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  • OT, Stock Market???

    It is a puzzle to me why the value of a company is controled by the stock market. As I see it the stock market is gambling on whether a stock will go up or down by how many people want the stock, not the real value of the company.

    After a company has sold stock to buy equipment and a building and they have their building, equipment and employees and selling a product they are at the mercy of a public buying their product. I can see the value of the stock going down if no one buys the product but the company still has value.

    When the stock is in the stock market the value of the stock goes up or down in relation to the volume of buying or selling of the stock.

    If the stock goes down and the company still has it's building and equipment and employees it still has it's appraised value and is still selling a product then why does the value of the stock have anything to do with the value of the company?
    Last edited by Carld; 10-10-2008, 07:03 PM.
    It's only ink and paper

  • #2
    Yep, good observations.

    I've been debating with our broker over whether to dump a good portion of the portfolio because of big losses. She counters with historic data indicating things will turn around at some point and surpass previous highs.

    Just minutes ago I read the last ten days are approaching an all time record for percentage loss in the 112 year history of the DOW. So much for historical data!!!!

    I can only imagine how this loss is affecting people who are counting on their market-invested savings for retirement.

    Comment


    • #3
      I'm fascinated why a company like General Motors has a market capitalization of over 3 billion dollars, (seems like alot), and employs countless thousands of employees world wide, While a company like Google has an enormous mark cap like a hundred times greater than GM, but only employs about 10,000 people globally.


      Gary

      Is it all smoke and mirrors?
      Gary


      Appearance is Everything...

      Comment


      • #4
        WSJ Article

        Interesting Wall Street Journal article:

        Buy.

        Worldwide stock markets are ending the week in complete collapse. Yes, it's terrifying.

        And that means great, top-quality shares are being thrown on the bonfire along with everything else.

        Johnson & Johnson's collapsed about 25% in a few weeks. It's down to a price to earnings ratio of 11, yielding about 3.2%. The crash leaves British Petroleum yielding more than 8%. It's the same with Vodafone, the global cellular operator. Kraft's down to levels below than those Warren Buffett paid last winter. Yield: 4.1%. Novartis is down too. The yield's over 3%. Ditto Nestle. Japan's Nippon Telegraph & Telephone is going for a mere 10 times forecast earnings.

        Even the solid, safe stuff is going cheap.

        "Why would I buy a bank when I can buy BP with an 8% yield," a fund manager asked me this morning.

        Indeed.

        Those stretching a little more can look at Procter & Gamble, Microsoft, Exxon, IBM, Coca-Cola, PepsiCo, Merck, Pfizer, Wal-Mart, AT&T… the list goes on. Blue chips. Cash machines. Top quality companies that won't need to be dependent on their (bankrupt) bankers in the years ahead.

        For anyone with spare cash, this is like shooting fish in a barrel.

        Closed-end funds are simply being given away.

        Japan has fallen about a fifth in two days. Credit crisis? Japan has a cheap stock market and huge piles of cash. It isn't helping the Nikkei.

        Emerging markets: Their economies look like ours 50 years ago – young workers, productive factories, and a high savings rate. It's a sound recipe for growth. And it isn't helping their share prices either. They've collapsed about 40% just since the start of September. Their markets are cheap too – if you can hang on.

        This isn't a bear market. It's a bucking bronco. It's trying to throw everybody off. And it's succeeding.

        I can tell from my conversations that so many people have given up on the stock market altogether. And that includes a lot of people on Wall Street. They've been beaten into submission, too.

        The American Heritage Dictionary defines capitulation as "the act of surrender or giving up." Famous last words, perhaps: But are we there yet?

        Comment


        • #5
          It is the perceived value that is controlling the price. If you have money to invest in a auto company for example. Both make cars but who is selling more , who has more efficiency in operations etc.
          Why buy GM when they must fork out $1635 for health care for each active and retired employee, when Toyota pays out now. GM is not the best deal for a stock holder.
          The market and the economy will find it's own level and make corrections if left alone because indiividual investors watch their money in order to get the best value. The danger is in these government controls and artifical props which only ends up building a house of cards.
          Non, je ne regrette rien.

          Comment


          • #6
            Originally posted by Paul_NJ
            Buy.

            Worldwide stock markets are ending the week in complete collapse. Yes, it's terrifying.

            And that means great, top-quality shares are being thrown on the bonfire along with everything else.

            For anyone with spare cash, this is like shooting fish in a barrel.
            That's what Chief said two weeks ago, and the Dow has dropped another 2,000 points since then.
            It's panic selling, and no one, including Wall Street, knows how much lower it's going to go.

            According to most economists, the worse is yet to come: because of the world-wide credit log-jam, cities can't issue bonds for public works projects, small companies can't make payroll, people can't buy houses or cars (even if you have perfect credit), so there is going to be some seriously bad news in the next couple of weeks about unemployment, and that's going to cause the market to crash even more.

            On the Bright Side, an economist on MarketPlace just pointed out that at the rate the Dow has fallen this week, it will be at 0 in 18 more trading days
            Last edited by lazlo; 10-10-2008, 09:51 PM.
            "Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did."

            Comment


            • #7
              According to most economists, the worse is yet to come: because of the world-wide credit log-jam, cities can't issue bonds for public works projects, small companies can't make payroll, people can't buy houses or cars (even if you have perfect credit), so there is going to be some seriously bad news in the next couple of weeks about unemployment, and that's going to cause the market to crash even more.
              Not here. I have a secured line of credit instead of a conventional mortgage and I can "borrow" from it any time according to the contract. Just to make sure I transfered 5k to another account from it yesterday and there were no problems. Better yet, the interest rate, which is at prime, is going down.
              Free software for calculating bolt circles and similar: Click Here

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              • #8
                i'm no financial whiz, stock market guru, or economics major, so i really have no idea what's going on. i do have a question though, years ago i remember reading about stocks and it seemed that what investors wanted was a stock that paid a dividend that yielded more than they could earn in some generic interest-bearing investment like a savings account or bond. today it seems like all anyone cares about is how cheap they can purchase the stock for and how much they can sell it for at some time in the future. are my observations correct, or exactly why would someone buy a stock today (meaning recent history, not today specifically when the market is tanking)?

                andy b.
                The danger is not that computers will come to think like men - but that men will come to think like computers. - some guy on another forum not dedicated to machining

                Comment


                • #9
                  Originally posted by andy_b
                  i'm no financial whiz, stock market guru, or economics major, so i really have no idea what's going on. i do have a question though, years ago i remember reading about stocks and it seemed that what investors wanted was a stock that paid a dividend that yielded more than they could earn in some generic interest-bearing investment like a savings account or bond. today it seems like all anyone cares about is how cheap they can purchase the stock for and how much they can sell it for at some time in the future. are my observations correct, or exactly why would someone buy a stock today (meaning recent history, not today specifically when the market is tanking)?

                  andy b.
                  There certainly are different ways of viewing investment in stocks, and I think your observation points to one of the reasons the market is so volatile and so troubled now. Stocks whose value is seen as the possibility of future gain are very volatile, and people who speculate on them often lose their shirts. Much of the market even in stocks that have other value is driven by the same need for gain, and this is why some quality stocks become undervalued, if investors don't see enough capital growth. There are, however, still many investors who look at the dividend return and think on a longer time scale, and if dividends are reliable enough, you may be wise to disregard the fluctuations in price, as long as the stock retains its value, or rises at a reasonable rate, between the time you buy and the time you sell (or die).

                  Comment


                  • #10
                    The problem is that MOST stock buyers have NO interest whatever in the company, what it does, how it does it, etc. Nothing past the probability that it will go up or down.

                    if it is likely to go down, sell short. If likely to go up, buy from a short seller.

                    The typical issue is illustrated by the fact that if a company reports BETTER earnings than expected, THE STOCK GOES DOWN in many cases........

                    Now, that is counter-intuitive, if you assume people are buying for value.

                    Nope, they figure that NEXT report will be that much WORSE, because the possible earnings are now "used up"...... So they downgrade it.

                    Stock is just a commodity to them.
                    Last edited by J Tiers; 10-11-2008, 01:04 AM.
                    1601

                    Keep eye on ball.
                    Hashim Khan

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                    • #11
                      It is a puzzle to me why the value of a company is controlled by the stock market.
                      There are lots of theoretical ways to value, but what better way than a liquid market?

                      As I see it the stock market is gambling on whether a stock will go up or down by how many people want the stock, not the real value of the company.
                      The value of a company is in essence its future earnings, discount for time value of money. what do you mean when you say 'the real value of the company?" The stock price is the aggregate expression of everyone's view on the future discounted earnings, that is the real value

                      After a company has sold stock to buy equipment and a building and they have their building, equipment and employees and selling a product they are at the mercy of a public buying their product. I can see the value of the stock going down if no one buys the product but the company still has value.
                      Yes it does still have value, but it declines, or depreciates as things are used up. This value is book value, or Assets - Liabilities or Equity. Its a sorry state of affairs when the market value (stock price) is less than the book value (what i think you are calling real value??). If the market doesn't think that the discounted future value of earnings is greater than the current book value, what they are saying is that prospects are so poor that shareholder value would be better served by liquidation

                      When the stock is in the stock market the value of the stock goes up or down in relation to the volume of buying or selling of the stock.
                      yes, the change in supply and demand is market passing judgment on the discounted future earnings - at any given price each investor (funds, etc not day trader bs) in the market has a view on whether or not the future earnings justify the price, so at a given price they go long or short.....and when the price moves their position changes. Viewed another, its not that market likes or doesn't a Co, its whether they like at the price or not.

                      If the stock goes down and the company still has it's building and equipment and employees it still has it's appraised value and is still selling a product then why does the value of the stock have anything to do with the value of the company?
                      i think you're confused on what value means. warning, accounting lesson coming up.... Lets make up a balance sheet.....simple business...own a $100 building with an $80 mortgage, book value of equity is $20.

                      Assets $100

                      Liabilities$80
                      Equity $20

                      The stock price is nothing to do (in simplistic terms) with the balance sheet, its the sustainable earnings power of the company. The company is making money, say there are 100 shares and earnings are $0.13 per share and the earnings multiple is 10x, the market cap would be $130 dollars. That $130 is no way connected to the balance sheet and doesn't recorded on the balance sheet. Incidentally, if the business is sold to, like as in an M&A deal, the difference between what the acquirer pays, say 130, and book, say 20 gets recorded as good will - $90 good will...otherwise you won't every see the market price of the stock show up on the balance sheet

                      Now, if the earnings drop to $.01, you might think the stock price would go to $13. However as price gets down around book, it finds support...unless investors think its going belly up and that liquidation won't realize the $20. Its uncommon for companies market cap to less than the book value (assets - liabilities)

                      Why does market value depend on the future discounted earnings? look at it this way....lets say all companies trade at a 10x earnings multiple. I say, look, invest $100 with me and I expect to make a $10 profit each year. You say to yourself, or out loud to me, I'd be crazy to do that, if you make $10 and multiples are 10x, if you execute your plan to perfection, my investment is only worth $100, why would invest in you, be exposed to risk, for zero return (best case)

                      BUT if I tell you I'll make $15 profit with that $100, the stock (at 10x) becomes worth $150 (see its value on discounted earnings). A $50 profit. That profit came from management's ability to create a higher value through earnings ($150) than the cost or book value ($100).

                      The way stocks are value literally is a discount cash flow; present valuing a projected free cash flow steam. The value of the DCF is tied to what those future earnings are the what discount rate is used; the later varying according to sustainability of cash flows or in other words risk.

                      Sorry if that went too far, the important thing is someone buying the stock is thinking how much money will this company make in the future and that has little to do with the balance sheet or how the company is capitalized

                      Gary’s point…..
                      I'm fascinated why a company like General Motors has a market capitalization of over 3 billion dollars, (seems like alot), and employs countless thousands of employees world wide, While a company like Google has an enormous mark cap like a hundred times greater than GM, but only employs about 10,000 people globally.
                      GM’s (2007) balance sheet (billions)
                      Assets: 149

                      Liabilities: 184
                      Equity: -37

                      GM has a negative -37b equity (book value). Last year they lost 68B.

                      That’s why the market cap is sooooo low, sure they have 149 billion in assets, but they owe 184b!! plus they’re hemorrhaging.

                      Now Goggle:

                      Assets : 25

                      Liabilities: 3
                      Equity: 22
                      Here, there is positive book value of 22B. ....but the current market cap of about 100b isn’t driven by this though, its driven by 4.2B in earnings last year and like 50% year over year growth!
                      Last edited by Mcgyver; 10-11-2008, 12:36 AM.
                      .

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                      • #12
                        Originally posted by Paul_NJ
                        For anyone with spare cash, this is like shooting fish in a barrel.
                        maybe, the other cliche that it could be is 'catching a falling knife.'

                        what's Christmas sales going to be like this year? I heard prediction yesterday for 09 to be the worst year for the global automotive business ever. All this crap cascades through the economy and could beat up earnings for quite a while across the board - just don't get caught thinking that the brain trust is all on one side of the market....there's an equilibrium between short and long or price moves to create one right, right? In other words what ever price you think is a great buying opportunity today, there's someone else thinking they should sell and its just not realistic to think its only stupid people on the side opposite yours
                        .

                        Comment


                        • #13
                          Carld asked:

                          “If (...) the company still has it's building and equipment and employees (...) and is still selling a product then why does the value of the stock have anything to do with the value of the company? “


                          I'm no stock broker, but here are some thought that might help.

                          The value of any asset (a building, a company, a piece of equipment, a patent, etc.) is in it's utility. For you house, the utility is you get to live in it. In business, the only utility of an asset is it's ability to generate future profits for the owner(s). In an extreme example, if a company becomes unable to earn money at all then the company is worth exactly nothing. For an owner of a company, the value of an asset owned by that company is worth what that asset does for the company's ability to earn money.

                          But, companies can always sell their assets, so the minimum value of the company must be what the net assets are worth, right? Nope. Why? Well, here's an example.

                          Say you want to buy a building, but part of the deal was that once per year you had to gamble the whole thing against a 1 in 10,000 change that it would be taken away from you. Would you do it? Would you do it if the seller knocked 1% off the price? How about 10% off? What if there was a 50% chance that you would lose it? What would you be willing to pay for the building in that case? What if there was a 99% change you would lose it, what price would you be willing to pay at that point? Not much, I would imagine, even thought the building is "worth" a lot more.

                          The above is an example of risk. As soon as there is risk attached, the value of an asset is less than it looks. In the case of a company, there is alway the possiblity of the company failing. As a shareholder in a company, you are the last creditor. If the company fails, every other creditor will get their cut before you, and there could be nothing left.

                          So, shareholders are always taking the chance that the stock will be worth nothing and there will be times where that risk is high enough that the value of the stock is less than the value of the companies assets.

                          The reverse is also true. In addition to the risk of failure there is a probability that the company will make money. If something causes the company to look like it will make a lot of money then the utility of that asset will increase and so will demand for it, raising the price of the a share in the company. Or at least that is how it is supposed to work.

                          Rob
                          Last edited by Rob Peterson; 10-11-2008, 01:02 AM.

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                          • #14
                            Originally posted by Evan
                            Not here. I have a secured line of credit instead of a conventional mortgage and I can "borrow" from it any time according to the contract. Just to make sure I transfered 5k to another account from it yesterday and there were no problems. Better yet, the interest rate, which is at prime, is going down.
                            I think you are looking at the credit issue differently.. The credit freeze isnt on you, or me, as a personal borrower with a good rating. Thats not the issue.

                            Its with banks wanting to borrow and their credit rating is in the bucket. So other banks wont lend to them.

                            Same as you having a good credit rating but your neighbor doesn't cause he had poor financial management. But on a larger scale with banks.

                            So if many banks have such a poor rating then it becomes a global issue. Banks dont operate on deposits. They work on money transactions. Futures.. They see a market for borrowers. So they take a loan for money. To disburse to their customers, at a higher rate, profit.

                            When they have borrowed to the hilt but cant make the payback with income they become a bad risk. Then they cant borrow cause no one will lend them money. They fail... The central banks wont lend..

                            That is the credit shortage they are talking about...

                            It isnt about your or my credit availability.. The banks are still PUSHING very inexpensive money at us, the small borrower. Heck yeah!! They need the income in the way of interest.. JR
                            My old yahoo group. Bridgeport Mill Group

                            https://groups.yahoo.com/neo/groups/...port_mill/info

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                            • #15
                              Ok.. I read all the posts here about the stock market.. Im impressed!!! Some of you guys really know yer stuff. Im impressed cause Ive also seen you post some very good machining post.

                              Ask the guy on the street if he thought a home shop machinist would know anything about finances and they may say no..

                              Thats why I love this site. There are some very educated folks here. Diverse.. I guess it goes with the nature. We all are kinda in search of knowledge. Any type of knowledge.. So I learn more than just machining stuff here. I get a world of knowledge here.. Thanks guys..

                              Ok, my input... On the declining market...

                              I really feel bad for the retired folks. The ones who have relied on their 401k or mutual fund to carry them through retirement. SS is a nice lil piece of change, but for many it was the 401k that they were relying on.

                              They are being hurt big time right now.. And afraid of the future Im sure. They can actually see their retirement money slipping past, GONE!!..

                              So sorry for those folks... They rely on that as income to feed themselves.. They are afraid... JR
                              My old yahoo group. Bridgeport Mill Group

                              https://groups.yahoo.com/neo/groups/...port_mill/info

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