine works at the behest of the biggest clients.
So here's what happens. Mutual funds get long stocks that the brokerage firms want sold and are
. If the stocks fall, the mutual-fund portfolio manager call the salespeople at the brokerage houses and call the analysts and say "You better push so-and-so because you are burying me in it." Or, "I need you to push this stock, I need it higher." Sometimes the portfolio managers supply data or insight that helps the cause.
So, when the stock market gets hit, like it did last week, the mutual funds get on the phone to the sponsors and demand action. Amazingly, it actually works. The stocks do move up. Because sponsorship does matter.
Ahh, you are thinking, but what if the stocks aren't any good? Well, I tend not to think about that at all. It is not important in the short term. Perhaps you would understand this better if we talk television or the movies. The networks and the motion-picture producers know that if they put their promotional muscle behind something, even something that is lame, they will get people to watch it. Promotion works. Cajoling works. Packaging works. Wall Street is great at that.
The Street knows how to play the game. It makes a big splash on the research call. It makes sure every salesperson goes out with it. Then you leak it to the television shows and the wires. Then you get your firm to go out as a size buyer. And the next thing you know you've got pin action.
Mutual funds, of course, like to play this game, too. They like to take stocks up, get brokerage firms short and further stimulate the demand to get the stocks they love going. And why not? It is a virtuous circle for everybody. The brokerage houses get the commissions. The mutual funds get their numbers moving up, they then get on TV and get written about in magazines and newspapers -- and then next thing you know they get more money in their principal job, which is asset-gathering. That allows them to take their stocks up again which starts the process all over again!
This mutual-fund/brokerage complex makes it extremely difficult to knock stocks down both short- and long-term. They can keep stocks up in the air for years, hanging in for much longer than the underlying businesses justify. Recently, we saw it work on
, a company that deserved to sell much lower much sooner than it did but was propped up by the complex for years. Same thing with some insurance stocks that should not have been trading up. And, of course, with may of the new tech stocks that have since hit the skids.
Ultimately, stocks should trade as a function of the businesses underlying them. But these days I often don't even care about such analysis.
It costs you too much money to avoid the complex. It makes you a fortune to bet with it, whether it should or not. I make no judgments.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at