Stock markets

[Francesca R]

Property markets are weakening fairly sharply in the US and the UK. Stress in credit markets is growing quite alarmingly. Big global banks are making huge write-downs on sub-prime, asset backed debt and requiring support from sovereign wealth funds controlled by non-western governments. Volatility implied through options is high. Yet equities are trading close to all-time highs.

Seems like something of a conundrum? Is it really the case that "liquidity injections" and interest rate cuts from central banks can make everything OK for equity investors?

[Sefarst]

I'm of the opinion that stock markets are a very poor indicator of the state of an economy, though they tend to receive the most attention. The East Asian Crisis of the late '90s was the exact opposite of what we're seeing now. The HPAEs watched their stocks plummet as the rest of their economies remained moderately stable. There's a very real problem and danger of the subprime mortgage issues spreading even more as banks start cutting back on loans.

But I agree, it's counterintuitive for the market to be doing so well while the rest of the economy is shaky.

[Loss Leader]

Property markets are weakening fairly sharply in the US and the UK. Stress in credit markets is growing quite alarmingly. Big global banks are making huge write-downs on sub-prime, asset backed debt and requiring support from sovereign wealth funds controlled by non-western governments. Volatility implied through options is high. Yet equities are trading close to all-time highs.

Seems like something of a conundrum? Is it really the case that "liquidity injections" and interest rate cuts from central banks can make everything OK for equity investors?


Well, here's my problem with that - the stock market is nothing other than an agregate of individual stocks. The value of an individual stock is (or should be) equal to the expected return on the investment. A share of stock bought for $20.00 should be exactly equal to the company's discounted expected future returns divided by its outstanding shares of stock. A $20.00 share of stock should in the future make you exactly $20.00 in today's money.

So, my question to you is which stock do you think is overvalued? Which stock do you believe traders and analysts have placed too high a price on?

If you can't tell me the name of a single overvalued stock, I don't see why the average of all stocks should be considered to be too high.

[Francesca R]

Well, here's my problem with that - the stock market is nothing other than an agregate of individual stocks. The value of an individual stock is (or should be) equal to the expected return on the investment. A share of stock bought for $20.00 should be exactly equal to the company's discounted expected future returns divided by its outstanding shares of stock. A $20.00 share of stock should in the future make you exactly $20.00 in today's money.Agree, you should be happy to pay $20 for a stock whose future cash flows in perpetuity have a present value of the same, as long as the discount rate includes an allowance for each of (i) inflation (ii) the future real risk free rate of return, and (iii) compensation for the non-zero risk of the stock.

So, my question to you is which stock do you think is overvalued? Which stock do you believe traders and analysts have placed too high a price on?I suspect that the consensus estimate of (iii) above (the risk premium) should be higher now than it was in, say, June. (i) and (ii) probably have not changed much. Therefore the fair price of the stock market today should be lower than it was 6 months ago, but the actual level of the market is approximately the same.

If you can't tell me the name of a single overvalued stock, I don't see why the average of all stocks should be considered to be too high.OK--but I'm not really thinking in the realm of bottom-up analysis; more top-down.

[The Central Scrutinizer]

Well, here's my problem with that - the stock market is nothing other than an agregate of individual stocks. The value of an individual stock is (or should be) equal to the expected return on the investment. A share of stock bought for $20.00 should be exactly equal to the company's discounted expected future returns divided by its outstanding shares of stock. A $20.00 share of stock should in the future make you exactly $20.00 in today's money.

So, my question to you is which stock do you think is overvalued? Which stock do you believe traders and analysts have placed too high a price on?

If you can't tell me the name of a single overvalued stock, I don't see why the average of all stocks should be considered to be too high.

Exactly. Unless one plans on buying every single stock in "the market", why would one care if "the market" is overvalued? Or undervalued, for that matter.

It's all about stocks. The market is irrelevant.

[Francesca R]

Exactly. Unless one plans on buying every single stock in "the market", why would one care if "the market" is overvalued? Or undervalued, for that matter.

It's all about stocks. The market is irrelevant.Plenty of people buy/sell every stock in the market. Mutual funds, index trackers, futures contracts, swaps . . .

[The Central Scrutinizer]

Plenty of people buy/sell every stock in the market. Mutual funds, index trackers, futures contracts, swaps . . .

Name one.

[Francesca R]

I just did. Anyone who invests via one of those. And I don't mean "every stock that trades"; I mean every stock in an index. That is "the market" in the sense that I refer to "the market" as being close to its highs.

[balrog666]

Property markets are weakening fairly sharply in the US and the UK. Stress in credit markets is growing quite alarmingly. Big global banks are making huge write-downs on sub-prime, asset backed debt and requiring support from sovereign wealth funds controlled by non-western governments. Volatility implied through options is high. Yet equities are trading close to all-time highs.

Seems like something of a conundrum? Is it really the case that "liquidity injections" and interest rate cuts from central banks can make everything OK for equity investors?


All-time highs?? You don't consider inflation or currency fluctuation meaningful to a value measurement?

[Francesca R]

Inflation: No not really since I am considering the last 6-12 months

FX: No, local currency values are high in strong and weak currency markets

[balrog666]

Inflation: No not really since I am considering the last 6-12 months

FX: No, local currency values are high in strong and weak currency markets


BWAAAAAAAAAAAAAAAAAAAAAAAHAHAHAHA! Good one.

I know you're important and all but the world didn't begin when you started to pay attention.

[Francesca R]

Yes but don't you see I just need someone like you to help it make sense and it really digs at me when you withold all that wisdom? Must I beg?

[drkitten]

A share of stock bought for $20.00 should be exactly equal to the company's discounted expected future returns divided by its outstanding shares of stock.A $20.00 share of stock should in the future make you exactly $20.00 in today's money.

So, my question to you is which stock do you think is overvalued? Which stock do you believe traders and analysts have placed too high a price on?

If you can't tell me the name of a single overvalued stock, I don't see why the average of all stocks should be considered to be too high.

The discount rate is a global function of the economic climate as a whole, not a function of any individual stock, yes? If I think the assessment is set using the wrong parameters -- or if the underlying parameters (such as the risk of global inflation) have changed substantially but the pricing as a whole has not reflected that -- then I think "all of them" is a quite reasonable answer.

[Loss Leader]

The discount rate is a global function of the economic climate as a whole, not a function of any individual stock, yes? If I think the assessment is set using the wrong parameters -- or if the underlying parameters (such as the risk of global inflation) have changed substantially but the pricing as a whole has not reflected that -- then I think "all of them" is a quite reasonable answer.


I am given to recall the economics student walking through the quad with his professor. He sees a five dollar bill lying in the grass and points it out. "No," says the professor, "There is nothing there." The grad student bends down and shows him the bill. "There is no five dollar bill." The student finally asks why the professor refuses to see the bill as he now pokes at it with a pen. "Because," says the professor, "If there were a five dollar bill on the ground, somebody would have picked it up already."

[Francesca R]

I am given to recall the economics student walking through the quad with his professor. He sees a five dollar bill lying in the grass and points it out. "No," says the professor, "There is nothing there." The grad student bends down and shows him the bill. "There is no five dollar bill." The student finally asks why the professor refuses to see the bill as he now pokes at it with a pen. "Because," says the professor, "If there were a five dollar bill on the ground, somebody would have picked it up already."This funny tale is generally used to make the efficient market hypothesis (and the full applicability of general equilibrium economic models) appear silly.

So does your invocation of it mean that you "agree" that the idea that markets are always efficiently priced is silly? I ask because you previously appeared to be implying the opposite (that a statement that the market might be out of whack was highly suspect)

[a_unique_person]

Property markets are weakening fairly sharply in the US and the UK. Stress in credit markets is growing quite alarmingly. Big global banks are making huge write-downs on sub-prime, asset backed debt and requiring support from sovereign wealth funds controlled by non-western governments. Volatility implied through options is high. Yet equities are trading close to all-time highs.

Seems like something of a conundrum? Is it really the case that "liquidity injections" and interest rate cuts from central banks can make everything OK for equity investors?

Excess cash that people have nowhere else to put it. Sticking it in the bank is seen as week, because anyone can do that, and you don't need a small army of tax advisors and accounts to manage your money any more.

[Puppycow]

Property markets are weakening fairly sharply in the US and the UK. Stress in credit markets is growing quite alarmingly. Big global banks are making huge write-downs on sub-prime, asset backed debt and requiring support from sovereign wealth funds controlled by non-western governments. Volatility implied through options is high. Yet equities are trading close to all-time highs.

Seems like something of a conundrum? Is it really the case that "liquidity injections" and interest rate cuts from central banks can make everything OK for equity investors?

I don't know about the UK market, but I tend to think that the dollar's weakness means there will be some good export growth for the US. Real estate is undergoing a correction, but this is part of the business cycle. There is growth overseas, and maybe all those dollars Americans are paying for oil will eventually come back either in the form of investments or purchases of US exports.

[a_unique_person]

Rumours of Stagflation. Sounds quite possible. Prices rising out of any relation to interest rates economic capacity, economy facing a downturn due to the subprime crises.



The US economy is showing early signs of stagflation as growth threatens to stall while food and energy prices soar, former US Federal Reserve chairman Alan Greenspan said today.
In an interview on US network ABC's This Week with George Stephanopoulos, Greenspan said low inflation was a major contributor to economic growth and prices must be held in check.
"We are beginning to get not stagflation, but the early symptoms of it," Greenspan said.
"Fundamentally, inflation must be suppressed," he added.
"It's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer-term period."







http://www.theage.com.au/