Investors can still afford stones

July 17, 2008 11:44 AM

Pakistani Investors Stone ExchangePakistan investors stormed out of the Karachi Stock Exchange, smashed windows and cursed regulators after the benchmark index fell for a 15th day, the worst losing streak in at least 18 years.

But take heart! At least there are not committing suicide. At least not yet.

`People have sold their assets in the last 15 days to meet payments and if things continue this way, you will start hearing of suicides.' - Kauser Javed,

But before one snarks - the future in the US may be one of loss in the market.

When you get all puffed up about gas prices, you fail to see the overall picture: a thousand gallons of gasoline over the past year have cost about $1000 extra. Home prices fell 14.1% (Case-Shiller), or about $30.000 per home. In other words, an estimated 200 million US drivers have paid some $200 billion extra for gas, while values for the 100 million US homes have fallen by $3 trillion. And that’s just housing; trillions more have also vanished from other parts of the economy. It may take longer for some of the effects to be felt, but that makes them no less real. Thus, people who live in deflating homes should be careful with stones.

posted by rough ashlar (29 comments total)

See that's America's problem. Not enough inchoate, spittle-flecked rage.

Not that we don't have some, but clearly not quite enough.
posted by Naberius at 11:54 AM on July 17, 2008

I was about to call racist on this post until I realized "stone" was a verb, not a noun here.
posted by DU at 11:56 AM on July 17, 2008 [1 favorite has favorites]

Coming soon to DVD - INVESTORS GONE WILD!
posted by champthom at 11:57 AM on July 17, 2008

How about $100 TRILLION in payments coming due to unfunded mandates?

For more about that depressing scenario, listen to Fed board member Richard Fisher [[(scroll down to his Commonwealth Club presentation, entitled "Inflation and Debt: The Interaction of Fiscal and Monetary Policy"]]

This is one of the most chilling projections of what we face that I've yet heard. We have a lot of work to do.
posted by MetaMan at 12:09 PM on July 17, 2008

I was going to buy two with points and a big flat one, but after this market correction, I might have to settle on two flats and a packet of gravel.
posted by anthill at 12:11 PM on July 17, 2008 [1 favorite has favorites]

Does ANYONE have a sound, rational proposal for why the economy might get better? The only credible thing I've heard is that the rising fuel prices and higher import prices might jump-start domestic manufacturing.
posted by tinkertown at 12:11 PM on July 17, 2008

Obviously, these people haven't learned to rejoice in their important and honored place in the free-market. You know...that whole "winners-and-losers" thing. Apparently they thought they would always be the winners.
posted by Thorzdad at 12:14 PM on July 17, 2008 [2 favorites has favorites]

Well, that'll definitely restore confidence.
posted by Kadin2048 at 12:28 PM on July 17, 2008

I wish you hadn't included the pointless digression of the US economy, because now this thread will be filled with multi-page discussions of that, in yet another thread.
posted by smackfu at 12:29 PM on July 17, 2008 [6 favorites has favorites]

Apparently they thought they would always be the winners.

Well, at least for some financials, the SEC seems to think they should not be losers. A slippery slope?.
posted by preparat at 12:32 PM on July 17, 2008 [1 favorite has favorites]

Well, there is a little more to this story than you've posted. First, let's set the background.

Pakistan is hardly what we'd call an equity culture. Investing at the retail level is clearly a new activity for most - if not - market participants in that country. So folks at all levels in that country just don't know what they're doing - the riots are simultaneously proof of this, and indicative of deeper issues.

First, the expertise of some of market participants is clearly questionable e.g., "`I have lost my life savings in the last 15 days and no one in the government or regulators came to help us,'' said Imran Inayat, 45, a protester and a former banker who retired early and said he lost 300,000 rupees ($4,175) on the market."

Wait a minute - this guy is a banker? And he put his life savings in the market? Well, I learned never to put any more money in the market than you can stand to lose. I'm sure I'm not alone being this circumspect.

Second, Pakistan outperformed all indices globally over the past decade, up an order of magnitude, no less. Such explosive growth is hardly sustainable, and brings us to the next point.

Third, Pakistan had attracted significant amounts of global - "hot" - money in recent years. At one point well over 20% of the entire KSE-30's float was held by foreigners. Why on earth the local regulators would allow such significant foreign ownership in such a very, very small market is not clear.

Fourth, with the market at such frothy levels, its obvious to ask why weren't folks capturing their profits? The answer is what we almost always see - the institutional class investors do in fact cash out, while retail got screwed. But that's the just on the surface - more than likely there was corruption at multiple levels of the regulatory structure, and these people were leading the way out. Not sure if they were following institutional ("hot") money or leading it, but not everyone got screwed by this decline.

And fifth, apparently the regulators tried to impose a 1% drop rule, shutting the exchanges once daily trading losses totaled 1%. All good, NYSE has them as well (somewhat different numbers though). But for some odd reason, they removed the stops and let this market free fall.

So it's clear the problems over there shake out to :

1. Not an equity culture
2. Frothy market, driven by funds, institutional investors and other sources of hot money
3. Inept / non existent regulators that let retail get screwed (I bet they got theirs though)

Many of these developing markets are very, very corrupt; years ago I did some primary research on Chinese "Red Chips, the securities that only Chinese could purchase. Turns out that the Class B's (which Westerners could purchase) of the same company tracked the Class A's consistently and regularly - but WITH A LAG. They did this because the system back then was ineffective, and insiders would move Class A's based on private information. Class B's - held by foreigners - would track buy with a lag, as we were trading on public data. The stock markets in Pakistan are in a similar state of development; very, very embryonic.

I'm not sure what the connection to the United States market is rough ashlar. Not snarking mind you; just the case for a US crash based upon rioting in the streets of Karachi hasn't been proven in this FPP.

Could be I'm missing something (that happens alarmingly often!) but since we're pretty sure The Fed ain't hiking rates this year, and oil seems to be mitigating - or at least stablising - the markets have been bouncing nicely off the recent lows.

In fact, looking at Q1 data [.pdf], we see that operating earnings for the S&P 500 were hammered, declining some 25.9%. But that's deceptive, as if we exclude financials we can see that operating earnings were actually up 8.8% YOY. Not too shabby.

Financials are, of course, one of the larger contributing sectors to the S&P 500 earnings were financials (some 29.7% actually).

So I guess my point is the recent volatility we've seen in the US - given the strong earnings performance - is hardly the stuff market collapses are made of.
posted by Mutant at 12:35 PM on July 17, 2008 [16 favorites has favorites]

tinkertown: The economy is going to get worse before it gets better.

Way worse.

Basically, for the past decade or so, America has turned into a pure-consumption environment. We've had a net negative savings rate (which is almost indescribably bad). Before the economy can "get better" three things need to happen:

1. People need to stop buying things they don't absolutely need. The country needs to get back in the mindset of actually saving money from day to day. The recession, come hell or high water, is going to cause this to happen, no doubt about it.

2. Home prices need to correct additional amounts. Between HELOCs, refinances, and other various and sundry mortgage products, prices are still way out of whack of affordability. If you're spending more than 28% of your monthly income on your home, you're spending too much.

3. Some of the financial service industry needs to be allowed to fail. This means more Indymac-style bank implosions. (Look for Wamu to be next, is my guess) Banks participated in putting up what was basically a financial house of cards, and now the cards are tumbling. If the US Government keeps pumping money into failed institutions (FNM, FRE) then the value of the dollar is going to continue to sink.

My generation hasn't ever seen a bad recession-- the early nineties were really chicken feed compared to what's happening (and about to happen) now. The Paris-Hilton-MTV-Cribs-Big-Party glorification in society is going to go away, no question, because people are going to be hurting for money for food, much less bottles of Dom or 22" rims. The best thing for each and every individual is to absolutely kick ass at your job, become invaluable, and put 10% of your salary in an account that you can't touch. Ideally, that account should be globally diversified, so if and when the dollar drops some more, your investment doesn't get as hurt.
posted by mark242 at 12:36 PM on July 17, 2008 [2 favorites has favorites]

If you want to see what the Republicans have in mind for America look at Iraq. It was the neo-con / Ryndite playground. Every one of their most cherished notions was implemented: a "flat tax", no messy regulation or oversight of industry, etc. That worked out well, didn't it?

So the time has come, yet again, for America to elect a grown up, that is a Democrat, to fix the mess left behind by nearly a decade of Republican irresponsibility and drunken Sorority girl style spending [1], and the general view that the US treasury is intended to funnel tax dollars to their already obscenely wealthy cronies.

Naturally, this outbreak of fiscal responsibility, economic growth, peace and prosperity will prove unbearable to many Americans and they'll elect another Republican in 2016. Reagan and Bush I broke the US economy, Clinton fixed it, Bush II has (as anyone with any sense at all was able to see coming) broken the US economy again and it'll be up to Obama to fix things.

The problem is that I'm not sure Obama can fix things. In addition to the general ruin that Bush has wreaked on our economy, in addition to the fact that he's got us in debt up to our eyeballs with China, he's also presided over a criminally negligent campaign of failing to address the looming energy crisis. Our economy runs on energy and rather than do anything to fix the problem of our addiction to petrochemicals, Bush has done nothing but use the coming crisis as an opportunity to further gut environmental protections and, of course, funnel yet more tax dollars to his rich friends.

That, more than the insane waste of a trillion dollars in Iraq is what will truly mark Bush II as the President Who Ruined America.

[1] I used to refer to Bush et al as spending like drunken sailors, but then realized that's a grave insult to drunken sailors everywhere. After all, when they run out of money they have to stop spending. Bush spends like a drunken Sorority girl, she's got daddy's credit card, she never has to stop spending, and she never pays the bills.
posted by sotonohito at 12:43 PM on July 17, 2008

sotonohito, why do you hate 'Merica?
posted by maxwelton at 1:32 PM on July 17, 2008

I think the world might be a better place if all the stock exchanges got stoned. You can read that at least two ways, but both of them work for me.
posted by TheOnlyCoolTim at 1:41 PM on July 17, 2008

I wish you hadn't included the pointless digression of the US economy, because now this thread will be filled with multi-page discussions of that, in yet another thread.

My only regret is that I have but one favorite to give for this comment.
posted by These Premises Are Alarmed at 1:52 PM on July 17, 2008 [1 favorite has favorites]

the benchmark index fell for a 15th day, the worst losing streak in at least 18 years.

That'll show those no-goodniks for worshiping their false gods.
posted by ROU_Xenophobe at 2:14 PM on July 17, 2008

Mutant, thanks for the informed and very interesting comment.

I wish you hadn't included the pointless digression of the US economy, because now this thread will be filled with multi-page discussions of that, in yet another thread.

My only regret is that I have but one favorite to give for this comment.

sometimes this place is like hanging around with the Coco Puffs bird, except it's cuckoo for tortured off-topic arguments about why America is horrible and we'll all be squatting in ditches poking each with sticks after the apocalypse that's definitely coming in the next 74 days because of MTV Paris Hilton Cribs Bush OMG Peak Oil WTF USians Britney Spears !!1111!one!

Criticizing my country doesn't offend me, really. I do it myself all the time. The lack of intellectual rigor and the "topic be damned" beating of this particular dead one-trick pony gets old, though.
posted by drjimmy11 at 2:19 PM on July 17, 2008 [1 favorite has favorites]

sotonohito, why do you hate 'Merica?

After all, freedom isn't free, you know. Sometimes it costs a trillion dollars.
posted by recoveringsophist at 2:23 PM on July 17, 2008

Wow, the country that currently has areas of it's territory under the control of religious extremists isn't a good investment? Who've thunk it?

What irks me about the Bush-hating doomsayers predicting imminent economic collapse is how many of them you can find waiting in a line in front of the Apple store to spend $300 on a goddamn telephone. If you have the time to camp out in front of the store to buy a luxury product like that, the economy must still be doing reasonably well.

The problem in the economy is that people are willing to camp out in front of the store to buy a luxury product. The American consumer revels in their acquisition of fancy bric a brac as means of forging a personal identity. The people in that line need an iPhone for the same reason that other people need Viking stoves and Subzero refrigerators. But the psychology plays out more subtly as well. People will spend $100 on "high-performance" athletic clothing from UnderArmour to run on a treadmill in an air-conditioned fitness club. for 40 minutes 3 times a week. UnderArmor was developed to meet the needs of professional football players, you don't need it.

You think UnderArmor is cool, and you want it. So you buy it. You think the iPhone looks cool, or it makes you feel clever. All that touching and dragging makes you think you are actually doing something other than listening to music. So you buy it.

People still buy Moleskin notebooks for $12 a pop even though staples sells the same thing for $5. Because they have to be able to tell someone that they jot down their "ideas" in a Moleskin.

It isn't that we are trained to construct our identity in this way, it's that we want to do it this way. It's a lot easier to construct your identity by draping yourself in brand names whose brand image mirrors the image you want to create. You get a Moleskin notebook, an iPhone, an American Apparel hoodie, some retro Nike's or Chuck T's, and everyone will think you are a smarter than average "creative" looking for inspiration for your next project.

But this is actually ok, because the entire economy is already setup up to cater to this. It doesn't cater to the people who toil away in isolation to become something or to make a unique contribution to the world. If people suddenly all decided to devote their lives to something productive, the system would seize up. Someone might forgo an iPhone for piano lessons or a photography class. Someone might skip the Wall-E premiere to build a kit car with their friends.

So don't worry. The system already runs along the ruts in the path of least resistance, and I don't expect any serious disruptions.
posted by Pastabagel at 2:24 PM on July 17, 2008 [6 favorites has favorites]

Mutant: Many of these developing markets are very, very corrupt
Does this apply to ETFs? Or is Brazil past this? I'm thinking of EWZ.

same company tracked the Class A's consistently and regularly - but WITH A LAG.
Don't you get rich when you find a stock that consistently lags another?
posted by rakish_yet_centered at 2:41 PM on July 17, 2008

I thought you might be talking about stone exchanges.
posted by StickyCarpet at 2:57 PM on July 17, 2008

Food/gas: "This stuff costs too much! Burn this place to the ground!"
Stocks: "This stuff does not cost enough! Burn this place to the ground!"
posted by milkrate at 3:29 PM on July 17, 2008

If you have the time to camp out in front of the store to buy a luxury product like that, the economy you must still be doing reasonably well.

The statement makes more sense that way. There's a lot of reasons you could be seeing danger clouds on the horizon while doing well enough for yourself to buy consumer electronics.

People still buy Moleskin notebooks for $12 a pop even though staples sells the same thing for $5.

I'm assuming you're not talking about the thin ones, because they're something like 3 for $10, but that's still fairly pricey for small paper product, so if you're aware of any alternatives to the thin ones with very similar (or smaller) dimensions, I'm definitely interested.
posted by weston at 3:33 PM on July 17, 2008

How about $100 TRILLION in payments coming due to unfunded mandates?

Of which $68 trillion is supposedly required for doctors visits and hospital stays. Thats $225,000 per every current american. Even at the current level of US health spending (about $5K per capita) which is overblown that could treat every man, woman and child in the country for 45 years. If we had that amount of money on a per capita basis over here (Australia) we could treat every man, woman and child in the country for 100 years and we have a public health system of all things.

LUCY! YOU GOT SOME SPLAIN TO DO!
posted by Talez at 3:42 PM on July 17, 2008

Pastabagel: I'd like to subscribe to your newsletter.
posted by Leon at 4:06 PM on July 17, 2008

We should send Phil Gramm, chief McCain economic advisor and author of the Enron Loophole (you have noticed the startling resemblance in the run-up in oil prices to Enron's criminal manipulation of the California electricity market, right?), over there to tell them to stop whining about their imaginary losses.
posted by jamjam at 4:13 PM on July 17, 2008

Talez: I suspect whoever's supplying that $100T number is using it to represent something similar to the net present value (in reality probably the "infinite horizon discounted value", which seems similar conceptually, although the calculation is more complex) of some never-ending stream of expenses, not annual cost.

So if that's the case, $225k is basically the cost required to purchase a perpetuity that pays out one person's contributions, forever. You can't do as much with it as you think you can.

The most recent place I have seen that figure is a speech by Fed heavy Richard Fisher:

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.

Annualized out, he claims it's equivalent to 68% of total income tax receipts on a continuous basis. I.e., you can either pay $99.2T up-front, or (by my calculation) $802.47B (2007 dollars) per year, forever.
posted by Kadin2048 at 10:45 PM on July 17, 2008

rakish_yet_centered -- "Does this apply to ETFs? Or is Brazil past this? I'm thinking of EWZ."

Well, ETFs - or Exchange Traded Funds - are collective investment vehicles sold in the United States. So while the vehicle itself certainly won't be corrupt and you as an investor won't have any problems wrt getting what you've paid for (your interests are protected by the SEC), the managers of such funds may, and sometimes do, invest in regimes that aren't up to Western standards for transparency and regulatory rigour.

But thats just one of the reasons why people should use such vehicles to invest in many sectors, especially so Developing Nations. Via an ETF you're acquiring professional management, who are focused on that asset class / country / region, and frequently maintain extensive personal / professional ties with folks at all levels of the government. Its not uncommon for the people who are running an ETF (and other funds) to be able to circumvent the government impose freezes on captial we frequently see in the Developing World.

I don't really look at Brazil (or Sovereigns at all, being a cash flow investor) myself, so I don't have a view on how corrupt or mismanaged it's markets might be. I do know there's been an awful lot of capital flowing into that country, the real is starting to move like a petrocurrency (esp so since 2005) and the nation is considering joining OPEC. So let the good times roll in Rio.

In any case, before investing in an ETF one of my initial screens is to check whether or not the fund is trading at a premium or discount to net asset value.

Why are we interested in this? Well, unlike vehicles such as Mutual Funds, ETFs raise money once, and then issue shares which trade on the stock market. The NAV is essentially the value of assets each share owns. A premium or demand to NAV reflects supply & demand considerations wrt the pool of shares available to purchase.

One of my screens (for the asset class I invest in, which is not Developing Nations) is to try to purchase shares at a discount to NAV. In this way, one is acquiring $1 worth of assets for less than $1 (trying to capture the so-called margin of safety but my rules are flexible across four main screens, so sometimes I'll violate that constraint) .

So looking at EWZ we can see it's trading essentially flat (a premium of 0.10%). Also, looking range of the NAV we see it's trading roughly in the middle (the 52 High / Low being $100.57-$50.85) so thats interesting.

I guess you've got to ask yourself what's driving Brazil's growth, and is it sustainable? But in terms of an ETF, you certainly won't have any problems with corruption - that's what you've hired the professional management for.



"Don't you get rich when you find a stock that consistently lags another?"

Well, there are sorta two answers to that question.

I was working for a bank when we undertook that analysis, so directly benefiting from such research isn't possible. But the firm? Of course the firm benefits. But now that I'm no longer working for a bank I can use any discrepancies I identify for my own purposes.

I did that analysis perhaps eight years ago, and suspect that pricing discrepancy has long disappeared. The Efficient Markets Hypothesis tells us this tends to happen when someone identifies such market opps. You've got lots of people all looking at the same markets and the same instruments, and its very, very rare that someone finds something overlooked by everyone else. At best you can only hope that this opp can be profitably exploited before its priced away.

That being said, one of the things I find most interesting are pricing anomalies in the stock market that persist even after being discovered. I did an FPP recently that inventoried equity market pricing discrepancies that have long persisted in spite of being well known.

Some - for example, The January Effect - are almost household names, they're so well known. But even so they persist, sometimes hundreds of years after discovery. They also cut across national and cultural boundaries. Very, very curious.
posted by Mutant at 1:22 AM on July 18, 2008 [2 favorites has favorites]