The FINANCIAL — Understanding the stock markets, their behaviour, the underlining strengths of shares, their current and perceived values, the art of engineering profits, the flows of capital in and out of stock exchanges, the institutional powerhouses which dictate share price movements up or down, the billions which are bought and sold in the flick of a second, the individuals and corporations which make a massive win or loss, the mums and dads, the pensioners who put their little savings and wait to see them grow bit by bit or get eroded in no time, the financial pundits, the forecasters, the diviners of profits, the myriad of schemes floating around to make a quick buck through computer driven forecasting, the noise, the din and the yell of buyers and sellers, the yawns and the thrills on the trading floor, the green and red flashes which make hearts pump, the night riders who stay awake in different cities to buy and sell – are all part of a complex theatre of transactions which govern the global financial system.
Workings of stock markets and the utopian philosophy of distribution of corporate wealth among a larger segment of world’s population seems a like an economic paradigm, spinning uncontrollably in mid air, without any tangible and significant connect to the realities on the ground.
Let’s take the concept of market capitalisation which measures the total monetary value of a corporation and provides it the strength required to borrow more from banks and other institutions, to develop growth strategies, to create strategic business units, to enlarge market share and to continue to increase profits and strengthen shareholder value.
Market capitalisation is computed by multiplying the number of outstanding shares in a listed company by the last transaction price of a share on a given trading day.
Take a large corporation such as General Electric commonly referred to as GE. It has a total of 10,587,317,000 shares. It’s 52 weeks trading history shows that the shares sold at $21 at high and at $14 at low. This means, at one point in time during one year, the corporate wealth was at $222,333,657,000 and at another point in time within the same year, it was at $148,222,438,000. Between the high and the low points, the difference in corporate wealth was whopping $74,111,219,000.
A drop from the high to the low is a staggering 33% in one of the world’s largest corporations and this raises a total gamut of issues which the prevailing economic system cannot fully answer. To begin with, there is a driver called “market sentiment”. This is about both the company, its team, its products and services and its performance capability on the one hand and on the external environment pertaining to the overall national, regional and global economies, war and peace, earthquakes, tsunamis and other natural disasters, potential market demand for specific products and services, elections, party politics and agendas and a myriad of other things.
Although share prices, in theory, are determined by current and future profits of a corporation and the Price : Earning multiples which are driven by a corporation’s profit trajectory, the overall market sentiment, on a given day, affects the share prices bought and sold. The sudden jump in price or a sudden drop in price may not necessarily have any direct connect to the productivity of a corporation or indeed its profits or losses on a given day. What happens however is that a large amount of money is made or lost on a given day or week or month, making some very rich and some very poor, making the stock markets the world’s largest casinos.
The unreality of share pricing and wealth creation is compounded by more sinister and dubious means where fraudulent manipulators of share pricing could have a full play, despite some very stringent rules pertaining to insider training, concealing of material information to the public and reporting standards set by Stock Exchanges. The institutional investors, mainly the large funds, do have the biggest say in shaping the pricing structures. A large “buy” or “sell” of shares amounting to billions of dollars can mutate the anatomy of a company overnight, push it up or down, make it prosperous or bankrupt, and in recent cases of the financial turmoil, result in large layoffs of employees. Hewlett Packard’s decision this week to make 27,000 of its employees redundant globally is an example of how a leading company can capitulate so suddenly.
My criticism of the stock markets and their control of the mobility of large amount of funds is based on my perception that stock markets have now become, more or less, wasters of much needed financial resources and that they suck up billions of dollars every day from the economy, to be used in a game of financial poker. It ties up large funds in a relentless pursuit of making those funds alone make profits, without the funds being directly applied to real development, although the theory is that corporations benefit by higher share prices which give them the ability to harness more capital for expansion and growth.
There is an additional issue. IPOs such as Facebook with an initial listing at $16 billion and Singapore’s F1 proposed listing at $2.5 billion tend to attract investors wanting to make quick returns, mainly based on the market sentiment that the volume of trading in these stocks would always be higher and consistent. Facebook is a useful social network, and F1 is a high profile motor sports, but one may beg the question as to what essential part of ordinary men and women’s life do they actually occupy and enhance. Or to reverse the question, could all this money have been committed to a corporation working toward better education or health and, making profits.
We have invented some catch phrases to describe and explain what are somewhat inexplicable or embarrasing. When a trader with a large fund or bank commits a huge blunder in his bets, he is dubbed as a “rogue trader” and ostracised from the club. Investors who have lost money in the “default” economies are asked to take a “ hair cut”, meaning that they need to forgive and forget part of what they have loaned. Someone making the wrong judgement on a $2billion deal and losing it for the company is brushed aside as being “stupid and sloppy”. Bankers who claim millions in bonuses when they consistently post losses are regarded as “super bankers” without whom the banks will just fold up and die. When a stock market nose-dives, it is often referred to as “market correction”. There are bulls and bears in this stock market forest. Merrill Lynch’s logo of a raging bull and the copy line “a breed apart” is somehow very poignant when we consider that only the bulls can survive in a world of financial and currency wars.
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