Talk­ing stocks

The Pak Banker - - 4EDITORIAL - Khur­ram Husain

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.

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