Monday, October 22, 2007
Cleaning Up The House - Financial Markets
Financial Markets Need A Small Dose Of RealityUnderlying some of the core weakness in the global financial markets, presently, is the lack of positive expectations driving market sentiment. This is really a short-sighted perspective of the future opportunities for investment, as there are significant growth areas out there (eg. renewable energy industries, environmental restoration and protection industries, hydrogen producers, internet, telecommunications, railway transportation and specialised professional services). If only the financial regulators could fix the current imbalance that options and futures have on overly influencing the markets, then there would probably be more people entering the market to take long positions in equity investments than there is right now.
The current weakness is interwoven and financially linked with the credit crisis caused by sub-prime mortgages and poor credit rating in general. Simplified, its a matter of bringing better overall truth, fairness and transparency to investors in the financial markets and holding the crooks in the 'Tower', to ponder their fate. Calls for self-regulation are like asking hungry cats to guard the one sole remaining Budgie for prosperity.
Today, it can be difficult to achieve the pure equity capital and DCF based valuation of a company in stock market pricing, because the realised trading price can be heavily influenced by very large options trading in the stock. Heavy options trading of a stock performed in combination with any bad news in the media about an equity brings more volatile pricing swings than would otherwise be the case without options. Also, some very clever individuals can work the 'system' to play both elements at the same time in a 'turn key' operation, taking huge profits on the calls they sell, or the puts they buy. If this process is happening to many significant name traded equities at the same time then it becomes an index based play. This is fine if you are 'in the money', but on the side of the real equity company (the capital share investors and the employees), the market reaction to the fall in stock price can be disastrous for both the company and the national interests of the GDP dependent country.
When a significant company fails after being played, a country can be impacted at multiples logarithmically greater than the gain made by a few individuals. Had this process been in place in the early 1900's, Henry Ford might have ended a long career of fixing horse drawn buggies, and the letter 'T' would have only been a dream.
Some countries have more exposure than others do to the current situation in the financial markets. This is because they have allowed the capital devaluation process to occur, and they have been the complex instruments' initiation point. If you were to talk about certain elements in hedge funds, it would be an even longer story.
Time will let financial markets improve in all countries, once the financial regulators react to bring reality to people's investments. Otherwise, real equity will dry up without action in some countries. There's always room for 'sharks' and 'fish', but we shouldn't allow the ponds to be emptied, nor the ugly looking 'Great White's' to swim free.