IF you have any money in the stock market, and you are not a super wealthy individual with high-level contacts, you should be very concerned. There are a number of reasons why, but let me share only a few. For one, your broker could well be misleading you. Stock market brokers are famous for doing that. Each profession has its peculiar quirks, and a large section of stock market brokers are often perceived as elaborate con artists.
Except that the con may not be all that elaborate. Basically the market going up or down has very little to do with developments in the rest of the economy, particularly with company fundamentals. Stocks rise and fall based on the inflow and outflow of funds in the market. This is why we saw the market rising even when extraordinary levels of uncertainty were building up in the country, and the economy was tanking throughout 2007. And it is also why the market has risen so sharply in the last year or so.
The market going up or down has very little to do with developments in the rest of the economy.
The quantity of funds coming into the market is determined mainly by the lack of opportunities elsewhere. Look at the figures on investment, for instance, and you'll see they are lower than they have been in many years. Yet companies are posting profits. So money is being made but it is not being invested. That means it is either being spent, or it is being ploughed into speculative investments like stocks and property.
This is why you see shopping malls packed, and the import bill for consumer durables continuing to rise, as well as sales of automobiles, home appliances, mobile phones and furniture reaching new highs. Everybody is having a good time in this economy, by and large, but nobody is willing to acquire stakes in it, or put their money into long-term projects in it.
Funds flow into the stock market through four major channels. There are the large brokers, very small in number, and a large number of small brokers. Both have different strategies for bringing in money. Then there are the asset management divisions of the banks, as well as the mutual funds. And lastly there are the small investors who are trying money directly.
Each one of these parties has its rackets, except for you, the small investor with a wad of cash in your hand and not much of an idea of where to put it. To run a racket you need money in bulk supply.
Many of the big brokers have their pump and dump schemes, where they trade primarily amongst themselves in any given stock in order to get its price to rise. Once the price begins to rise, it attracts the attention of the smaller players, which is everybody else on the list. Then they all get into the act. At that point the big brokers stop trading amongst themselves, and then start selling at the elevated price.
The asset management divisions basically have money from their banks. I know banks aren't supposed to put their own funds in their asset management divisions, but there are ways to get around such regulations. For one, bank high-ups, often including the sponsors themselves, will arrive at a gentleman's agreement to place a mutually agreed sum of money from their institutions into each other's asset
to play with
their management division, with some agreement as to the returns and timeline for withdrawal.
Many smaller brokers need to burn a little shoe leather to operate their racket. Their job is to hobnob with the well-to-do, searching for a handful of wealthy clients. What investment strategy they decide on, and what returns are promised to the handful of wealthy clients that make up the small broker's boutique list will be largely inside information held between them.
These players look towards the retail investor to augment their funds, and provide the cannon fodder for their play. Ultimately the stock market is basically about, and for, a small group of individuals who find a way to command funds in bulk quantity. Those who have to go sifting through the noisy and quarrelsome rabble that makes up the community of retail investors to build up a large share of their funds in play usually end up making no money worth the name.
The problem comes in when the whole game changes. That can happen in a number of ways. A change of government at home, or the arrival of a financial storm from abroad can upset the apple cart in a big way.
We don't yet understand exactly how the overseas financial storms actually transmit themselves into our financial system. But at least we are beginning to acknowledge that they do. It has everything to do with the changes that are sparked in the thinking of those controlling the bulk funds, and the retail investor is always the last to be in the know. The bolt for the exits begins quickly, and the last one out can get trampled underfoot once the stampede of the retail investors gets going.
The reason you should be concerned right now is that an overseas financial storm is brewing, and it has just licked our financial markets briefly, sparking a stampede the likes of which we have not seen in many years. Last year, there was a similar stampede when word of the third umpire's finger was blaring out of every TV set in the country. Fortunately, all we got instead was the umpire's third finger and nothing more, so the game got back into play again. This time it could be different. If you have a nest egg in play, be careful.