On the bigger issue of inside information, this is the entire basis of the stock market. People out in the sticks with no access to corporate data do their own "analysis" and decide that they have uncovered some nugget of information that will make their choice prescient. The fact that this is almost never true is besides the point. It is same logic that those following horse racing use.
I once had some "inside" information about a pending acquisition so I bought some of the stock. The acquisition never took place and the stock went down. Was the information wrong, was it deliberate misinformation designed to pump up the price, or did events just take a different turn, who knows?
Look at the most popular game these days, trading on analyst's "expectations". When the earnings come out the stock goes up or down depending on whether results met expectations, not on whether the company is doing better or worse. Since most analysts work for or with trading firms the opportunities for mischief are limitless.
Even mutual funds play the same game. They sell themselves on the basis of some vague idea that they can perform better than average because of superior stock picking techniques. Of course half do worse than average and half do better. Even the ones who do worse still collect their management fees, however.
Let's stop pretending that we are "investing" and not gambling. Policies not Politics ---- Daily Landscape
The losers in this "bezzle" (J K Galbraith's wonderful expression for when the losers don't know they are losing)are the "end users" who use markets to "hedge", and small time traders without the access to information the big boys have.. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
A real hedger doesn't lose. say you wish to buy oil next month at $50 and that's where the future is trading. You go buy your hedge. Then come the day you want the physical oil you buy at noon and then sell his hedge off simultaneously (or just does an efp -- trades oil for futures) he at most loses the bid/ask. No harm.
Some big sellers (say a Scandihooligan) sell large quantitiies of physical oil off of the IPE settles on a derivative basis. That is, they use the settle to price a physical sale without going through the futures for most of the oil. So another player(the buyer) can trash the settle with a much smaller quantity and gain a profit. The problem is letting the other side have leverage.
there are easy solutions to the problem
Thanks, exactly what I wanted Chris to ackowledge. "It's the statue, man, The Statue."
But the real hedgers don't have the advantages of the guys sitting in the middle in terms of access to data and order flow.
And if a Big Oil company is in cahoots with a Big Investment Bank - a not unlikely scenario - then other market players can get doubly screwed.
All you have to do is:
(a) add up the profits made by Goldman Sachs, Morgan Stanley energy desks - not to mention BP's trading profits - and ask yourself why the top people in the Banks got where they did; and (b) why every other investment bank is queuing up to poach energy teams from their competition; and (c) why star energy traders head for hedge funds, because they don't see why their employer should get so much of the profit THEY are making; and the $64 billion question (d) at whose expense are these multi billion "super-profits" (I don't begrudge trading profits, by the way) being made?
The answer to that is hedging "end user" producers and consumers, and, increasingly, hedge funds. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
I'm not sure what you are getting at with your heldging comment, but people are hedging everyday on many transactions simply because they want to take financial risk out of their life--farmers, business people, investors. If you want to lock in a payment being made to you in Euro's in 6 months, lock it in in dollar terms because you are a US citizen,,you can do that--and not worry about hoping the Euro is still worth the same as today in 6 months. On the other hand if you think the euro will be stronger and you want to take that risk, you can just wait and see what happens. to me, it's all about having those choices--and it's certainly been a good thing for me in the past.
The stock markets are not as black as you see them based on your exposure to a much uglier commodity market where players are assumed to be expert and have their eyes open. For example, commod players are not only allowed but are expected to be trading based on info not widely known in the market. That's illegal in the stock markets. If your company is about to announce a new product, it cannot do a big stock buyback the day before. If your refinery is burning, you can buy like hell if you can move faster than the others.
Real hedgers have opportunity to avoid game playing, they just have to not get talked into badly designed instruments/strategies marketed by exchanges like the IPE.
Governments are continually looking for sources of more funds to flow into financial markets, to prop up securities prices. That is one of the main things that drive privatization.
So there is something "rigged" even when it comes to long-term investment in the stock market. A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
The point is that, with an increasingly large share of the national income going to the very wealthy, you are going to have more and more funds for which investment opportunities have to be found. That alone will drive up stock prices. A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
http://www.bullandbearwise.com/SPEarningsChart.asp
I agree that much of the pressure is money flowing into the market that used to go elsewhere, but a big reason for that is that safer investments don't return squat compared to inflation. The Japanese and Greenspan have made borrowing way too cheap.
The Japanese and Greenspan have made borrowing way too cheap.
Japan, imo, is a one-off due to their unusual situation in demographics. thus a stagflation for years,,,,,and a prelude for the world looking out 5--20 years. ie, wonderful situations don't last forever.
As for Greenspan and Co, I just dont agree. Our rates have been dropping since about 1997. I used to get 7% in a money market then and it got as low as 1%. That forced a lot of folks into other riskier investments if they had to have the yield. We just spent it on a house so that took care of our cash "problem".
We didn't need to go so low on rates but the liquidity was made available first for y2k and then after 9/11 to make sure the economy didn't puke. Still, it has had some side effects of puffing real estate and other markets IMO.
The huge deflation in labor made it possible to keep these rates low without inflation. But it was a bad bargain for many in the labor pool while making people like me richer.
The huge deflation in labor made it possible to keep these rates low without inflation
actually I think the boom would be far stonger in the euity markets without the terror issues in the MidEast. There is a large risk premium on financial assets, imho, due to this factor. these factors will make markets grow steadily since the risk premium is already there. but if things ease in the mideast (and I doubt it), but if they do. watch out, these equity markets will explode.
as to Japan, I think it's a prelude to the future. the next 5 years demographically will be OK for them, so their markets will be OK. but then it comes back, and begins to hit the western world as well. I don't know if we have answers for this one yet. (I know this is not accepted economic thinking, btw.)
I don't think Greenspan did a poor job either btw. I think he and the Japanese both did what they had to for the most part. The drop to 1% seemed a bit overdone though. But if I was that smart I'd be rich.
btw, I find your comments and insight very valuable. you're obviously a very bright guy, and I think come at things from a different experience base than mine. one learns a lot from bright people with a different perspecitve,,,,that was a valuable lesson for me that I learned early in life. Whew, at least I learned something early in life.
http://www.wilshire.com/Indexes/Broad/Wilshire5000/
their site shows about 14.45 Trillion as of today.
I think the main reasons the markets have done so well the last 15 years are
One major reason for why Wal-Mart has smashed companies like Sears and K-Mart into dust, aside from the utter incompetence of companies like K-Mart and the fact that the game has long passed Sears by, has been its strong integration of technologies to measure and control its inventory. Wal-Mart has enjoyed, I believe, stunning productivity growth relative to its major competitors. CostCo -- WallieWorld's big competitor in the Buy In Bulk market -- has, as well, if I'm not mistaken.
So there are very good reasons for the markets' solid gains. Some of it was the result of too much hype, of course, back in the 1990s. And, no doubt, that will happen again, because that's simply a fact of life in the stock market. But, on the whole, I think the trend makes sense. The primary role of Iraq has been to spook investors, who really and truly hate that sort of uncertainty, especially in a region as dangerous -- and, for now, as economically important -- as the Middle East. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
mutual funds on average perform worse than the overall market, mainly because they have to deduct their fees from the returns. thus even producing "market returns" means you are actually lower than the market return by the fee--likely 1-3% per year.
I disagree with the last point of course and have explained more than once the rationale. while there is certainly day to day speculation, the vast majority of trading in the public markets is long term investing, and I've given obvious examples of this in the past.
To a certain (high) degree of approximation. The very existence of hedge funds disproves (by countereaxmple) the assumption that information has already been discounted in the stock prices.
I was going to pick a nit on the term "random walk" but I'll refrain. If you're using it in a nontechnical sense there's no nit to pick. "It's the statue, man, The Statue."
wc himself seems to spend a lot of effort looking at the fundamentals and investing according to his best assessment of the "available information", which means he doesn't really believe all information has been discounted, or the two-fund theorem. "It's the statue, man, The Statue."
And even if everyone had the same info, they don't all draw the same conclusions. "everyone knew" that the dollar/euro at $1.35 was just a stopping point on the way to the gutter. Then it traded back in for 2 years.
And also, not everyone is a "guy with reputation". Which is only more to support my claim that the market is not as simple as the guys in mathematical finance need to believe it is so their models are even tractable with a supercomputer. "It's the statue, man, The Statue."
wc himself seems to spend a lot of effort looking at the fundamentals and investing according to his best assessment of the "available information", which means he doesn't really believe all information has been discounted, or the two-fund theorem.
so I look for segments where I think the market has not yet discounted available information, or maybe said another way where the markets for some reason are not closely followed and the random walk theory won't apply, and try to make a little extra money there. (that and the private investments are areas where insight and hard work can give me an edge).
but on calling the big companies, or the overall market trends, I find that I probably lose as much as I win--ie, a random walk. so why not just take the index funds in those areas?
the vast majority of trading in the public markets is long term investing, and I've given obvious examples of this in the past.
I don't think that with a billion shares traded per day one can consider the "vast majority" is for long-term investing. If you mean that individual investors generally aren't day traders then I think you are right.
However even though people may have put their money in mutual funds for the long term this does not mean that the funds are just sitting on the money. My (very conservative) retirement fund has a turnover of over 100% per year. I assume more aggressive funds trade even more frequently.
The point is that the fund always advises participants not to try to time the market and then goes ahead and does it themselves.
Another scam is to quote expenses as a percentage of the capital invested instead of as a percentage of the yield. So a fund with an expense ratio of 1% earning 5% for the year is really taking 20% of the earnings in fees. No wonder Wall Street wants to privatize Social Security. Policies not Politics ---- Daily Landscape
I don't agree with your way of looking at the %'s. but since I use index funds, my expense ratios are very low, so I don't worry about the argument.
This is a fundamental insight. what makes markets move these days (as it should in theory, btw) is "new information", i.e. information that shows that reality is different from expectations - or more precisely from the consensus, or average, of expectations.
Thus the sometimes aparently incomprehensible reactions of the market to some horrible news (it goes up, because the market was expecting even worse and had already discounted such bad news) or good news (it goes down because it now expects a different reaction from the Fed to that data).
Actually, more than half do less well than the market (which may be compatible with what you say, as the average of managers and what the market does may be different). It would seem that, apart from a few people that seem to be genuinely better (or are extremely lucky), the vast bulk of that industry are useless parasites. In the long run, we're all dead. John Maynard Keynes
Colman: A very murky crystal ball. (May 19th, 2006)
The fact is that the "market expectation" has implied probabilities of future movements that bear little relationship with the likelihoods of actual events. "It's the statue, man, The Statue."
