MarketVolatility_750x188

Perpetual Tension

Countless factors contribute to market fluctuations, and the perpetual tension between bulls and bears across the globe is an obvious tug-of-war every single minute of every single day. Financial news floods the media. Earnings reports prompt speculation. Consumer surveys, employment reports, supply and demand, Fed announcements, third world conflict, climate change… these factors, and many more, dictate the daily peaks and valleys of every index on every global exchange.

  • Jan 6, 2014: Dow = 16,437
  • Jan 5, 2015: Dow = 17,737
  • Jan 4, 2016: Dow = 16,347
  • Jul 5, 2016: Dow = 17,841

The actual average advance of the Dow so far this past year? 1,494 points. That’s about 9% for the year so far — a mere 8 points per day. Not so bad, but over the past two years, it’s gone nowhere.

Question #1: If daily volatility virtually disappeared and the Dow simply moved up (or down) three points every single day, how many people would abandon Yahoo! Finance, the Financial Times and CNBC? Imagining a scenario like this is somewhat pointless. It will never happen. There’s a voracious appetite for this data, along with a need to reach investors with relevant, timely reporting messaging, products and services.

Question #2: Who owns and controls 55% of the entire global stock market’s current equity value/debt of $56 trillion? According to the Official Monetary and Financial Institutions Forum (OMFIF.org) Annual Global Public Investor Report – June 2014, central banks and government institutions actually own about $30 trillion of the entire global public equities/debt pie.

Let’s Consider

Yahoo! Finance generates $260,000 per day in advertising revenue. Bless them. The amount of live interactive data they provide in real time, for free, is miraculous. CNBC, one of NBC-Universal’s most profitable channels (all owned by Comcast, by the way), and reaching 93 million viewers, generates average annual revenues of $510 million, again from ad revenue in its various forms, and is estimated to be worth $4 billion. There are many other free financial channels (Marketwatch, Bloomberg, CNN, etc.), but Yahoo! and CNBC do an excellent job at covering all the bases.

Let’s try something. Let’s place all ‘current global financial news stories’ (and all scheduled guest commentators) into two general groups. Let’s call these groups ‘cautious optimism’ and ‘cautious pessimism’, ready to be layered into the news stream in a ‘timely’ manner. Tempting, if you get my drift. What happens next is anybody’s guess, but rest assured, the wild rides will continue, and the coverage will strive to capture ever more viewers.

Now, Let’s Focus on the Second Question

When any large financial institution (or group of related institutions) controls a sizable portion of global markets AND sits alongside those who dictate policy and in many cases literally create the news (or at least can reliably predict it), those entities can easily move markets by 1%-2% over the course of a single day, earning handsome profits along the way (either way, by the way). The other 45% of the market (individual investors, private institutions and their brokers) will then often follow suit, moving the market further up (or down).

So, the point of this little fable? With all the hoopla, the Dow moved 6% from August to August. Volatility peaks curiosity, and draws eyeballs. Volatility sells. Volatility can also produce a greater annual yield than a boring market that creeps up (or down) three points per day. When you control corporate stock, along with the news, it’s a match made in heaven. We’re all for stimulating the economy, and there’s absolutely nothing wrong with Yahoo! Finance or CNBC. They’re both excellent sources of valuable and timely information – the best in the business. But, every time the markets rally or decline too quickly, curious eyeballs tune in, advertising sells, and investors follow the trend.

One More Related Tidbit: Stock Buybacks

Previously, we posted this story about corporate stock buybacks. Super low interest rates (from the same behemoth lending institutions) make it sooo tempting for corporate heads to buy back their own shares, naturally increasing the value of the remaining outstanding shares. In the past twenty months, at least $650 billion in stock buybacks were posted. Stock prices go up, and small investors buy more. With buybacks, the value of INDIVIDUAL executive holdings goes up as well. So, here we have the quintessential triple play – a win-win-win for the top 1%. The current level of U.S. corporate debt, all combined, totals about $13 trillion. The Economist has recently referred to this scheme as Corporate Cocaine.

So ends our fable. The moral of the story? The stock market is NOT what it used to be. There ARE many great success stories, and at the time of this writing, we can all agree that some investors have done well over the past six years. But the numbers don’t lie. Average P/E and P/S ratios are too high (again). Corporate debt is also way too high. Endless consumption of natural resources is not a good thing. In fact, it’s clearly turned out to be a very bad thing. At some point, this will all have to correct itself.

Please take some time to visit Uvida’s upcoming property, SectorStories.com, currently in development. Here you’ll find perspective on the nature and recent history of today’s stock market and its sectors.