Requesting help on what the stock market actually IS

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Requesting help on what the stock market actually IS

All,

This seems like the right kind of place to post this question.

I do not understand the stock market. Not what it's doing, not why I lost (or gained) money - that isn't my confusion. I don't understand what it IS.

Here's how it seems to work.

The IPO (initial public offering) is basically a huge loan, from a "bank" consisting of hundreds or thousands of "investors" who are all willing to lose their money. You could go to the bank for a loan, but there are lots of reasons a bank won't lend you money. If you want to build a highway from California to Hawaii, for instance, the bank is going to turn you down because a) banks don't loan out trillions of dollars to start-up companies at one shot, b) it's a stupid idea, and they know they're going to get stiffed. Investors, however, can come up with truly enormous amounts of money, and their eye to the bottom line is often a bit more lax than a bank's. Until recently, anyway, when the banks proved themselves pretty lax, too.

The peculiarity of this loan is that you can't pay it back. In fact, no one wants you to pay it back. They want you to make interest-only payments - "dividends" - forever and ever (and ever).

So far as I can see, the only real benefit to the company is during the IPO. After that, it becomes a stone around the neck of the company, with the constant need to pay out dividends. I've watched companies make their stupidest decisions trying to make the quarterly report "look good" for the investors. The issue of government taxation is trivial to the point of negligible compared to the dividend question for a public company.

Now this kind of makes sense for the Honolulu-Sacramento freeway project, which needs a huge influx of capital to build the road. But in the tech companies where I've been a little closer, it's clear that the real purpose of the IPO is to let the principles cash out of their companies and get rich. It works like this: they take options or stock in lieu of pay or other benefits. The inner circle of principles get controlling stock, rather than options. Everyone else gets squat. When the company does its IPO, all this paper suddenly gets a dollar value put on it, the company gets a huge influx of cash, and the principles suddenly find themselves each owning several million dollars on paper. They are bound by SEC rules from dumping this stock immediately, but within about two years, they can start cashing out, which they do as quickly as allowed by law. As they flood the market with their stock, the price drops. As it reaches what they think is bottom, they start buying it back, obtaining more of it (it's cheaper than when they sold it), and driving the price back up because it's becoming scarcer. The losers are all the rubes who bought the stock during this decline. I don't actually know how many times they can successfully "pump" this, but in the end - if it's a reasonably sound company and they do this right - they end up owning most of the controlling stock again, AND they've taken all of the recent speculators' money and put it into their own investment accounts. They cash out a comfortable nest egg and keep running their baby - or cash it all out and move on.

The company itself gets all of the money the initial investors "raised" during the IPO, and uses it to buy computers, a new building, a fleet of cars, concrete for building the road, etc. If the company then builds the highway, starts collecting tolls, and starts turning a profit, everyone is happy. It's a big company, now, employing thousands, collecting tolls, turning a quarterly profit; the investors are getting a piece of the action (forever and ever); the principles are smoking cigars and congratulating themselves on their fine business sense. The company has this monkey on its back, but hey, it's the cost of doing big business, right?

The piece I'm missing is this - what happens when the stocks lose value? Suppose that a company doesn't make its quarterly projections, investors panic and start selling off stock shares, and the share price starts going down? That's what is happening across the board right now, so I think it's kind of relevant.

Seems to me this is really good for the company. After all, they already collected the IPO money and spent it on their fleet of cars and new office supplies. Yes, they're having trouble - that's why their projections were off, and investors started panicking. But apart from whatever real problems the company is having, can the investors come back and take their cars and office supplies away? I don't think so. Let's assume the company is still making money, just not as much as the investors are screaming for, and the problem with the stocks is a market panic that has nothing to do with the company itself. So as the share price keeps going down, the target dividend (as a percentage of the share price) goes down too. 10% yield on a $30 share is a lot less than a 10% yield on a $50 share. Each quarter, the millstone around the neck of the company gets a little lighter. I'm assuming that in a normal market, the company would start doing better, investors would "rally" (meaning they now see some blood in this company they can profitably suck), and the share price goes back up. This is bad for the company, right?

In an economy like this one, however, where the investors are all terrified of everything and the DOW keeps dropping, it seems to me this is better and better for the companies.

Best case, the share price drops below $5, or $2, or $1, and stops trading altogether. Now, the company is no longer public, though I'm not sure who "owns" it. Does it get liquidated? Does it revert to the employees? It still has the road that it built, and tolls are still coming in. But it is no longer has the burden of investors to pay.

It seems to me that the investors, after the IPO, are simply bloodsucking ticks. Sorry, I've had money in the markets too. Nothing personal. It's the initial investors who put up all of the risk capital that did the company good. Maybe the freeway project I mentioned would take 100 years to "pay back" the original investment.

But GM? Hasn't GM paid back its original IPO many times over by now? If so, why does it still have this millstone around its neck? Its original investors are almost certainly all dead by now, and have probably been paid back many times over. Public stock seems to me like a real bargain with the Devil, and (for the health of the industrial base and the nation as a whole) a really stupid way to do business.

Am I missing something? Please enlighten me.

Ragnar_Danneskjold's picture
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Re: Requesting help on what the stock market actually IS

IPOs are just the start.  Companies frequently make new offerings of stock to raise additional capital for some purpose, if they don't have the cash available, i.e., to launch a new product, or buy another company, etc..  Or they issue debt in the form of bonds that might be convertible to stock at a certain share price (usually far above the price when the debt was issued). In either case, a new offering or debt, existing shareholders are usually diluted.

Companies also buy back their stock, and sometimes issue debt for that purpose, although it is usually stupid to do so.   

So, yeah, you're missing a lot. 

 

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Re: Requesting help on what the stock market actually IS

The stock market is just where corporate equity is priced.  Stock price is a measure of how much investors want to own a piece of the company.  It is not a good thing for the company when it drops precipitously.  Not only does it indicate people are less willing to own the stock, it indicates it's harder for the company to get money when it needs it.  It will approach bankruptcy as the stock price rockets down (and it's chicken/egg...approaching bankruptcy drives the price down; price down drives closer to bankruptcy).  Though it doesn't benefit the company as a going concern, it can benefit the top debt holders depending on how you look at it.  They are the real owners.  The less valuable the equity is, the big institutions that loaned the company money will takeover most of the assets.  That's another way this deflationary depression will benefit the big banking oligarchs. They'll get a lot of the corporate assets, just like how they're getting a lot of houses now in foreclosure.  Corporations are slaves to their banks just like mortgage borrowers are.  

Your perception of IPOs and how the initial investors make a killing is generally accurate, especially in the technology industry.  IPO is a money-making operation for the initial controlling owners.  Entrepreneurs typically target either 1) IPO to make money and cash out, or 2) get acquired by a big software company like Microsoft so they can make money and cash out.  There were so many tech startups in the late 90's that never made a dime in revenue but got bought out by bigger .coms and software companies for hundreds of millions (with the owners taking a percentage, leaving the company, and moving to Capri).  The big acquirer eventually realized what they just bought was worthless.  It was a total charade...the investment banks driving these deals (all those institutions that went out of business last year) are just a really advanced version of the used car salesman.

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Re: Requesting help on what the stock market actually IS

Ragnar:

 So let's focus on that ignorance one piece at a time, if you don't mind spending the time.

The examples you mention seem to be simply repackaged ways of doing the same thing as the IPO. You issue paper, get cash, spend the cash, owe on the paper. The investor wants money back in excess of what he's put out. It's debt. So the stock represents a continuous drain on company resources, just like any debt. Is that much correct?

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Re: Requesting help on what the stock market actually IS

No, stock is not a drain on company resources...stock IS the company...different than debt.  1st, companies don't have to pay dividends.  2nd, those that do are simply in the business of providing a return on the capital invested.  Without that return, there would be no capital invested, the company wouldn't exist.  Even if it was a private company with no public stock, the company would still be paying its owners some sort of return on capital or, again, the company wouldn't exist. In fact, most private companies pay a HIGHER return to their owners than public companies do (note the castles in the Rockefeller, Vanderbilt, Morgan families who owned all the profits of their companies before the idea of a securitized public company existed).  Public companies provide a return based on the consensus estimates for the industry.  Private owners pay themselves everything they can get.  Moreover, dividends put a strong incentive on management to continue generating cash and not wasting it on investments that wouldn't be core to its business.  

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Re: Requesting help on what the stock market actually IS

Companies raise capital using the PRIMARY markets, either in the form of selling equities (stock) or debentures (bonds).  The bankers put the deal together, and the client is the company, and the client benefits most by raising the most cash and paying the lowest rates, in the case of bonds.

What happens to the stock thereafter in the SECONDARY markets is truly irrelevant to the initial purpose that the company wanted to raise capital and got it.  The secondary markets are purely speculative, whether on a long term or short term basis.  In the good old days that capital was (supposed to be) put to a good purpose; expansion, equipment, whatever.

Bonds are a safer bet; they in fact are loans and have rules about payback and default and liquidation.  But again, what happens to bond prices in between maturity is irrelevant to any but speculators.

 

 

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Re: Requesting help on what the stock market actually IS

Joe -

Here's another take.

The stock market is a mass of buyers and sellers bickering over the relative worth of equities.  If there are more buyers than sellers, the price of a stock goes up and vice versa.  Buyers pay the ask price, sellers get the bid price and usually there is a spread between the two.  Every now and then there is tenuous agreement between buyers and sellers and the spread between the bid and ask price gets real small.  That's where the evil market maker comes in.  He raises the ask price, or lowers the bid price, or does both to get the buyers and sellers feuding again.  They call that 'creating a liquid market'.  That is market maker code for 'separating people from their money'.

Every day is a battle - sometimes the buyers win, sometimes the sellers win, and both become each other.  the market maker always wins because he is going to squeeze the last penny from either the buyers or the sellers.  Buyers can be your friend if you are selling.  Sellers can be your friend if you are buying.  The market maker is never your friend - he is going to walk the buying price away from potential buyers hoping they will follow and pay that extra penny or two.  He is going to walk the selling price away from potential sellers to squeeze them.

Market makers are crucial to market function - much like Darth Vader was to Star Wars, except there is no happy ending.  Market makers will for all eternity be on the "Dark Side".

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Re: Requesting help on what the stock market actually IS

Joe,

No, stock is not a continuous drain on company resources.  Just the opposite in fact, because without stock, the company might not have sufficient funding to operate.  People buy stock because a) they have an expectation that the company will generate excess profits that will allow for the payment of dividends/returns b) they have an expectation that the company will grow in value, which would normally cause the share price to increase. 

Excess profits might be paid out as dividends, but you really shouldn't look at this as an expense....this is the primary reason companies exist (to turn a profit).  Otherwise, you might as well throw your money in a hole and forget about it. Or a company might grow in value without generating excess profits (i.e., if management directs profits towards new capital equipment to increase production, research for new products, acquistitions of other companies, etc).  

Take your IPO example.  The current owners might do an IPO because they want some or all of their capital back.  Afterall, it is their capital and they could just sell the company altogether.  But they still want to keep a stake, and have some of their capital back. So, imagine the company owner's original investment was toward some piece of machinery necessary for the company to produce its product .  If the company were to sell that machinery to give back some of the owner's original investment (because it might not otherwise have the cash to do so), that might be the end of the company.   So, the owner(s) make an IPO to allow the company to continue operations.   

 

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Re: Requesting help on what the stock market actually IS

I got about halfway through before concluding that you should read some basic books on stocks.  Most of your conclusions are mostly wrong and mostly based on false premises.  It's too much to go into here, though others have taken the time to show you how it works.  Again, I recommend you start at the beginning, not at what you think you know based on what you think you've seen.

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Re: Requesting help on what the stock market actually IS

Patrick:

Fair enough, but one of my concerns is, what IS a good basic book on stocks? And I mean really basic.

After all, here we are looking at a money system that is nearly a century old, endorsed by none other than John Maynard Keynes, and somehow all these smart people over the course of a whole century just kind of overlooked this little itsy-bitsy problem that the money supply has a runaway exponential curve built into it; a money system where they have had to systematically underreport the inflation rate for fifty years to hide this itsy bitsy problem; a money system that has had entire university departments full of economists explaining to us in increasingly complicated ways, in book after book and course after course why this is all just fine, just needs a nip and a tuck, the fundamentals are strong, even though one of the most basic principles of economics is that money should have something to do with the economy. What, are goods and services also increasing exponentially? I apparently missed that seminar.

The DOW was below 7000 yesterday, after being at 14000 only what, a year ago? If stocks represent value, what happened? Did every industry in our entire country go out and burn half of their capital equipment, or dump it into the sea? Where, exactly, did all of that value suddenly go? 

There is a fundamental problem not only in the money supply, but somewhere in the stock market, because it isn't just GM that is run by idiots who don't know how to run a business. It is failing company after failing company. We have a seriously eroded national infrastructure, a gutted manufacturing sector, a deep economic resistance to shortening supply lines and moving to sustainability in any form, and the free markets have not kicked in to correct this because, clearly, however this system really works, it doesn't encourage smart decisions. That is the elephant in the living room.

The facts of the current economy say that the people who know how this system works, don't know how this system works. They are the ones writing the books. So I ask again - what book should I be reading? Give me a title, and don't ask me to pick one at random off the shelf.

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Re: Requesting help on what the stock market actually IS
Joe wrote:

 The DOW was below 7000 yesterday, after being at 14000 only what, a year ago? If stocks represent value, what happened? Did every industry in our entire country go out and burn half of their capital equipment, or dump it into the sea? Where, exactly, did all of that value suddenly go?

 


Ah, this is a different question than "what is the stock market?"  This is "why have prices fluctuated so greatly?"

You're right that companies haven't dumped half their assets into the sea.  What has changed is the "value" of those assets...value in quotes because it's a misnomer in a world of debt-based value....debt aint value. 

Joe wrote:

There is a fundamental problem not only in the money supply, but somewhere in the stock market

 

There's your answer.  The stock market is subservient to the monetary system just as everything else in this world is. So, I hate to keep saying it in all the other threads as well, but the problem with our system is the debt-based, fractional reserve monetary system run by the Fed and the other central banks.  This manifests in stock prices in 2 ways:

 

1.  NOMINAL prices (illusory value):  a debt-based monetary system guarantees steady inflation and this will be baked into the nominal prices of all assets, including the stock market.  In the last year as the debt market has started collapsing, so have asset prices.  As the world deleverages, so will asset prices (the stock market will actually anticipate it and stay ahead of the deleveraging, which is why stock prices dropped so fast...other prices will lag...main street economy will start deflating later as people realize this isn't just a recession).

2.  REAL prices (value):  the debt deflation/depression will cause a massive reduction in economic output...collapse in demand and supply.  So the real cashflow-generating value of stock will decline substantially over the next few years.  The stock market has seemingly priced a lot of that decline into stock prices. 

 
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Re: Requesting help on what the stock market actually IS

I don't know much about the stock market either, so I'm just guessing here. But let's say that stocks are expected to yield 11% (is that the right way to say it?) while at the same time the banks offer you a loan for buying stock at 5%. Obviously, if a lot of people expect to make that much profit, the demand for stock will rice and so will its prices. The demand for credit will also have its effect on interest rates, but that wouldn't be equally large, would it?

The rising prices of the stock mean that the dividend part of the expected yield becomes smaller while the ricing price part of the yield becomes larger. And this means higher risk, if you ask me. On the long term only the dividend counts, as you can only profit from ricing prices by selling your stock. As the dividend part becomes smaller and smaller, and even lower than the interest payed on the loans, the rising price part may suddenly become zero or negative, as no one believes there is any basis for the prices to rise any further. If the banks are not out of their minds (and that's a big if), then they will increase interest rates to protect themselves against the higher risks, worsening any stock market crash in the process.

Now it seems that over and over again, to big bets have been made on rising prices, and the solution that banks and governments have chosen, is to increase profits made by the companies whose stock is overpriced. This way every stock market crash since WWII has let to regulation that resulted in higher dividends and a basis for higher stock prices. A rise that easily surpassed inflation.

The money to pay for higher stock prices, however, came from households, who made great deficits, exhausted their savings and went deeply into debt. So there you have it: now either stock prices have to drop to more natural levels, or household income has to rise drastically. The first means deflation and the second hyperinflation. I think this explains the credit crisis, but I might be overlooking something important.

 

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Re: Requesting help on what the stock market actually IS

JoeNemeth,

Six years ago I bought an old book, written by a trader, published in 1873. Ten Years in Wall Street, by William Worthington Fowler.  Old copies are expensive and difficult to find.

There is a new reprint of the book, but mistitled as its sequel, Inside Life in Wall Street. How Great Fortunes are Lost and Won...

With disclosures of doings and dealing on change including  the secret history of the noted speculations since the Crash of 1857. The great rises and panics of the age, and how they were produced, including full descriptions of the "Black Friday" of 1869 and an inside view of the Great Panic of 1873.

Though this book was written in 1873, what is says holds true today... It is a basic book that tells you exactly, what the stock market actually IS.

Cat

If you want to invest or trade the market, no one book isn't going to tell you what to do.  Shot me an email and I will be happy to tell you how to learn.

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Re: Requesting help on what the stock market actually IS

Debt-based value sounds like an oxymoron, doesn't it? Unfornunately, it is not an oxymoron, it is the way the economy functions.

You place money in the bank, the bank goes into debt to you, they loan out that money, the borrower goes into debt to them.....the bank makes money. There is a lot of value in debt!

Sounds like a put-down here Joe, but it isn't. Stock Ivesting for Dummies is a good read:

http://www.amazon.com/Stock-Investing-Dummies-Paul-Mladjenovic/dp/076455...

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Re: Requesting help on what the stock market actually IS

You're confusing stocks with the money supply.  There are hundreds of books on stocks.  The way they function is no secret.  Buy a few and get started.  Strabes hit it right on the head.  The money supply is the problem, stocks are just another asset class, bought and sold with a flawed currency.

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Re: Requesting help on what the stock market actually IS

Patrick and a few others are 100% correct.  The financial markets are a wonderful place, and while its currently more than a little rigged, still a decent pricing mechanism.  Its one thing to get the messages the markets are telling you; its another to be caught in untrue paradigms about how stocks are neccessary to outpace inflation (money supply problem). 

Also initially you mentioned the worst rigged game of all the IPO, which is truly a game of hot potato where the potato eventually gets priced by the secondary markets as opposed to the pricing that the bankers are trying to earn the issuing company through the primary markets.  The primary markets buyers are the true "lenders" of capital to the client company, and most want their money back immediately because they don't want to stick around to let the market price the issue.  There is a great herd mentality surrounding the IPO game, and its best to stay away unless "you have worked your way up the food chain." - That's exactly what a huge producing broker told a hedge fund buyer once who wanted to play the IPO game while he let me listen on the conversation 20 years ago.

 

 

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Re: Requesting help on what the stock market actually IS
strabes wrote:

You're right that companies haven't dumped half their assets into the sea.  What has changed is the "value" of those assets...value in quotes because it's a misnomer in a world of debt-based value....debt aint value. 

.....<snip>

 The stock market is subservient to the monetary system just as everything else in this world is. So, I hate to keep saying it in all the other threads as well, but the problem with our system is the debt-based, fractional reserve monetary system run by the Fed and the other central banks.  This manifests in stock prices in 2 ways:

1.  NOMINAL prices (illusory value):  a debt-based monetary system guarantees steady inflation and this will be baked into the nominal prices of all assets, including the stock market.  In the last year as the debt market has started collapsing, so have asset prices.  As the world deleverages, so will asset prices (the stock market will actually anticipate it and stay ahead of the deleveraging, which is why stock prices dropped so fast...other prices will lag...main street economy will start deflating later as people realize this isn't just a recession).

2.  REAL prices (value):  the debt deflation/depression will cause a massive reduction in economic output...collapse in demand and supply.  So the real cashflow-generating value of stock will decline substantially over the next few years.  The stock market has seemingly priced a lot of that decline into stock prices. 

strabes -
As far as the market goes, you need to disconnect market performance and equity price movement from the debt-based reserve system the Fed employs.  The market is what it is and if you just accept what it is you can turn it to your advantage.  I don't care why the market moves the way it does, I don't care what direction the market moves, I don't care how well run a company is, I don't care who the CEO is or what the company's Beta or EPS is.  All of those are illusory distractions to lull the average Joe or Joanne into thinking they need a broker or a financial manager to navigate them through the straight line maze the markets really are.  At the risk of offending some - the financial industry is a well disguised scam targeting the lazy and ignorant.  They do not care about your money or whether your portfolio makes money, they care that they have money under management - that is the basis for determinng their bonuses.
Market neutrality, a little education and some good technical analysis software and knife edge discipline is all you need.  trade the market and accept what it gives you - not what you expect or want it to give you.
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Re: Requesting help on what the stock market actually IS

Great question JoeNemeth.

Here's the best piece of writing on "what is the stock market?" that I've ever run across by the eminently respectable and always readable John Hussman:

The “money flow” myth

I am increasingly losing confidence that Wall Street operates on a well-defined base of knowledge. Instead, I am struck by the number of platitudes and false constructs that seem to dominate the investment management industry.

First, we should be very clear that there is no such thing as money going into or out of a secondary market. When stocks are issued in an IPO, or bonds are floated to investors, companies receive funds from investors and, in return, give investors pieces of paper called stocks and bonds, as evidence of the investors' claim on some future stream of cash. This is a “primary market” transaction.

Once those pieces of paper are issued, they are traded between investors in the “secondary market.” When we talk about the stock market, we're talking almost exclusively about the secondary market, because new issues make up a very small part of total activity.

Dear Wall Street analysts and financial reporters – when investors purchase a stock in the secondary market, the dollars that buyers bring “into” the market are immediately taken “out of” the market in the hands of the sellers. It is an exchange. This is why the place it happens is called a “stock exchange.” The stock market is not an air balloon into which money goes in or out and expands or contracts that balloon. Nor is it a water balloon that is expanded by pouring in “liquidity.” Prices are not driven by the amount of money that buyers “put in” or sellers “take out” (as those dollar amounts are identical). Prices are determined by the relative eagerness of the buyer versus the seller.

If a dentist in Poughkeepsie is willing to pay up 10 cents to buy a single share of General Electric, the total market value of General Electric increases by over $1 billion (GE has 10.28 billion shares outstanding - do the math). In this way, market capitalization can be created and destroyed out of thin air and on the smallest of trading volumes. So you'd better be sure that the there is a sound and fairly reliable stream of expected cash flows backing up the value of the securities you're buying.

Cash does not ever find a “home” in a secondary market. Every time you hear the phrase “investors are putting money into…” or “investors are taking money out of …” or “money is flowing out of … and into …,” it is a signal that the speaker is unable to distinguish a secondary market from a primary one.

As I used to teach my students, if Mickey sells his money market fund to buy stocks from Ricky, the money market fund has to sell some of its T-bills or commercial paper to Nicky, whose cash goes to Mickey, who uses the cash to buy stocks from Ricky. In the end, the cash that was held by Nicky is now held by Ricky, the money market securities that were held by Mickey are now held by Nicky, and the stock that was held by Ricky is now held by Mickey. There may have been some change in the relative prices between cash, money market securities and stocks, depending on which of the three was most eager, but there is precisely the same amount of “cash on the sidelines” after that set of transactions as there was before it.

The “liquidity” trap

I'm similarly convinced that Wall Street has no idea what it's talking about when it uses the word “liquidity.” While using the phrase “global liquidity” lends a further element of worldly sophistication, Wall Street still hasn't the slightest idea what it's talking about. The phenomenon that's being called “liquidity” is nothing more than a combination of fiscal irresponsibility and risk blindness, and will ultimately prove itself to be the time-bomb that it is when investors begin to “re-price” that risk.

Let's go back to basics. If the economy produces output valued at $100, we can classify that $100 as either consumption or investment. Let's say that $80 represents “consumption.” We define “savings” as the portion of output that wasn't consumed ($100-$80), which is $20. Not surprisingly, that's exactly the value of the stuff we classified as “investment.” It's an accounting identity that saving always equals investment (always – if the investment goods weren't sold, the income wasn't generated, and the saving didn't happen).

If we look at individual actors in the economy, it will generally be true that some of them want to save part of what they have, and some of them want to invest more than they have. So we need a way for savers to transfer their income to the people who want to use those savings. This is done by issuing securities. Money is transferred from the saver to the spender, and the spender issues a receipt which offers some hope of repayment in the future.
Here is the crucial point. Once a security is issued, that piece of paper thereafter represents savings that have already been deployed in order to purchase investment goods and services (factories, equipment, housing, computers, and so forth).

The security is simply a receipt. It means that at some point in the past, someone produced goods and services without consuming them, and someone consumed or invested in goods and services without producing them. That change of ownership was accomplished by issuing that stock, or bond, or IOU. Again, it represents money that has already been spent – goods and services that have already been deployed.

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Re: Requesting help on what the stock market actually IS

Chris -

I understand where Hussman is coming from looking at the market as a "buy and hold" investment tool.  But if you just "trade" the market to generate cash to pay debt, pay for purchases, give to charity and build up a cash reserve (that can be invested in precious metals or goat cheese or whatever commodity is deemed to have value) does any of it matter?  Notwithstanding the mangrove like interconnection with banking, financials, credit and the inevitable unwinding.  There are numerous opportunities daily to get in a trade (up or down), take a chunk of the move, toss the brick on the pile and move on to the next trade.  Eventually you have a big pile of bricks with which to build a house, or a windmill, or a well, or a church, school, barn, etc. 

The market has weathered these storms in the past, although not like the Force 5 hurricane bearing down on it now, but when the dust settles, it will still be there barring - sweeping legislative reform and institution of heavy handed oversight and regulation.  Even then, it will still be there - with a slightly newer set of rules to play by.  Cat has a book written in 1873 that describes how the market worked back then and guess what - it is essentially unchanged from the way it works today.

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Re: Requesting help on what the stock market actually IS
Dogs wrote:

At the risk of offending some - the financial industry is a well disguised scam targeting the lazy and ignorant.

I completely agree!  But it doesn't help answer Joe's question to just say it's a scam.  I'm trying to explain how this particular scam (the crash of 08/09) happened.  It was a scam driven at the highest level by the Fed, so I'm trying to use their macroeconomic lingo BS to explain how the Fed's scam worked.  This scam was so big it couldn't have been led simply by Wall St institutions--the "smaller" guys--and their traders.  They're the day-to-day scammers, with their favorite phrase being "let 'em eat premium!", but they're playing their scam within the larger scam of the Fed.  The larger scam explains the super growth in equities from the Depression until 07 and the subsequent collapse since 08.

 

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Re: Requesting help on what the stock market actually IS

What led to the crash was horrific lending practices by the banking industry encouraged by Chris Dodd, Barney Frank, George Bush, Dick Cheney, Barack Obama, John McCain, Fannie Mae, Freddie Mac and greedy bankers coupled with  inflationary problems that finally popped the credit bubble.

1) Everyone, even if they really couldn't afford it, had the right to live the American dream of owning their own home. If one was not wearing a Jesse James mask with a ..44 in his hand (i.e. even if a sub prime mortgage risk rather than a prime (ideal) risk), mortgages were given to them.

2) This worked OK for awhile, but then gasoline went to 4 bucks a gallon (inflation), Bush's silly  'ethanol from corn' policy sent corn prices sky high. Cattle eat corn, so beef prices went up. Everything in the supermarket seemed to follow this price jump (more inflation).

3) Suddenly, these debtors had to spend their money to buy gas for work and to put food on their table. A need to pay the mortgage took a back seat to other basil needs.

4) But institutions had issued securities backed by these mortgages. Many corporations including banks, insurance companies, whatever, invested in these securities.

5) When the mortgages became worthless, so did the securities. The corps that invested in these securities lost a lot of money.

6) This scared the stock holders and they began to sell their stocks at a loss.

7) It ballooned and the stock market crashed.

And there is the story of the 08/09 crash. It will not recover anytime soon if it recovers at all.

 

 

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Re: Requesting help on what the stock market actually IS
strabes wrote:

I'm trying to explain how this particular scam (the crash of 08/09) happened.  It was a scam driven at the highest level by the Fed, so I'm trying to use their macroeconomic lingo BS to explain how the Fed's scam worked.  This scam was so big it couldn't have been led simply by Wall St institutions--the "smaller" guys--and their traders.  They're the day-to-day scammers, with their favorite phrase being "let 'em eat premium!", but they're playing their scam within the larger scam of the Fed.  The larger scam explains the super growth in equities from the Depression until 07 and the subsequent collapse since 08.

Strabes -

I'll get an email out to you tonight - getting ready to go to dinner with another CC couple. 

This scam wasn't led by anyone - the market just responded to the traders driving it.  Mortgage backed securities, derivatives - all bundled and sold to Goldman, Lehman, Merrill, Bear Stearns, etc. and swapped between each other.  Value was perceived - and on Wall Street perception IS reality.  The market boomed, traders profited trading to the upside, those that cashed out made real money and lots of it.  Those that stayed got tsunamied as the derivatives began unraveling and it became evident that all of the held asset "value" was hollow and ultimately worthless - everything that was even tangentially connected to a company touched by derivatives and banking imploded.  This was not led by the Fed, this was the market being the market.  The market has been doing the exact same thing since well before the Fed virus was unleashed from the monkey colony on Jekyll Island.

You just have to understand the game, and play it on your terms.  You can't lose money on a trade you don't get in.

From Mrs. Dog's post up above -

"Six years ago I bought an old book, written by a trader, published in 1873. Ten Years in Wall Street, by William Worthington Fowler.  Old copies are expensive and difficult to find.

There is a new reprint of the book, but mistitled as its sequel, Inside Life in Wall Street. How Great Fortunes are Lost and Won...

http://www.amazon.com/Revelations-experience-change-Worthington-Fowler/dp/1425560180/ref=sr_1_2?ie=UTF8&s=books&qid=1236461675&sr=1-2

(Use Chris' link to Amazon so he gets a little moolah)

With disclosures of doings and dealing on change including  the secret history of the noted speculations since the Crash of 1857. The great rises and panics of the age, and how they were produced, including full descriptions of the "Black Friday" of 1869 and an inside view of the Great Panic of 1873."

Once this mess runs its course (assuming the black helicopters haven't flown us all to secret rocket launch pads to transport us to the holding pens on Venus), the market will continue to function as it always has.  Maybe with the Dow at 2500, but it will still function.

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Re: Requesting help on what the stock market actually IS
jerrydon10 wrote:

6) This scared the stock holders and they began to sell their stocks at a loss.

7) It ballooned and the stock market crashed.

And there is the story of the 08/09 crash. It will not recover anytime soon if it recovers at all.

jerrydon -

Precisely why market neutrality allowed people to make a lot of money trading to the downside.  95% of market participants only know how to trade a market going up.  A monkey can do that.  The 5% that trade the market in both directions stand to make far more money than the 95%.

And trust me, the market will recover.  Some sectors (solar) have already bottomed and established "real" valuation and are beginning to take off.

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Re: Requesting help on what the stock market actually IS
Dogs wrote:

This scam wasn't led by anyone - the market just responded to the traders driving it.  Mortgage backed securities, derivatives - all bundled and sold to Goldman, Lehman, Merrill, Bear Stearns, etc. and swapped between each other.  Value was perceived - and on Wall Street perception IS reality.  The market boomed, traders profited trading to the upside, those that cashed out made real money and lots of it.  Those that stayed got tsunamied as the derivatives began unraveling and it became evident that all of the held asset "value" was hollow and ultimately worthless - everything that was even tangentially connected to a company touched by derivatives and banking imploded.  This was not led by the Fed, this was the market being the market.  The market has been doing the exact same thing since well before the Fed virus was unleashed from the monkey colony on Jekyll Island.

Yes but had the Fed not bailed out LTCM and kept the price of money near zero with low rates, the activity you describe so well would not have occurred to the degree that brought us to levels of leverage that haven't been seen since before the Depression.  It's why we're going to suffer deleveraging oblivion, i.e. another depression, for several years.  So you're right Wall St trading made it happen, but the passive action of the Fed providing a guaranteed "put" for Wall St made a system where new levels of risk would be rewarded and dramatic failure would be eliminated. The incentive was to get as drunk as possible at this drunkfest and cashout before the party was over.  Wall St needs to be in a system that rewards and punishes.  The Fed passively told them there was only reward.  

Yes it was "the market being the market," but the market operates within a frame that affects velocity, risk perception, etc. The Fed and govt create that frame within which the market does its thing.  If the Fed sets rates at 10%, that dramatically changes how the market will be the market.  The govt eliminating Glass-Steagall changed how the market was being the market. Hypothetically changing cap gains taxes to 70% would change the market being the market.  Saving LTCM...

Having said that, I believe you that none of this matters in terms of individual trading and making money.  I look forward to your email! 

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Re: Requesting help on what the stock market actually IS
Dogs_In_A_Pile wrote:

jerrydon -

Precisely why market neutrality allowed people to make a lot of money trading to the downside.  95% of market participants only know how to trade a market going up.  A monkey can do that.  The 5% that trade the market in both directions stand to make far more money than the 95%.

And trust me, the market will recover.  Some sectors (solar) have already bottomed and established "real" valuation and are beginning to take off.

Yup Dog's........a lot of these guys  cleaned up on that. You can buy "put options" which traditionally go up when the stock markets go down. This is the way that insurance companies cover their butts when they sell annuity investments to consumers based on the performance of a market segment such as the S&P 500.

You can also "sell short" in that you make a profit if the stock goes down. The SEC outlawed selling short in 2008 when the market began to crash. I don't know if they have re-legalized the practice yet.

My gut tells me that the market will recover as well, but no one "knows" when something has bottomed. And one thing we can be assured of is that peaks and valleys will dominate the graph of whatever the market does. Does the beginning of a peak mean it has stabilized?

Nope. could just be a peak heading for an even deeper valley.

We also need to look at history. I have said this on here before, but it is important and I intend to keep preaching it. Wink

One stock market crash occured in 1929 but it did not bottom until 1932. That market then took almost 25 years to recover (1954). 

That's why I will restate that this market will not soon recover and it may never because I have no idea what will happen in the next 25 years. Do you?

 

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Re: Requesting help on what the stock market actually IS
jerrydon10 wrote:

Yup Dog's........a lot of these guys  cleaned up on that. You can buy "put options" which traditionally go up when the stock markets go down. This is the way that insurance companies cover their butts when they sell annuity investments to consumers based on the performance of a market segment such as the S&P 500.

You can also "sell short" in that you make a profit if the stock goes down. The SEC outlawed selling short in 2008 when the market began to crash. I don't know if they have re-legalized the practice yet.

My gut tells me that the market will recover as well, but no one "knows" when something has bottomed. And one thing we can be assured of is that peaks and valleys will dominate the graph of whatever the market does. Does the beginning of a peak mean it has stabilized?

Nope. could just be a peak heading for an even deeper valley.

We also need to look at history. I have said this on here before, but it is important and I intend to keep preaching it. Wink

One stock market crash occured in 1929 but it did not bottom until 1932. That market then took almost 25 years to recover (1954). 

That's why I will restate that this market will not soon recover and it may never because I have no idea what will happen in the next 25 years. Do you?

jerry  -

Couple of quibbles, Puts don't "traditionally" go down as the market or underlying equity price drops - they always go down.  I'm speaking of course of in, at or near the money puts.  A $5 Put option on Goldman Sachs (trading around $76), isn't worth anything - the market maker will sell it to you, but there is likely no Bid price listed so you won't beable to sell it.

Peak, valley?  Doesn't matter.  trade in the direction of the market. 

 

I don't have any moral or ethical issues with buying and selling puts because the price of the stock is already dropping.  I will NEVER sell a stock short because selling the stock induces downward pressure on the price and I just won't play that game.  I would gladly pass up a million dollar trade from a short sell because I will not compromise my moral standard to do so.

Check out "Markets In Motion" by Ned Davis for a great comparative display of market history.

And as far as the market recovering in the future and me knowing what it is going to do?  Yes, I do know what it is going to do.

It is going to go up, down or sideways.  If it goes up, I'll buy and sell call options and sell naked puts.  If it goes down, I'll buy and sell put options and sell naked calls.  If it goes sideways, I'll sell naked options and let time value decay lower the price of the option and buy it back to close the position at a profit. 

Money mouth

 

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Re: Requesting help on what the stock market actually IS
strabes wrote:

Yes but had the Fed not bailed out LTCM and kept the price of money near zero with low rates, the activity you describe so well would not have occurred to the degree that brought us to levels of leverage that haven't been seen since before the Depression.  It's why we're going to suffer deleveraging oblivion, i.e. another depression, for several years.  So you're right Wall St trading made it happen, but the passive action of the Fed providing a guaranteed "put" for Wall St made a system where new levels of risk would be rewarded and dramatic failure would be eliminated. The incentive was to get as drunk as possible at this drunkfest and cashout before the party was over.  Wall St needs to be in a system that rewards and punishes.  The Fed passively told them there was only reward.  

Yes it was "the market being the market," but the market operates within a frame that affects velocity, risk perception, etc. The Fed and govt create that frame within which the market does its thing.  If the Fed sets rates at 10%, that dramatically changes how the market will be the market.  The govt eliminating Glass-Steagall changed how the market was being the market. Hypothetically changing cap gains taxes to 70% would change the market being the market.  Saving LTCM...

Having said that, I believe you that none of this matters in terms of individual trading and making money.  I look forward to your email! 

strabes -

Last post before dinner.  From a trading perspective, none of what the Fed did or does matters.  Or Treasury or the White House or the Idiocracy in the House and Senate.  All that matters is that the market (and stocks) move.  Money is made trading stocks that move - I could care less what direction or what caused it.  As far as I'm concerned, Little Timmy geithner could come out every day at 2:00 PM and announce some new zillion dollar "Bailouts-R-us" package - the markets will respond, move one way or the other and I will trade that direction.

Don't get hung up on why the market is moving - just be glad that it is.

Be back in a bit.

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Re: Requesting help on what the stock market actually IS
Dogs_In_A_Pile wrote:

jerry  -

Couple of quibbles, Puts don't "traditionally" go down as the market or underlying equity price drops - they always go down.  I'm speaking of course of in, at or near the money puts.  A $5 Put option on Goldman Sachs (trading around $76), isn't worth anything - the market maker will sell it to you, but there is likely no Bid price listed so you won't beable to sell it.

Peak, valley?  Doesn't matter.  trade in the direction of the market. 

I don't have any moral or ethical issues with buying and selling puts because the price of the stock is already dropping.  I will NEVER sell a stock short because selling the stock induces downward pressure on the price and I just won't play that game.  I would gladly pass up a million dollar trade from a short sell because I will not compromise my moral standard to do so.

Check out "Markets In Motion" by Ned Davis for a great comparative display of market history.

And as far as the market recovering in the future and me knowing what it is going to do?  Yes, I do know what it is going to do.

It is going to go up, down or sideways.  If it goes up, I'll buy and sell call options and sell naked puts.  If it goes down, I'll buy and sell put options and sell naked calls.  If it goes sideways, I'll sell naked options and let time value decay lower the price of the option and buy it back to close the position at a profit. 

 

OK, Then why ain't we rich?  Tongue out

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Re: Requesting help on what the stock market actually IS
Dogs wrote:

Don't get hung up on why the market is moving - just be glad that it is.

Yeah I want to not get hung up, but I'm having trouble.  I'd prefer to just trade the market and make money regardless of what the idiots in control do.  But, I was also brainwashed at a military academy that I should be a leader and care about the system and participate in it to fix it.  So...I find myself dragged into understanding the way it works so I could potentially get involved in the fix, run for office, whatever, eventually to help everyone else with a better system.  I am starting to see that it's a waste of time and I should just learn to maximize my trading profits and build assets.  And truthfully, I can probably help more from that position, having assets to help my local community, than I can from focusing too much on the macro system.

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Re: Requesting help on what the stock market actually IS

jerrydon10: ricing prices because of increases in demand (for oil) or decreases in supply (of food) are not inflation, except when it concerns the demand for and supply of money.

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Re: Requesting help on what the stock market actually IS
woupiestek wrote:

jerrydon10: ricing prices because of increases in demand (for oil) or decreases in supply (of food) are not inflation, except when it concerns the demand for and supply of money.

The definition of inflation is more dollars chasing less goods. Demand exceeds supply. The dollar inflates. There are too many people on here trying to over-complicate very simple economic scenarios wrapping those over-complications in semantics. People can understand this, but some aren't helping....Wink

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