THIS IS MY 171ST BLOG ON UNDERSTANDING MONEY
TOOLS
July, 2019
This blog may be a supplement to my last blog 170. Someone asked me where does all the
money come from driving the stock market higher? Good and logical question. Here are some answers:
- The
markets are controlled by the wealthy and institutions around the world, up to
around 85% of market’s value.
- You
can borrow money from your investment firm, called “margin”.
- Younger
people have seen their home prices rise so they are taking out home equity
lines of credit and buying stocks.
Dangerous!
- Wealthy
from unstable countries are placing their money in the USA and markets.
- Older
people holding companies that are going down like Sears, JC Penney, K Mart and
others are selling the losers and putting the money back into the markets,
rather than bonds as they pay little in interest. Foreigners as well as people in the US, are buying US bonds
with discretionary income; bond yields rising.
- Another
thing you need to watch for is volume of shares traded on a given day, on a
given exchange. The market might
have moved higher or lower, but on weak volume. That is an indicator of weakness, or buyers/sellers staying
on the sidelines waiting for signals of direction.
What else is driving the markets? Let me explain in more depth, but let me mention my
authority on this topic. I held 4
security licenses for about 20 years; overkill. However, I like finance, numbers and economics. Most of these years I worked in
conjunction with Wall Street. I
try to write these blogs rendering practical, current information unlike what
you might receive reading a book on finance and other industries. I also try to
write in an informal, wordy mood trying to make the information interesting,
simple to understand and somewhat fun.
The financial business is an enormous international
industry, mainly controlled by the big Wall Street investment banking firms,
and their joint commercial banks and trusts. Every financial planner, stock broker or whoever the name is
has their licenses with a principal, that being through an investment banking
firm. They are employees and
regulated. These individuals are
registered with the Securities Exchange Commission and the National Association
of Securities Dealers. They have
passed tests to have these licenses (usually Series 7 and 63), and “should”
obey the principles and practices as a fiduciary. Many casualty insurance company people hold a Series 6
License to sell mutual funds and annuities.
Because of the “hot” stock markets everyone has jumped into
the business. 35 years ago after
the Glass-Steagall Act of 1933, (separation of all financial industries from
one united), went out the window with the 1986 Tax Reform Act commercial banks
placed people within their banks to be financial planners/advisors for their
customers. Wall Street firms have
branches in most financial centers around the world. This increases the sales of more stock.
Wall Street and the wealthy want to make money. Easy to drive the market up like it has
been going when you have millions of employees and brokers/agents working on
it. It makes sense that the more
agents worldwide the higher the market should go. Agents need to make a living! These brokers/agents/financial
planners have families to support and quotas to meet, they need to sell, sell,
sell! Just watch TV ads, every
other advertisement is a financial company, mixed in with law firms and drug
companies. The big firms tell
their brokers what to buy and sell through recommendations. These are not necessarily accurate or
honest. For the past few years it
has been “buy” recommendations.
Then, it may go to “hold” recommendations and then to “sell”. Rarely do they say “sell” as they don’t
want to lose control of the money from accounts, or blemish their reputations
with companies. 50 years ago, and prior to, we only had “stockbroker”
designations handling trades, and not the numbers of people involved of today.
If Wall Street thinks it is time to get out of the markets
typically they will get their big customers and themselves out first, or do
“puts” or “sell orders” to make money, before the customers/the public, you and
me have knowledge.
Permit me to make an illustrative comparison happening the
past few years to Wall Street and the stock markets. Let’s pick any of the “FANG” stocks, that is Facebook,
Amazon, Netflix and Google. Take
the first, Facebook. It started as
a social media site sharing people’s photos and interests. Then, they gathered personal
information and sold it to companies to make their advertising more
direct. It was mentioned this week
that Facebook now has a capitalized value of $585 billion. They were just fined an extraordinary
$5 billion. Does anyone realize
this amount is less than 1% of their value? Ridiculous!
People keep buying the stock.
Let’s say a person has a fairly unique Chevrolet auto that sells for
$25,000. Assume auto dealers get
together and determine they can sucker the consumers into paying $1 million,
then $5 million, then $10 million for this type of car and it seems to be never
ending. That is what’s happening
with many of the stocks today. No
fundamentals, no real value, but an amazing amount of “perceived” value!
I feel I must touch upon this topic quickly, and it involves
media, news and perceptions. It
just came out with headlines, “China Growth Slowest Since 1992 as Beijing
Struggles”. You might think China
is tanking? The article then states
that China’s growth, or GDP, is currently 6.2%. Does anyone realize that is 300% larger growth than the
USA? Also, India is coming on fast
with success and financial growth.
It was just released that in the past 10 years India has brought 270
million people out of financial poverty. Impressive. Can we make these kinds of statements here, no. It’s time for reality to set in. The
pundits argue you can’t draw comparisons as both these countries have so many
more people.
Hope you got something out of this short blog.
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