Monday, March 30, 2009

The Great Stock Market Cash Cow?

The stock market is the great cash cow of finance. But how does it work? At a very basic description the stock market is simply a worldwide market place for financial products. A market being a place where buyers and sellers come together to trade money for goods and services. But the goods and services traded in the stock market are purely finance ones. Money is given in market for company stocks and derivatives of company stocks and securitized lines of credit instead of the fruit and vegetables in a traditional physical market.

There is only a complex series of answers to the question; ‘how does the stock market work’? And those answers differ according to the perspective of the person asking the question. There are four questioner groups when it comes to the economics of the stock market;

1. The companies that issue the stocks.
2. The buyers and shareholders who hold the stocks.
3. The brokers and the stock market traders who work the finance coal face as it were.
4. The stock market company that owns and operates the actual marketplace and electronic support systems.

The stock market works for the companies whose stocks are quoted on it as a cash cow. These companies put up for sale stocks (certificates of ownership) so that they can raise finance for capital investment such as warehouses or new railroad tracks. Once the stocks are marketed and sold, they become finance products in their own right and will be traded and speculated with numerous times. Even though ownership of the stocks may change hands many times, the originating companies are required to communicate with each and every stockholder. The stockholders will receive payout annually which will depend on the ‘earnings per share’ declared from the profits of the company.

The annual dividend payouts to stock market investors have to be good enough to entice buyers to buy in competition with other forms of investment. These are the basic economics of the stock market.

The stock market works for the buyers of stocks also as a cash cow. They take profits on their investment finance through dividend payouts and the (hopefully) rising value of their stocks. This occurs as long as the quoted companies are running a good business and making themselves attractive to stock market investors.

The economics of the stock market goes like this; the supply of stocks for each company in the stock market is restricted and so the price of a stock rises when this is the case (fixed supply) and the demand increases because the business is doing well.

The stock market works for the brokerage houses as guess what? Yes you of course a cash cow. They take fees from their clients every time they buy or offload stocks from their portfolios. They also take consultancy and advisory fees for guiding clients to the best stock market transactions. They also act as repositories for the actual stock certificates, mostly on computer accounts nowadays but also in quaint vaults.

The stock market works for the stock market company that occupies and manages the physical marketplace trading floors and electronic support systems as a cash cow. No surprise there then. The New York Stock Exchange NYSE is the largest in the World and is owned by ‘Euronext’ and as a corporation they are quoted on the stock market as well.

Whose Fault Is The Stock Market Crisis?

Is this an economic recession, depression or just a finance crisis? Well the early signs were property prices nose diving. Anybody with a home loan bigger than the sale price of their property really knows what this economic crisis is about. Home foreclosures are soaring. If you have been foreclosed then you probably couldn’t care less about the stock market crisis. People who wish to buy a house or apartment can’t get the money because the banks and savings & loans are in a finance crisis of risk aversion over borrowers defaulting on repayments. Realtors having properties listed for longer and selling for less and they really know what an economic crisis this is too. And so any business or individual in hock beyond their income are seeing the finance crisis up close and personal.

So whose fault is it?

Well it started with all those ‘sub-primers’ so they must have brought the banks and stock market down. I bet they don’t feel themselves to be ‘sub-prime’ though. They took on those home loans through Citigroup and Bank of America in good faith that they would make the repayments. They never intended to default, nor did they want to. Poor personal finance is not yet a crime but we all have to take responsibility for our economic decisions.

So it must be the fault of all those carpet-bagging mortgage dealers? They knew and didn’t care, when pushing buyers to sign the mortgage contracts, that there was small chance of meeting the repayments all through the loan term. Were they blinded by their commissions? Did they cause the finance crisis by pushing those introductory offers? Surely the organization guidelines had to be followed and the risks of default looked at, and the loans guaranteed.

So the banks are at fault for the crisis of finance? It is they who do the foreclosing and they who take the losses by selling assets at a few cents on the dollar while simultaneously charging each other impossible levels of interest for credit. These actions are dragging the crisis of finance out. They are all in the same boat and rowing in opposite directions.

But let’s get personal and blame all the managers at all those banks and Fanny Mae or Freddie Mac. They must have cut the economic risk levels and standards at which loans were made. But how can it be? Surely someone was watching this situation develop.

Is it the hedge fund managers and finance brokers who brought the stock market down? Those city slickers have made up some very complicated, and bewildering finance products. These ‘derivatives’ are all based on securitized assets such as home loans all bundled up together. Our tax dollar bailouts have bought us such things as ‘plain vanilla instruments’, ‘Caps/Floors’, Swaptions, and ‘Commodity Swaps’. It all sounds like pyramid selling Madoff and Ponzi style. Certainly Bear Stearns (remember them?) went too far on this type of speculation.

All those smart guys at the Federal Reserve Commission must hold some responsibility for the economic crisis. Where was their ‘big picture’ view when we needed it? Are they to blame for not holding back the stock market bubble before it burst? Far from cooling things down the ‘Fed’ have kept the price of money way too low for way too long. They’ve pumped up the economy with cheap personal and corporate credit.

The bottom line of this economic crisis is written in bold red and it is that we are ALL at fault for ignoring some economic facts of finance life. We cannot go on living and spending today while paying tomorrow. We have to live within our means. Investment has to be for the long term in real things and speculation for a quick buck is just blowing bubbles.